First Solar, Inc. (FSLR) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to First Solar's Fourth Quarter 2011 Earnings Conference Call. This call is being webcast live on the Investor section of First Solar's website at www.firstsolar.com. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to David Brady, Vice President, Treasury and Investor Relations. Mr. Brady, you may begin.

Good morning, everyone, and thank you for joining us for First Solar's Fourth Quarter 2011 Earnings Call. This afternoon, the company issued a press release announcing its financial results for the fourth quarter of 2011. If you did not receive a copy of this press release, you can obtain one from the Investors section of First Solar's website at firstsolar.com. In addition, we have posted the presentation for this call on our Investor Relations website. An audio replay of the call will also be available approximately 2 hours after its conclusion. The audio replay will remain available until March 5, 2012, at 11:59 p.m. Eastern Standard Time and can be accessed by dialing (888) 203-1112, if you're calling from within the United States, or (719) 457-0820, if you're calling from outside the United States, and entering the replay pass code 861-2954. A replay of the webcast will be available on the Investors section of the company's website approximately 2 hours after the conclusion of the call and will remain available for approximately 90 calendar days. If you're a subscriber of FactSet or Thomson ONE, you can obtain a written transcript. With me today are Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer; and Mark Widmar, Chief Financial Officer. Mike will present an overview of market conditions and then Mark will review our operational and financial results for the fourth quarter of 2011 and discuss the details of some of the charges we took. We will then open up the call for questions. [Operator Instructions] First Solar has allocated approximately 1 hour for today's call. Both the financial numbers reported and discussed on today's call are based on U.S. generally accepted accounting principles. In a few cases where we report non-GAAP measures, such as free cash flow or non-GAAP EPS, we have reconciled the non-GAAP measures to GAAP measures at the back of our presentation. Now I'd like to make a brief statement regarding forward-looking remarks that you may hear on today's call. During the course of this call, the company will make projections and other comments that are forward-looking statements within the meaning of Federal Securities laws. The forward-looking statements in this call are based on current information and expectations and subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. Those statements involve a number of factors that could cause actual results to differ materially from those statements, including the risks as described in the company's most recent annual report on Form 10-K and other filings within the Securities and Exchange Commission. First Solar assumes no obligation to update any forward-looking information contained in this call or with respect to the announcements described herein. It is now my pleasure to introduce Mike Ahearn, Chairman of the Board and Interim Chief Executive Officer of First Solar. Mike?

