UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
_____________________
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 28, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ______________
Commission
file number 001-34166
SunPower
Corporation
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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94-3008969
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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3939
North First Street, San Jose, California 95134
(Address
of Principal Executive Offices and Zip Code)
(408)
240-5500
(Registrant’s
Telephone Number, Including Area Code)
_____________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer x
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The total
number of outstanding shares of the registrant’s class A common stock as of
October 31, 2008 was 43,751,699.
The total number of
outstanding shares of the registrant’s class B common stock as of October 31,
2008 was 42,033,287.
SunPower
Corporation
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Page
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3
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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33
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Item 3.
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51
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Item 4.
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53
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54
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Item 1.
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54
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Item 1A.
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54
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Item 2.
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88
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Item 4.
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88
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Item 6.
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89
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90
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92
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PART I. FINANCIAL
INFORMATION
Item 1.
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Financial
Statements
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SunPower
Corporation
Condensed
Consolidated Balance Sheets
(In
thousands, except share data)
(unaudited)
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September
28,
2008
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December 30,
2007
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Cash
and cash equivalents
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Restricted
cash, current portion
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Costs
and estimated earnings in excess of billings
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Advances
to suppliers, current portion
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Prepaid
expenses and other current assets
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Restricted
cash, net of current portion
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Property,
plant and equipment, net
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Advances
to suppliers, net of current portion
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Liabilities
and Stockholders’ Equity
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Accounts
payable to Cypress
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Billings
in excess of costs and estimated earnings
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Customer
advances, current portion
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Total
current liabilities
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Customer
advances, net of current portion
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Other
long-term
liabilities
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Commitments
and Contingencies (Note 8)
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Preferred
stock, $0.001 par value, 10,042,490 shares authorized; none issued and
outstanding
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Common
stock, $0.001 par value, 375,000,000 shares authorized: 43,916,940 and
40,269,719 shares of class A common stock issued; 43,734,532 and
40,176,957 shares of class A common stock outstanding; 42,033,287
and 44,533,287 shares of class B common stock issued and outstanding, at
September 28, 2008 and December 30, 2007,
respectively
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Additional
paid-in capital
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Accumulated
other comprehensive income
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Accumulated
earnings (deficit)
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Less:
shares of class A common stock held in treasury, at cost; 182,408 and
112,762 shares at September 28, 2008 and December 30, 2007,
respectively
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Total
stockholders’ equity
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Total
liabilities and stockholders’ equity
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statements of Operations
(In
thousands, except per share data)
(unaudited)
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Three
Months Ended
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Nine
Months Ended
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September
28,
2008
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September
30,
2007
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September
28,
2008
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September
30,
2007
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Cost
of components revenue
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Sales,
general and administrative
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Purchased
in-process research and development
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Impairment
of acquisition-related intangibles
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Other
income (expense), net
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Income
(loss) before income taxes
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Income
tax provision (benefit)
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(unaudited)
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Nine
Months Ended
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September
28,
2008
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September
30,
2007
Note
1
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Cash
flows from operating activities:
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Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
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Amortization
of intangible assets
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Impairment
of acquisition-related intangibles
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Purchased
in-process research and development
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Impairment
of long-lived assets
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Impairment
of investments
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Amortization
of debt issuance costs
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Share
in loss (earnings) of joint venture
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Excess
tax benefits from stock-based award activity
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Deferred
income taxes and other tax liabilities
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Changes
in operating assets and liabilities, net of effect of
acquisitions:
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Costs
and estimated earnings in excess of billings
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Prepaid
expenses and other assets
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Accounts
payable and other accrued liabilities
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Accounts
payable to Cypress
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Billings
in excess of costs and estimated earnings
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Net
cash provided by (used in) operating activities
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Cash
flows from investing activities:
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Increase
in restricted cash
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Purchases
of property, plant and equipment
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Purchases
of available-for-sale securities
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Proceeds
from sales or maturities of available-for-sale
securities
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Cash
paid for acquisitions, net of cash acquired
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Cash
paid for investments in joint ventures and other private
companies
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Net
cash used in investing activities
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Cash
flows from financing activities:
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Proceeds
from exercises of stock options
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Excess
tax benefits from stock-based award activity
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Purchases
of stock for tax withholding obligations on vested restricted
stock
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Proceeds
from issuance of common stock, net
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Proceeds
from issuance of convertible debt
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Convertible
debt issuance costs
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Principal
payments on line of credit and notes payable
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Net
cash provided by financing activities
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Effect
of exchange rate changes on cash and cash
equivalents
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Net
increase (decrease) in cash and cash equivalents
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Cash
and cash equivalents at beginning of period
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Cash
and cash equivalents at end of period
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Additions
to property, plant and equipment acquired under accounts payable and other
accrued liabilities
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Change
in goodwill relating to adjustments to acquired net
assets
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Issuance
of common stock for purchase acquisition
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Stock
options assumed in relation to acquisition
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1. THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The
Company
SunPower
Corporation (together with its subsidiaries, the “Company” or “SunPower”) was
originally incorporated in the State of California on April 24, 1985. In
October 1988, the Company organized as a business venture to commercialize
high-efficiency solar cell technologies. The Company designs, manufactures and
markets high-performance solar electric power technologies. The Company’s solar
cells and solar panels are manufactured using proprietary processes and
technologies based on more than 15 years of research and development. The
Company’s solar power products are sold through its components and systems
business segments.
On
November 10, 2005, the Company reincorporated in Delaware and filed an
amendment to its certificate of incorporation to effect a 1-for-2 reverse stock
split of the Company’s outstanding and authorized shares of common stock. All
share and per share figures presented herein have been adjusted to reflect the
reverse stock split.
In
November 2005, the Company raised net proceeds of $145.6 million in an initial
public offering (the “IPO”) of 8.8 million shares of class A common stock
at a price of $18.00 per share. In June 2006, the Company completed a follow-on
public offering of 7.0 million shares of its class A common stock, at a per
share price of $29.50, and received net proceeds of $197.4 million. In July
2007, the Company completed a follow-on public offering of 2.7 million shares of
its class A common stock, at a discounted per share price of $64.50, and
received net proceeds of $167.4 million.
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures to Lehman Brothers Inc. (“Lehman Brothers”)
and lent approximately 2.9 million shares of its class A common stock to Lehman
Brothers International (Europe) Limited (“LBIE”). Net proceeds from the issuance
of senior convertible debentures in February 2007 were $194.0 million. The
Company did not receive any proceeds from the approximately 2.9 million loaned
shares of its class A common stock, but received a nominal lending fee. On
September 15, 2008, Lehman Brothers Holding Inc. (“Lehman”), filed a petition
for protection under Chapter 11 of the U.S. bankruptcy code, and LBIE commenced
administration proceedings (analogous to bankruptcy) in the United Kingdom (see
Note 10). In July 2007, the Company issued $225.0 million in principal amount of
its 0.75% senior convertible debentures to Credit Suisse Securities (USA) LLC
(“Credit Suisse”) and lent approximately 1.8 million shares of its class A
common stock to Credit Suisse International (“CSI”). Net proceeds from the
issuance of senior convertible debentures in July 2007 were $220.1 million. The
Company did not receive any proceeds from the approximately 1.8 million loaned
shares of class A common stock, but received a nominal lending fee (see Note
10).
In
January 2007, the Company completed the acquisition of PowerLight Corporation
(“PowerLight”), a privately-held company which developed, engineered,
manufactured and delivered large-scale solar power systems for residential,
commercial, government and utility customers worldwide. These activities are now
performed by the Company’s systems business segment. As a result of the
acquisition, PowerLight became an indirect wholly-owned subsidiary of the
Company. In June 2007, the Company changed PowerLight’s name to SunPower
Corporation, Systems (“SP Systems”), to capitalize on SunPower’s name
recognition.