Thanks, David, and welcome to our Q4 2011 earnings call. As discussed on our recent call, traditional solar markets subsidies are declining, continue to decline and significant nonsubsidized markets have not yet developed. Last week, the German environmental and economics administration released a proposal that would significantly reduce or potentially phase out the German solar market. The fate of this bill, which will we presented to the cabinet tomorrow and still needs to pass through Parliament and the chambers of the federal states, remains unclear. However, it is likely that even if less draconian measures are ultimately adopted, Germany, like other feed-in tariff markets, will continue to be challenged in 2012 and beyond. The key to First Solar's success is to develop new markets that do not depend on subsidies, and we believe we can do this by focusing on regions in the world that are blessed with a lot of sun and need more peak electricity. Our superior module technology, combined with our ability to design, engineer, construct and maintain large solar electricity generation plants and integrate them with the grid, should enable us to reduce solar electricity prices to grid parity levels in these markets, while still making an attractive profit. Our demonstrated success in selling solar electricity and solar generation plants to leading U.S. utilities will provide targeted customers in these new markets with important validations of our capabilities. Solar electricity has never been deployed without subsidies at the large scale we envision as local utilities, regulators and politicians will need time to understand how to plan and integrate solar electricity into their local grids. Fortunately, our existing U.S. project pipeline provides the level of continuing demand while we work on opening the new markets that will drive our future growth. However, it is important that we begin taking steps in 2012 to create these new markets in light of those long lead times involved. And we've been busy working on our 3-year plan over the past several weeks. As an outgrowth to the planning process, we've decided to idle 4 lines in our German plant for up to 6 months this year, postpone the commissioning our proposed facilities in Mesa and discontinue work on our proposed plant in Vietnam, which is expected to result in an impairment charge of up to $100 million this year. We've also begun the process of eliminating unnecessary operating expenses, which we'll continue over the course of 2012. At the same time, we have begun to add resources in targeted markets where we expect to derive significant growth in coming years. The impact of these and additional actions would be rolled up in a 3-year plan, which we had hoped to share with you today but is now scheduled to be discussed on our Q1 earnings call in May. This quarter, we incurred $125.8 million in additional warranty reserves to reflect an updated estimate of costs related to the manufacturing excursion that occurred between June 2008 and June 2009. As previously disclosed, a small percentage of product manufactured during that time period may experience premature power loss once in the field. First Solar identified and addressed the manufacturing excursion in June 2009 and later initiated a voluntary remediation program that goes above and beyond our standard warranty obligations. The remediation program includes module removal, testing, replacement and logistical services and additional compensation payments to customers under certain circumstances. A large volume of claims made under the remediation program were processed in the fourth quarter, and we identified a significant increase in remediation costs under the terms of our voluntary program. Our estimates now benefit from having processed over 95% of the total claims submitted under the life of the program. The total cost of remediating the manufacturing excursion that occurred from June 2008 to June 2009 now stands at $215.7 million, including $145.6 million above and beyond our standard warranty. There are approximately 4% of the claims submitted for which we have not yet been able to determine if remediation is required. If it is determined that these claims should be remediated, there's at least the potential for additional costs of as much as $44 million. And while the cost of the program has been much higher than we would've liked, we believe we've done the right thing in demonstrating our commitment to our customers beyond our product warranty. Also, our analysis of hundreds of PV systems and modules returned under warranty as part of this program, combined with analysis of system level performance for sites under O&M agreements, has given us unique insight into the real world performance of our products in a wide range of PV systems. That knowledge has contributed to the continuous improvement of our technology and refinement of our product development roadmaps. Briefly turning to the markets. In North America, we continue to make progress with projects in our pipeline. At Agua Caliente, we had completed approximately 60% of the balance-of-system and installed 2.9 million modules by the end of the fourth quarter and we energized first 30 megawatts in January of this year. Construction has started at Desert Sunlight, and while we cannot recognize revenue under GAAP, we have received net cash from receipts of $77 million as of the end of the fourth quarter. AVSR1 has yet to receive funding for the loan guaranty, but Exelon and First Solar are pleased that Los Angeles County has approved changes to the construction permits for the project, satisfying the requirements for the funding of the initial loan advance for the project. The companies have extended their deadline for receiving the initial loan advance to April 6 to allow sufficient time for the funding to be received. In the meantime, the project construction continues to move forward. While Topaz did not receive a loan guarantee, we nevertheless completed the sale of the project to MidAmerican Energy Holdings Company in January, and we'll begin recognizing revenue in the second half of 2012. We're pleased to include on our growing list of customers MidAmerican, one of the leading investors in renewable energy, which also purchased 49% of the interest in Agua Caliente from NRG last month. In China, we recently executed small demonstration projects with 2 strategic partners, one was a ground monitor project with Guohua Energy Investment Company, one the largest gencos [ph] in China and a subsidiary of the Shenhua Group, which is the largest coal mining company in the world. The other project was a rooftop project in Beijing with Boe Energy Technology Co., and we continue to complete the feasibility study for the order of 30 megawatts Phase 1 project and to secure project approval in 2012. In Australia, we began construction of Australia's first utility scale solar installation, a 10-megawatt AC project being delivered to Verve Energy and GE Energy Financial Services there at Geraldton in Western Australia. This project will establish a platform for solar growth in the future, supported by existing renewable energy target of 20% by 2020, the national carbon legislation and the Clean Energy Finance Corporation, which is committed to invest $10 billion in non-wind large-scale renewables. And finally, we've spent considerable time over the past several weeks in potential sustainable markets, including India, China, Southeast Asia, the Middle East and parts of Latin America and continue to be encouraged by the opportunities for First Solar to create nonsubsidized markets in these regions. Now I'd like to turn the call over to Mark to review our operational and financial results and then update guidance for 2012. Mark?

Okay. Thanks, Mike, and good afternoon. I'll start with operations on Slide 6. In Q4, our production was 540 megawatts, up 37% versus the prior year, but down 2% quarter-over-quarter. The year-over-year increase was driven by capacity expansions in Germany and Malaysia. Sequentially, in order to better align our supply with market demand, we idled our Malaysia facility over the year-end holiday season. This downtime reduced our capacity utilization for the quarter to 94% or 600 basis points below the third quarter. Malaysia now, though, is currently running at full capacity. At our 2012 guidance call in December, we stated that we will be running our manufacturing plants at 80% utilization in 2012. As demand in Europe is more challenged than expected, we will be reducing our utilization rates further to a range of 60% to 70% which will reduce our production in 2012 to a range of 1.5 to 1.8 gigawatts. As part of this process, we are suspending 4 production lines for up to 6 months in Frankfurt-Oder and accelerating our go-fast efficiency roadmap by idling and retooling each line sequentially in Malaysia. These actions might not be sufficient to reduce production to a level that aligns with demand, so additional actions might be necessary as we continue to adjust production capacity to match expected market demand. Because we will not be running at full capacity, we will not be disclosing our line run rate on a quarterly basis. That said, we continue to make improvements for our line throughput, helped by our advancements in module efficiency. Thus, we will -- we are increasing our goal for our line run rate from 80 megawatts per year by 2014 to over 90 megawatts by the end of 2015. Our average line conversion efficiency for our modules was 12.2% in the fourth quarter, which was up 0.6 percentage points year-over-year and up 0.4 percentage points quarter-over-quarter. This is our largest sequential increase since 2007. Our best plant improved to 12.6%, which is up from 12.4% last quarter and 11.6% last year. We continued to make significant progress in conversion efficiency. And for 2012 year-to-date, our average conversion line efficiency is 12.4%, up 200 basis points from the end of the year. And the current efficiency rate of our modules produced on our best lines in 13.1%. We expect sustained improvements in efficiencies as we continue to invest in our technology. Last month, we announced that we received confirmation from the National Renewable Energy Labs or NREL that First Solar achieved a record 14.4% efficiency for cad tel thin-film module, which eclipses the prior record of 13.4%, also held by First Solar. The record performance comes to us 6 months after First Solar announced that they had achieved a record 17.3% efficiency for cad tel thin-film cells. Both the cell and module record setters were constructed using commercial scale manufacturing equipment and materials that can be implemented across our existing line for capital spend of around $100 million for each of the next 3 years. The achievement supports our module efficiency roadmap, updated last month and underscores the tremendous ongoing potential of cad tel. Module manufacturing costs per watt for the fourth quarter was $0.73, which is down $0.01 quarter-over-quarter. This cost includes $0.01 impact from increase in the warranty accrual rate and a $0.01 headwind from a plant underutilization. Had our plants run at a full utilization, as we historically have, then our module manufacturing costs per watt would have been $0.72 or $0.03 below the third quarter on a comparable basis. Our best plant is manufacturing modules at a cost of $0.69 per watt excluding the impact of underutilization. Moving onto Slide 7. We show our updated view of available capacity and anticipated production utilization. This updated slide no longer includes Mesa. In our guidance call for 2012 in December, we noted that production in Mesa would be delayed until 2013. As we further evaluate market demand and our capacity requirements, we have now decided to put Mesa on hold until market demand justifies additional capacity. First Solar will retain ownership of the building associated with the site, and we expect to relocate various engineering and administrative work groups to the office space there. Some of the space on the main floor will also be used to store products and equipment in transition. Moving to manufacturing to our systems business on Slide 8. In 2011, we added approximately 650 megawatts AC of contracts to our pipeline and installed approximately 425 megawatts DC. Our pipeline stands at 2.7 gigawatts AC, which represents the sum of the contractual megawatts of the projects in our pipeline. As of the end of the first -- fourth quarter, we have recognized revenue for approximately 180 megawatts equivalent. The remaining pipeline will either be constructed in the future or is currently under construction, but all revenue recognition criteria have not been met. Megawatt equivalence is calculated by taking total cumulative revenue recognized divided by the total contracted revenue for each project multiplied by the megawatts for such project. Mike also discussed the solid progress we were making our for our 4 large projects: Agua, AVSR, Topaz and Desert Sunlight. In addition to these large projects, we continue to advance the balance of our systems pipeline. In the first quarter of 2012, we have begun construction on Copper Mountain 2 and received initial funding under the contract. In addition, outside of the 4 large projects previously mentioned, we had completed the financing of one of our projects subject to certain conditions, which we anticipate announcing in closing of the projects in the next couple of weeks. Moving on to the financial portion of the presentation on Slide 9. Net sales for the fourth quarter were $660 million, down from $1 billion last quarter. The decrease was primarily due to lower third-party module volumes and lower module and balance-of-system volumes in our systems business. Our EPC revenue mix decreased from 39% of total net sales in the third quarter to 30% of net sales in the fourth quarter. Our solar power systems revenue, which includes both our EPC revenue and solar modules used in the systems business, decreased slightly from 65% of sales in the third quarter to 64% of sales in the fourth quarter. Aggregate module ASPs increased 2.9% quarter-over-quarter including the impact of currency or 4.1% excluding currency. Module ASPs in the systems business increased sequentially whereas third-party module ASPs declined 4%, excluding currency. We expect the largest sequential decline in the third-party module ASPs from the fourth quarter of 2011 through the first quarter of 2012, as higher-priced legacy contracts expired at the end of 2011. On a year-to-year basis, fourth quarter module ASPs decreased 2% and third-party ASPs declined 24%. Gross margin was 20.9%, down 16.8 percentage points from the prior quarter. The decrease was due to an increase in incremental warranty charges primarily related to our previously announced manufacturing excursion. Absent these onetime charges, gross margins would have been 36.1%. Module gross margin was 19.5%, down from third quarter module gross margins of 41.4%. Excluding the impact of incremental warranty charges, module gross margin would've been 35.5%. Operating expenses were up $467 million quarter-over-quarter to $623.4 million. The primary reason for the increase were a series of charges that we considered nonrecurring, namely a $393.4 million goodwill impairment; a $31.8 million in lost power compensation related to the manufacturing excursion and $60.4 million of restructuring charges, which consisted of $53.6 million for asset impairment and associated decommissioning and $6.8 million in severance. These restructuring charges were previously announced in our 2012 guidance call last December where we said the total charges could be up to $85 million. The goodwill impairment is a noncash charge that does not affect our cash position or cash flows from operating activities. The goodwill was primarily related to the acquisitions of OptiSolar in 2009 and NextLight, representing benefits from expected