Cypress
Semiconductor Corporation (“Cypress”) made a significant investment in the
Company in 2002. On November 9, 2004, Cypress completed a reverse
triangular merger with the Company in which all of the outstanding minority
equity interest of SunPower was retired, effectively giving Cypress 100%
ownership of all of the Company’s then outstanding shares of capital stock but
leaving its unexercised warrants and options outstanding. After completion of
the Company’s IPO in November 2005, Cypress held, in the aggregate,
approximately 52.0 million shares of class B common stock. On May 4, 2007
and August 18, 2008, Cypress completed the sale of 7.5 million shares and 2.5
million shares, respectively, of the Company’s class B common stock in offerings
pursuant to Rule 144 of the Securities Act. Such shares converted to 10.0
million shares of class A common stock upon the sale. The Company was a
majority-owned subsidiary of Cypress through the third quarter ended September
28, 2008. As of September 28, 2008, Cypress owned approximately 42.0 million
shares of the Company’s class B common stock, which represented approximately
50.1% of the total outstanding shares of the Company’s common stock, or
approximately 47.4% of such shares on a fully diluted basis after taking into
account outstanding stock options (or 46.5% of such shares on a fully diluted
basis after taking into account outstanding stock options and approximately 1.8
million shares lent to an affiliate of Credit Suisse), and 88.5% of the voting
power of the Company’s total outstanding common stock. After the close of
trading on the New York Stock Exchange on September 29, 2008, Cypress
completed a spin-off of all of its shares of the Company’s class B common stock,
in the form of a pro rata dividend to the holders of record as of September 17,
2008 of Cypress common stock. As a result, the Company’s class B common stock
now trades publicly and is listed on the Nasdaq Global Select Market, along with
the Company’s class A common stock.
The
condensed consolidated financial statements include purchases of goods and
services from Cypress, including wafers, employee benefits and other Cypress
corporate services and infrastructure costs. The expenses allocations have been
determined based on a method that Cypress and the Company considered to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. See Note 2 for additional information on the
transactions with Cypress.
The
Company is subject to a number of risks and uncertainties including, but not
limited to, an industry-wide shortage of polysilicon, potential downward
pressure on product pricing as new polysilicon manufacturers begin operating and
the worldwide supply of solar cells and panels increases, the possible reduction
or elimination of government and economic incentives that encourage industry
growth, the challenges of achieving its goal to reduce costs of installed solar
systems by 50% by 2012 to maintain competitiveness, the continued availability
of third-party financing for the Company’s customers, difficulties in
maintaining or increasing the Company’s growth rate and managing such growth,
and accurately predicting warranty claims.
Summary
of Significant Accounting Policies
Fiscal
Years
The
Company reports on a fiscal-year basis and ends its quarters on the Sunday
closest to the end of the applicable calendar quarter, except in a 53-week
fiscal year, in which case the additional week falls into the fourth quarter of
that fiscal year. Both fiscal 2008 and 2007 consist of 52 weeks. The third
quarter of fiscal 2008 ended on September 28, 2008 and the third quarter of
fiscal 2007 ended on September 30, 2007.
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial reporting. The year-end Condensed
Consolidated Balance Sheets data was derived from audited financial statements.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Financial
Statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 30, 2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates in these financial statements include
the “percentage-of-completion” revenue recognition method for construction
projects, allowances for doubtful accounts receivable and sales returns,
inventory write-downs, estimates for future cash flows and economic useful lives
of property, plant and equipment, asset impairments, valuation of auction rate
securities, certain money market funds, certain accrued liabilities including
accrued warranty reserves and income taxes and tax valuation allowances. Actual
results could differ from those estimates.
In the
opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, which the Company believes are necessary for a fair statement of
the Company’s financial position as of September 28, 2008 and its results of
operations for the three and nine months ended September 28, 2008 and September
30, 2007 and its cash flows for the nine months ended September 28, 2008 and
September 30, 2007. These condensed consolidated financial statements are not
necessarily indicative of the results to be expected for the entire
year.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), “Business Combinations” (“SFAS No. 141(R)”), which replaces
SFAS No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No.