synergies, economies of scale and vertical integration. We allocated most of the goodwill for these acquisitions to our components business, consistent with our historical view of the systems business’ function as being an enabler for the components business to drive module throughput. We believe that the acquisitions of OptiSolar and NextLight have provided tremendous value to First Solar far in excess of the acquisition costs including goodwill. As a result of these acquisitions, First Solar has announced the sale of and is currently constructing 4 of the largest solar power plants in the world. This impairment charge does not change the value of the acquired project pipeline nor does it change the company's view of its business prospects or future results as discussed later in this call. It is primarily triggered by the fact that the market capitalization of our stock was trading below the book value as of the end of the fiscal year 2011 and the related pressure is on the industry as a whole. In order to provide a comprehensive view of the manufacturing excursion and warranty charges in Q4, a breakdown is provided on Slide 10. For the quarter, we expensed $163.5 million. Of this amount, $125.8 million was for the manufacturing excursion. As Mike mentioned previously, a large volume of claims made under the manufacturing excursion program were processed in the fourth quarter, and we identified a significant increase in remediation costs under the terms of our voluntary program. The Q4 costs associated with the manufacturing excursion is composed of 3 items. The first item is the cost to remove, replace and provide logistical services related to the manufacturing excursion. In the fourth quarter, we expensed $23.9 million for these efforts and have expensed $99.7 million to date. The second item is expected payments to customers under certain conditions or power loss prior to the remediation of the customer system. In the fourth quarter, we expensed $31.8 million for this compensation and have expensed $45.9 million to date. The third item, $70.1 million, is due to an increase in expected number of replacement modules above our standard warranty rate required for our remediation efforts. Finally, we recognize the $37.8 million charge to increase our warranty accrual. We believe our PV modules are potentially subject to increased failure rates in hot climates. As a geographic mix of sales has shifted to hot climates, we have increased our warranty accrual. Our experience has shown that our warranty rates for hot climates are slightly higher than the return rates for temperate climates. With this change, our standard warranty accrual rate has been increased by 1 percentage point to account for the potential returns going forward. We will continue to review our warranty accrual rate in the future, and we'll adjust the rate as appropriate to reflect our actual experience. Due to the charge for goodwill impairments, additional warranty accruals and restructuring, we've recorded an operating loss of $485.3 million for the quarter compared to an operating income of $222.7 million in the third quarter. The fourth quarter net loss was $413.1 million or $4.78 per share. The effective tax rate was 14.2%. Before the nonrecurring charges mentioned above, that is, goodwill impairment, additional warranty accrual and restructuring, earnings per share for the quarter would be $1.26 on a fully diluted basis and the effective tax rate would be 19%. Overall, our fiscal year 2011 net sales grew 8% from 2010 to approximately $2.8 billion. On a GAAP basis, operating margin was negative 1.3% and earnings per share was a loss of $0.46. Excluding the full year impact of the items listed above, the full year diluted EPS would be $6.01. Slide 11 presents a walk from our GAAP EPS to our non-GAAP EPS for the fourth quarter 2011 and for the fiscal quarter -- or the fiscal year 2011, calling out the 3 nonrecurring charges related to warranty, goodwill impairment and restructuring. The complete reconciliation of GAAP to non-GAAP numbers can be found in the slides at the back of the presentation. Turning to Slide 12. I'll review the balance sheet and cash flow summary. Cash and marketable securities were $788 million, down slightly from $795 million as of the end of the last quarter. Accounts receivable trade balance declined quarter-over-quarter due to improved collections and lower shipments. Our unbilled accounts receivables increased $208 million due to a $224 million increase in unbilled receivables at Agua Caliente. Inventories increased mostly due to higher inventories in our systems business, both for modules and balance-of-system's equipment, partially to help secure the economic benefit of the 1603 Program for our projects. Project assets increased as we proactively developed projects that we have not yet sold. Deferred project costs also increased as we constructed projects that we have sold, but for which we cannot yet recognize revenue. As a reminder, when we sell a project, the project assets turn into either revenue or deferred project costs, depending on whether the applicable revenue recognition criteria have been met. Our debt level increased by $55 million from the end of last quarter, primarily to fund working capital increases on our systems business as certain projects anticipated to close were pushed out of the year. Operating cash flows for the quarter were $11 million, and free cash flow was negative $76 million. We spent $118 million for capital expenditures, down $106 million from last quarter. Depreciation was $67.9 million compared to $60.8 million last quarter. This brings me to our updated guidance for 2012. We are reaffirming our guidance for net income and earnings per share, excluding any impairment and restructuring charges that we may be taking this year. While earnings guidance is the same, the assumptions behind the guidance have changed, as shown in Slide 13. As we mentioned earlier, the euro market will be more challenged than we initially expected. So our third-party sales are expected to be in the range of 300 to 500 megawatts, down from prior guidance of 720 megawatts. To accommodate lower sales, we will further reduce our manufacturing utilization rate to a range of 60% to 70%. This will increase our module manufacturing cost per watt from $0.67 under fully utilized to $0.74 underutilization rates of 60% to 70%. Note that our profits, excluding underutilization, is the same as we have guided in December despite incurring a $0.01 headwind due to higher warranty accruals going forward. The reason is that we continue to accelerate our efficiency improvements. We now expect to average a module efficiency of 12.7% in 2012, up from the prior guidance of 12.6%. Turning to our guidance on Slide 14. We're reducing our 2012 revenue guidance from a range of $3.7 billion to $4 billion to a range of $3.5 billion to $3.8 billion to account for the lower third-party module volume. Offsetting the impact of the lower third-party module sales and the higher module manufacturing costs due to lower production volumes is favorable balance-of-system costs productivity associated with our systems business, where we plan to install 1.2 gigawatts of modules. Our operating cash flow guidance declined due to the 2012 cash impact associated with the incremental manufacturing excursion charges accrued as of the end of 2011. Our operating cash flow guidance for 2012 includes approximately $75 million of net cash receipts from Desert Sunlight. To summarize on Slide 15, overall, our operating performance for the quarter and year-end were solid, given the challenging market condition. We expect challenges in the subsidized markets to intensify in 2012, due to uncertain and in some cases, collapsing FiT regimes. Cash flow generation should accelerate in 2012 as working capital turns into cash flows. We are accelerating module efficiency and cost roadmaps to increase our competitive advantage. We are developing a 3-year plan to aggressively enter the sustainable markets, the details of which we will unveil in the first quarter earnings conference call. With this, we conclude our prepared remarks. And we welcome the questions -- the call for questions. Operator?