141(R) will significantly change the accounting for business combinations in a
number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and
restructuring costs. In addition, under SFAS No. 141(R), changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in
a business combination after the measurement period will impact income tax
expense. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008 and will be adopted by the Company for any purchase
business combinations consummated subsequent to December 28, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 160 on its financial
position and results of operations.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS
157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP
157-2 deferred the effective date of SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning after November 15,
2008. With the exception of investments and foreign currency derivatives held,
this deferral makes SFAS No. 157 effective for the Company beginning in the
first quarter of fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 157 on measurement of fair
value of its nonfinancial assets, including goodwill, and nonfinancial
liabilities.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of SFAS
No. 133” (“SFAS No. 161”), which expands the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 specifically
requires entities to provide enhanced disclosures addressing the following:
(a) how and why an entity uses derivative instruments; (b) how
derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. The Company is
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 161 on its financial position, results of operations and
disclosures.
In April
2008, the FASB issued FSP FAS No. 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors that should be
considered in developing the renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS 142, “Goodwill
and Other Intangible Assets.” FSP 142-3 also requires expanded disclosure
related to the determination of intangible asset useful lives. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. The Company
is currently evaluating the potential impact, if any, of the adoption of FSP
142-3 on its financial position, results of operations and
disclosures.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”), which identifies the sources of
accounting principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. This
Statement is effective 60 days following the SEC's approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles.” The
Company currently adheres to the hierarchy of U.S. GAAP as presented in SFAS No.
162 and the adoption of SFAS No. 162 during the three months ended September 28,
2008 did not have a material impact on its financial position, results of
operations and disclosures.
In
May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion, including partial
cash settlement. FSP APB 14-1 significantly impacts the accounting for
instruments commonly referred to as Instruments B, Instruments C and Instruments
X from Emerging Issue Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds
with Issuer Option to Settle for Cash upon Conversion” (“EITF 90-19”), and any
other convertible debt instruments that allow settlement in any combination of
cash and shares at the issuer’s option. The new guidance requires the issuer to
separately account for the liability and equity components of the instrument in
a manner that reflects interest expense equal to the issuer’s non-convertible
debt borrowing rate. FSP APB 14-1 is effective for fiscal years and interim
periods beginning after December 15, 2008, and retrospective application will be
required for all periods presented. The new guidance may have a significant
impact on the Company’s outstanding convertible debt balance of $425.0 million,
potentially resulting in significantly higher non-cash interest expense on its
convertible debt (see Note 10). The Company is currently evaluating the
potential impact of the new guidance on its results of operations and financial
condition.
In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active”
(“FSP 157-3”), which demonstrated how the fair value of a financial asset
is determined when the market for that financial asset is inactive. FSP 157-3 is
applicable to the valuation of auction rate securities held by the Company for
which there was no active market as of September 28, 2008. FSP 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued (see Note 5). The adoption of FSP 157-3 during
the three months ended September 28, 2008 did not have a material impact on
the Company’s consolidated results of operations or financial
condition.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
The
Company has changed its Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2007 to exclude the impact of purchases of
property, plant and equipment that remain unpaid and as such are included in
“accounts payable and other accrued liabilities” at the end of the reporting
period. Historically, changes in “accounts payable and other accrued
liabilities” related to such purchases were included in cash flows from
operations, while the investing activity caption "Purchase of property, plant
and equipment" included these purchases. As these unpaid purchases do not
reflect cash transactions, the Company has revised its cash flow presentations
to exclude them. The correction resulted in an increase to the previously
reported amount of cash used for operating activities of $7.9 million in the
nine months ended September 30, 2007, resulting from a reduction in the amount
of cash provided from the change in accounts payable and other accrued
liabilities in that period. The corresponding correction in the investing
section was to decrease cash used for investing activities by $7.9 million in
the nine months ended September 30, 2007, as a result of the reduction in the
amount of cash used for purchases of property, plant and equipment in that
period. These corrections had no impact on previously reported results of
operations, working capital or stockholders’ equity of the Company. The Company
concluded that these corrections were not material to any of its previously
issued condensed consolidated financial statements, based on SEC Staff
Accounting Bulletin No. 99-Materiality.