[Operator Instructions] And we'll take our first question from Brian Lee with Goldman Sachs. Brian K. Lee - JP Morgan Chase & Co, Research Division: I was just wondering what's the rationale for not outright shutting down some manufacturing capacity since you're taking some meaningful underutilization charges here and you have some higher costs facilities relative to Malaysia. Germany is about 20% of your capacity. So if you took a onetime charge, took that offline it seems like you have a shot at getting back on your original cost trajectory even in 2012.

Yes, Brian, this is Mark. And right now what we're doing is assessing all of our options, and we will continue to evaluate what makes the most sense. We believe, at this point in time, the temporary idling and shutdown that we have currently announced makes the most sense given the current expectations of the NOI [ph] market. To the extent the market demand continues to soften or if we have lack of visibility of stronger recovery as we begin 2013, then we would evaluate additional options. But I think what we're doing right now is prudent given what we see in front of us.

And we'll take our next question from Sanjay Shrestha with Lazard Capital Markets.

One point, guys. You guys talked about each line being 90-megawatt up from your prior goals of 80 megawatts, right? What is the embedded assumption in that for your module efficiency, as well as cost per watt target for you guys?

Yes, that would be consistent with what we indicated in last December. We indicated that our module efficiency should start to trend towards 14.5% within that range, closer to 15% as we exited 2015. And the module cost per watt should start to trend down to the low 50s, call it, kind of between $0.50 and $0.52.

And we'll take our next question from Stephen Chin with UBS.

Just wanted to ask about the FiT components guidance of 300 megawatts to 500 megawatts. Can we assume that that’s going to be profitable business on an operating basis in 2012 and that First Solar's walking away from an unprofitable components business?

I think when you look at the third-party business right now, I think it also varies depending on geography and in terms of the ability to capture value for the solution that you bring to the market. In certain geographies, I would say pricing is much more aggressive, which makes it more challenging to price at a level that would be accretive to operating income. And as we think about the underutilization charges that we'll be taking this year and our cost moving up to $0.74, I would not anticipate meaningful margin in certain geographies, and that's one of the things we'll continue to evaluate does it makes sense. To serve those markets, especially, if it's long term, we don't believe economics will be viable or sustainable, and those are decisions we will look at as part of our 3-year planning process.

And we'll take our next question from Satya Kumar with Crédit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: Just a question on the guidance for 2012. Your third-party sales was now down 40% below your prior guidance, and you're still guiding to 1.2 gigawatts in systems sales. I think in the last call you had said that a 10% change in the third-party sales will affect your guidance by $0.30. I just want to understand what has changed so significantly in the profitability of the systems business in the last 3 months that earnings guidance is still unchanged.

Yes, I think one of the things that we highlighted in terms of the benefit is, we've achieved significant costs productivity in our balance-of-systems for our systems business, and that's been more than sufficient to offset the earnings pressure that we see now with the lower volumes in third-party module. So as we continue to scale and get greater purchasing power, we drive earnings across the entire platform, as well as the with the efficiency gains that we have now at our modules and the bin class [ph] that we'll be able to utilize in order to build out those projects. We’re seeing much better margin realization of that side of our business, which is more than sufficient to accommodate the volume shortfall on the third-party sales.

And we'll take our next question from Amir Rozwadowski with Barclays.

Mark, Mike and David, you folks seem to be taking a number of steps to reflect the current market environment with respect to your own manufacturing capabilities. What I'm trying to assess is, what is sort of your embedded assumptions for the German market. And then, Mark, you mentioned at some point you guys are going to take sort of a second look to see of this is the right strategy or if you need to continue to shut down certain facilities. What is sort of that trigger point that we should keep in mind in monitoring when that could emerge; a decision along those lines?

Yes, I mean, it's really -- it's Mike. It's working through, as you know, the political process now, and while the initial announcement was pretty grim, I mean, there are discussions underway. And I think if we let the process work over the next couple of weeks, we'll have a better idea for where the German current market is going to land. And I think we'd like to see -- we want to see where this ends up before we do anything beyond what we've decided to do to date, but we're certainly going to be watching to see what the German feed-in tariff outcome is, factoring that into our decision.

And we'll take our next question from Smitti Srethapramote with Morgan Stanley.

I was wondering if you guys can give us an update on what you see happening in the U.S. utility scale market. We haven't heard anything about 100-megawatt-plus projects in the past several quarters. And given where natural gas prices are right now, what's your outlook? What's your latest outlook on the U.S. utility scale market?

Yes, I mean, I think we showed a slide on the last earnings -- or call the last call, anyway, in December that showed the new RFP solicitations in California based on solicitation year that's showed a pretty steep decline over the last couple of solicitation years. That's, I think, representative of the trend that new RFPs and PPA agreements are -- have declined pretty substantially, the pace of them. So the outlook is not for a significant new solicitations or offtake agreements. I mean, it's contracted to shipments and installations, which will continue to grow but as a function of agreements that have already been put into place during the last procurement cycle. So that's our working assumption. We see the U.S. in terms of new additional solicitations and offtakes, as being not nonexistent but sporadic and not at particularly high levels for the next several years.

And we'll take our next question from Timothy Arcuri with Citi.

Mike, on the last conference call, on the 3rd of November, I asked you about warranty expenses, and you said that it had all been taken into account in the financials. So did something change from the 3rd of November to the end of the quarter? Was it a rush of warranty applications? Is that what the issue was?

Yes, as Mark mentioned, we processed a large volume of the claims that were made over the life of the program in Q4. For the last quarter, we've reserved and reported based on the best available information then, and we discovered in processing of claims a lot of additional exposure, which is reflected in the charges that we've taken in Q4.

And we'll take our next question from Jesse Pichel with Jefferies. Jesse Pichel - Jefferies & Company, Inc., Research Division: Solar was early in identifying that best return in the solar supply chain was selling projects and not commodity modules. It would now appear that an even greater return is owning the projects, especially your projects, which were down under PPA agreements from years ago. Would your new 3-year plan consider owning and operating your pipeline projects?

Well, it's not -- we're not currently thinking of doing that, Jesse. And I think we would continue to evaluate all sorts of options, but we're not currently thinking that we would actually own and operate the assets. Part of that is the capital required, part of it is where we think returns will settle under a normalized state. That would not be a normalized way to highest return part of the value chain. But and I think we'll -- I'm not sure this couldn't vary by market and we see, really, that markets are very localized in their nature. And what we might be interested in doing, if not directly, with a partner on a given market, could potentially take that into account. But that's not the thinking as of today. And so we have to evolve into something like that if we did it.

And we'll take our next question from Kelly Dougherty with Macquarie.

Just following up on an earlier one about limited profitability on the external module sales. As we look beyond this year, do you have a target for how much of your production you want on the systems of the project side versus external module sales? And then you talked about each market being different maybe you could talk about which markets you still find attractive for the third-party modules.

Yes. Well, going forward, we pulled this 3-year plan together. Our intent is to design, build, construct and operate large PV systems. So we're not intending, as we move into the future, to sell modules as a discrete component. We think our competitive advantage derives partly from the module, but principally from the ability to design and install, if we do this installation directly or through other with our processes, but to design and install turnkey systems that are engineered for costs and reliability. And that's what we've demonstrated the ability to do, and combine that with an O&M capability and a set of assurances to our customers that are difficult would be very difficult for competitors to match. So we’re seeing this as a holistic offering and that it gives us a competitive advantage. It's also needed to open new markets and to move large volumes of systems. That's the strategy going forward.

And we'll take our next question from Mehdi Hosseini with Susquehanna International.

I'm a little bit confused about the goodwill impairment charge of $390-some million. How is that going to change economics of OptiSolar assuming that that’s where the charges are related to?

It actually won't have any impact on any of our projects. We tried to highlight that in the script. Again, the underlying economics and the value associated with those projects, primarily the main 4 large projects everybody's very familiar with. We're very comfortable with those projects and the economics. The goodwill impact will have no impact on any of the returns anticipated from those projects. That's purely an accounting noncash item that we had to recognize within the quarter. But again, no impact, I want to make sure that's clear. No impact associated with any of the projects that we've acquired via the acquisition of either NextLight or Opti.

And we'll take our next question from Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: A quick question about R&D expenses and potentially accelerating them in order to bring down your product costs, whether it's BoS or modules at a faster rate given the declining subsidies because you're still running at a pretty low R&D to revenue ratio.

This is Mark, actually. And again, that's one of the things that we are doing. We highlighted that a little bit as our strategy when we -- in order to align our production to market demand, we will be taking some outages in KLM sequentially across each of the 24 lines there, and what we'll be doing is upgrading those lines, leveraging capability that we've highlighted in our best performing line today, which is around 13.1%. So R&D efforts have been instrumental in the progress that we've made in driving our efficiency. We made a commitment last year to a go-fast roadmap, and I think you're seeing the benefit of that. We're making some pretty significant step function changes in the efficiency of our module.

And we'll take our next question from Vishal Shah with Deutsche Bank.

Just a question, Mike, can you tell us what the extent of your modules in the Indian market ...

Sorry, can you please speak up? We're unable to hear your question.

Yes, Mike, can you talk about the exposure to the India market in 2012 with the terms of your non-captive modules will be to the Indian market? And how should we think about your captive pipeline in 2012?