Note
2. TRANSACTIONS WITH
CYPRESS
Purchases
of Imaging and Infrared Detector Products from Cypress
The
Company purchased fabricated semiconductor wafers from Cypress at intercompany
prices consistent with Cypress’s internal transfer pricing methodology. In
December 2007, Cypress announced the planned closure of its Texas wafer
fabrication facility that manufactured the Company’s imaging and infrared
detector products. The planned closure is expected to be completed in the
fourth quarter of fiscal 2008. The Company evaluated its alternatives relating
to the future plans for this business and decided to wind-down its activities
related to the imaging detector product line in the first quarter of fiscal
2008. Accordingly, in the three months ended March 30, 2008, cost of revenue
included a $2.2 million impairment charge to long-lived assets primarily related
to manufacturing equipment located in the Texas wafer fabrication facility. The
Company did not purchase wafers from Cypress in the second and third quarters of
fiscal 2008. Wafer purchases totaled $0.6 million for the nine months ended
September 28, 2008 and $0.7 million and $3.8 million for the three and
nine months ended September 30, 2007, respectively.
Administrative
Services Provided by Cypress
Cypress
seconded employees and consultants to the Company for different time periods for
which the Company paid their fully-burdened compensation. In addition, Cypress
personnel rendered services to the Company to assist with administrative
functions such as employee benefits and other Cypress corporate services and
infrastructure. Cypress billed the Company for a portion of the Cypress
employees’ fully-burdened compensation. In the case of the Philippines
subsidiary, which entered into a services agreement for such secondments and
other consulting services in January 2005, the Company paid the fully burdened
compensation plus 10%. The amounts that the Company has recorded as general and
administrative expenses in the accompanying statements of operations for these
services was approximately $0.7 million and $2.8 million for the three and
nine months ended September 28, 2008, respectively, and $0.5 million and
$1.2 million for the three and nine months ended September 30, 2007,
respectively.
Leased
Facility in the Philippines
In 2003,
the Company and Cypress reached an understanding that the Company would build
out and occupy a building owned by Cypress for its solar cell manufacturing
facility in the Philippines. The Company entered into a lease agreement for this
facility and a sublease for the land under which the Company paid Cypress at a
rate equal to the cost to Cypress for that facility (including taxes, insurance,
repairs and improvements). Under the lease agreement, the Company had the right
to purchase the facility and assume the lease for the land from Cypress at any
time at Cypress’s original purchase price of approximately $8.0 million, plus
interest computed on a variable index starting on the date of purchase by
Cypress until the sale to the Company, unless such purchase option was exercised
after a change of control of the Company, in which case the purchase price would
be at a market rate, as reasonably determined by Cypress. In May 2008, the
Company exercised its right to purchase the facility from Cypress and assumed
the lease for the land from an unaffiliated third party for a total purchase
price of $9.5 million. The lease for the land expires in May 2048 and is
renewable for an additional 25 years. Rent expense paid to Cypress for this
building and land was approximately zero and $0.1 million for the three and
nine months ended September 28, 2008, respectively, and $0.1 million and
$0.2 million for the three and nine months ended September 30, 2007,
respectively.
Leased
Headquarters Facility in San Jose, California
In
May 2006, the Company entered into a lease agreement for its 43,732 square
foot headquarters, which is located in a building owned by Cypress in San Jose,
California, for $6.0 million over the five-year term of the lease. In
August 2008, the Company amended the lease agreement, increasing the
rentable square footage and the total lease obligations to 55,594 and $7.2
million, respectively, over the five-year term of the lease. In the event
Cypress decides to sell the building, the Company has the right of first refusal
to purchase the building at a fair market price which will be based on
comparable sales in the area. Rent expense paid to Cypress for this facility was
approximately $0.4 million and $1.1 million for the three and nine months
ended September 28, 2008, respectively, and $0.3 million and $0.9 million for
the three and nine months ended September 30, 2007,
respectively.