Yes. Well, we do have module sales going into India in 2012. Typically, they're installed in the projects that are being subsidized either under the federal program, the National Solar Mission or under any program. And strategically, we're viewing that as a way to get product into the market, demonstrate the performance, acquaint some of the players in the market with our technology and begin to understand some of the dynamics of the Indian market. So that will continue in 2012 and perhaps beyond. In parallel, we want to increasingly start to have discussions around moving in a non- subsidized way into utility scale projects until we started those discussions at the same time.

And we'll take our next question from Timothy Arcuri with Citi.

I just wanted to follow up on my prior question. Mike, do any of the warranty expenses relate to the new high efficiency module? Or is every dollar of this warranty related to the old warranty? I guess, it's kind of one thing if it's the old modules, but it's another thing if it relates to the new higher efficiency modules. And I just want to clarify that none of it relates to the new higher efficiency modules.

Yes, the total -- of the total charges, the $163.6 million, you have $125.8 million of that is related to the manufacturing excursion to the June '08 to June '09 time period. $37.8 million of that is related to a change in the warranty accrual rate that Mark mentioned, which is really driven principally by our view that the returns would be higher in hot climate. So the higher efficiency, if you refer, there were a set changes made for production from approximately June of 2011 forward. That would -- I mean, to the extent there -- our warranty returns there would be picked up in the increased warranty accrual rate, which we -- Mark mentioned, we increased by 1%.

Tim, I think the only thing I would just say is, that, again, the changeover to our Series 3 module happened kind of midyear 2011. So our experience at this point in time from the field return is somewhat limited. But what I can tell you is the data that we have internally as we look to key metrics that it would be indication of field performance; those metrics are at a level at some of the best that we've seen since we began production. So the indicators would say that the Series 3 modules, which, I think, may be ones you're referring to as higher efficiency modules, should have above average build performance relative to the legacy Series 2. We just don't have enough data yet to really assess and conclude on that, but the indicators we have are very positive from that perspective. The other thing I wanted to make sure that is clear is on the charge that we took in the manufacturing excursion of $125 million. Again, $70 million of that was related to the module-related costs, which, under the original program when we started to accrue charges, it is -- the assumption was our standard warranty rate would be sufficient to allow for those return modules. Given the volume of module that we now have and given the number of claims that we've had to process, we had to make an adjustment from that standpoint. So the $125 million, $70 million is just really the module-related costs that above and beyond is the other $45 million, $50 million or so.

And we'll take our next question from Mark Bachman with Avian Securities.

Can you discuss in some detail the construction delays that were associated with both Topaz and Desert Sunlight? My understanding here that the workers were furloughed and sent off the projects in San Luis Obispo and that the results were delayed at Desert Center. And in your explanation, if these delays are related to the balance-of-system portion, how should investors think about this given your advances that you've reported in the past quarters on the balance-of-system side?

I don't know really -- I don't know what’s that's referring to, to be honest with you. I'm not aware of any construction delays. I'm not sure where you got that information. That would be new to us.

So I had sent a couple of emails down during a quiet period to your Investor Relations department. And given that I couldn't get a response back, but I also sent them links San Luis Obispo newspapers talking about the furloughing of workers down there. So I would be surprised that your firm wouldn't know about that, Mike?

Well, I mean, we don't -- at our level, we are not experiencing any delays in any of the projects. They are proceeding on our plan. We don't see any deviations from plan, so it could be that -- I'm speculating, maybe some of that resources were scheduled that had to be adjusted. But from our planning point of view, we're on plan on all of these projects or ahead, in some cases. I honestly don't know. I mean, we can certainly research that and get back to you offline and answer that question.

And we'll take our next question from Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: Mike, just a follow-up on -- can you provide any updated thoughts on the CEO search and how that's going?

Yes, it's going well. I mean, we do have -- we have had a number of candidates go through the process. There's significant interest. We're making progress in terms of narrowing that down, and I feel like we're entering a phase where we'll start to kind of select and maybe start working through some negotiations here in fairly short order. So all in all, things will be going pretty well.

And we'll take our next question from Mahesh Sanganeria with RBC Capital Markets.

I just wanted to follow up on the warranty charge. I wasn't familiar with the excursion you had in 2008. Have you narrowed down the excursion to certain -- the module you sold into certain projects and your estimates you think are reflective of what future claims you will get or there could be a lot of variability in your estimation?

We did. We narrowed it. We did. The excursion itself was related to a process change that was made in approximately June of '08. That was addressed in June of '09, so we had sort of a 12-month time period. Based on that, we were able to, I think, to isolate the years with the production and then guesstimate at various times over this remediation program what the exposure might be. At this point, after the large volume of claims in the fourth quarter, we processed, I think, over 95% of the total claims. So we basically looked at almost everything that's there and we're reporting, as opposed to estimates like in the past, this is just actual data. So our confidence level is a lot higher. There are about, I think, 200 claims that were submitted that still need to be analyzed, so there's 200 left. And we gave an estimate that we think is an outside estimate, that there could be another $44 million, $43 million, if all of those were determined to have RPM-related [ph] issues. But at this point, we're in the final stages of the program, and what we're reporting today is largely actual results as opposed to estimates.

One thing back on the discussion on Topaz in particular, we just followed up with some additional information that we did have a short period of time where we did stop activity on site mainly for some evaluation of the post laying and then drilling, I guess, what we had to do. At the end of the day, it was a nominal effect, that's why it didn't hit my radar screen. When we look at our key metrics associated with all our projects, everything is on schedule, no underlying performance issues with a temporary delay that lasted a matter of few days and then we're back full running at production. So and everything is still building according to schedule. So our project is in great shape and same statement as it relates to where we are with Desert.

And we'll take our next question from Edwin Mok with Needham & Company.

So on the guidance for 1.2 gigawatts of inflation in the coming year, it seems like a pretty big jump from the current year. I was wondering how much of that is risk discounted. And of the big projects you're constructing, which one of them do you think you have the biggest risks of doing?

Yes, again, the good thing about those projects, other than we've got to finalize some activity with AVSR, those projects largely have been -- financing has been completed. They're closed, and they're very actively in construction at this point in time. And as you know, AVSR, where we've got final approval here through [indiscernible] has released the environmental impact study that were being done. Updated studies were being done, and we anticipate that to be -- activity to move forward here over the next 30 or so days. So those projects are all in good shape and moving ahead. What I would say, though, is with any of those types of projects there's always risk and things can be -- timing can impact them. It could be unforeseen events that we obviously don't know at this point in time that could delay them. Fortunately, what we're seen so far with our EPC team has been world-class execution as you can see with our Agua accomplishments what we've made in the first 6 months or so since we've closed that deal. That project has gone extremely well. And as Mike mentioned here, we have 60% or so of BoS already completed. So there's obviously risk. Those projects are large and complex. There's issues that will have to be addressed, but feel very confident in our team and our capabilities to execute according to schedules.

And we'll take our next question from Satya Kumar with Crédit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: Just a quick follow-up. The goodwill charges that you're taking, will that help earnings and 2012 non-GAAP EPS guidance? If it doesn't, future periods would that be disclosed? And also, have you looked at possibly using crystalline silicon panels in the systems division? Would you be open to doing that in the future?

On the discussion around goodwill. Goodwill, you do not amortize goodwill, so goodwill is more of an event that gets evaluated from an impairment standpoint. So to the extent that we now have impaired the goodwill, there's no potential impact on ongoing earnings stream, at least for that component of the goodwill. We do have about $60 million or so of goodwill associated with our systems business, but the discrete event, the $390 million that we took the impairment for will have no impact on future earnings, be positive or negative.

I mean, our modules cost less and perform better than crystalline silicon, so it wouldn't make any sense for us to use crystalline silicon modules. I mean, a significant part of our competitive advantage is in our manufacturing costs, and where we intend to be 3 years from now would be substantially below even the cash costs of a silicon module to our best estimate. So that really wouldn't be part of our game plan. The ability to integrate modules into an engineered system that optimizes all-in performance is something a module manufacturer like us is uniquely capable of doing. And to be able to wrap that with a data set and a monitoring capability and provide assurance to a utility that the manufacturer stands behind the entire result, that's pretty significant. And I don't see us ever being able to do that with some third-party product. So we're going to continue to be integrated and drive our technology into these markets.

And we'll take our next question from Mehdi Hosseini with Susquehanna International.

Just a follow-up on the difference between GAAP to non-GAAP, how should we think about the impact or the distribution of the difference between COGS and OpEx?

How should you think about it? I mean, we -- the charges that we have taken, the only thing that will show up in OpEx related to the manufacturing excursion would be the loss power compensation, which was, in the fourth quarter, $31.8 million. So that would show up in OpEx. The other items went all -- for the $163 million or so, all the other charges would show up in cost of goods sold. And then for the restructuring and the goodwill items, they're discrete items on the P&L. You can see where they show up. They do show up above the OpEx line, but not in the R&D or SG&A line items.

And we'll take our final question today from Chris Kettenmann with Miller Tabak. Chris Kettenmann - Miller Tabak + Co., LLC, Research Division: Just wondering if you could tell us -- you mentioned that hot climate affected panel performance, wondering if you could give us quantitative idea of the level of degradation and geographically where you saw most of the warranty claims come from.

At this point, we don't have a lot of data. We have enough to -- we know there's a natural physical acceleration of degradation modes in hot climates, but in fact that -- our accelerated reliability test exposes them to intense temperatures, so that's just the way these behave from a physics point of view. And we have enough to know and to feel that it's prudent to raise the rate until we get more data, but we're pretty early. I mean, we just started really shifting the mix in the hotter climates in the last couple of years. So we'll have to continue to reevaluate it as we get to see results, get more data. But for now, we thought it was prudent to increase the rate by 1 point because of the mix change of what we've seen to date.

That does conclude our question-and-answer session. At this time, I'd now like to turn the call back over to management for any additional or closing remarks.

No additional remarks on our side. Thanks, everybody. And if you have any follow-up questions, please, obviously, contact David and the IR team. And we'll make sure we'll respond with any response we have as quickly as possible. Thank you.

And that does conclude today's conference. We do thank you for your participation.