Employee
Matters Agreement
In
October 2005, the Company entered into an employee matters agreement with
Cypress to allocate assets, liabilities and responsibilities relating to its
current and former U.S. and international employees and its participation in the
employee benefits plans that Cypress sponsored and maintained. In July
2008, the Company transferred all accounts in the Cypress 401(k) Plan held by
the Company’s employees to its recently established SunPower 401(k) Savings
Plan. In September 2008, all of the Company’s eligible employees began
participating in SunPower’s own health and welfare plans and no longer
participate in the Cypress health and welfare plans. In connection with Cypress’
spin-off of its shares of the Company’s class B common stock, the Company and
Cypress agreed to terminate the employee matters agreement.
Indemnification
and Insurance Matters Agreement
The
Company will indemnify Cypress and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions: existing on,
under, about or in the vicinity of any of the Company’s facilities, or arising
out of operations occurring at any of the Company’s facilities, including its
California facilities, whether prior to or after Cypress’s spin-off of the
Company’s class B common stock held by Cypress; existing on, under, about or in
the vicinity of the Philippines facility which the Company occupies, or arising
out of operations occurring at such facility, whether prior to or after the
separation, to the extent that those liabilities were caused by the Company;
arising out of hazardous materials found on, under or about any landfill, waste,
storage, transfer or recycling site and resulting from hazardous materials
stored, treated, recycled, disposed or otherwise handled by any of the Company’s
operations or the Company’s California and Philippines facilities prior to the
separation; and arising out of the construction activity conducted by or on
behalf of us at Cypress’s Texas facility.
The
indemnification and insurance matters agreement also contains provisions
governing the Company’s insurance coverage, which was under the Cypress
insurance policies. As of September 29, 2008, the Company has obtained its own
separate policies for the coverage previously provided under the indemnification
and insurance matters agreement.
Tax
Sharing Agreement
The
Company has entered into a tax sharing agreement with Cypress providing for each
of the party’s obligations concerning various tax liabilities. The tax sharing
agreement is structured such that Cypress will pay all federal, state, local and
foreign taxes that are calculated on a consolidated or combined basis (while
being a member of Cypress’s consolidated or combined group pursuant to federal,
state, local and foreign tax law). The Company’s portion of such tax liability
or benefit will be determined based upon its separate return tax liability as
defined under the tax sharing agreement. Such liability or benefit will be based
on a pro forma calculation as if the Company were filing a separate income tax
return in each jurisdiction, rather than on a combined or consolidated basis
with Cypress subject to adjustments as set forth in the tax sharing
agreement.
On June
6, 2006, the Company ceased to be a member of Cypress’s consolidated group for
federal income tax purposes and certain state income tax purposes. On September
29, 2008, the Company ceased to be a member of Cypress’s combined group for all
state income tax purposes. To the extent that the Company becomes entitled to
utilize on the Company’s separate tax returns portions of those credit or loss
carryforwards existing as of such date, the Company will distribute to Cypress
the tax effect, estimated to be 40% for federal income tax purposes, of the
amount of such tax loss carryforwards so utilized, and the amount of any credit
carryforwards so utilized. The Company will distribute these amounts to Cypress
in cash or in the Company’s shares, at the Company’s option. As of
December 30, 2007, the Company has $44.0 million of federal net operating
loss carryforwards and approximately $73.5 million of California net operating
loss carryforwards meaning that such potential future payments to Cypress, which
would be made over a period of several years, would therefore aggregate
approximately $19.1 million.
The
majority of these net operating loss carryforwards were created by employee
stock transactions. Because there is uncertainty as to the realizability of
these loss carryforwards, the portion created by employee stock transactions are
not reflected on the Company’s Condensed Consolidated Balance
Sheets.
Upon
completion of its follow-on public offering of common stock in June 2006, the
Company was no longer considered to be a member of Cypress’s consolidated
group for federal income tax purposes. Upon completion of the spin-off on
September 29, 2008, the Company is no longer considered to be a member of
Cypress’s combined group for state income tax purposes. Accordingly, the Company
will be subject to the obligations payable to Cypress for any federal income tax
credit or loss carryforwards utilized in its federal tax returns in subsequent
periods, as explained in the preceding paragraph.
The
Company will continue to be jointly and severally liable for any tax liability
as governed under federal, state and local law during all periods in which it is
deemed to be a member of the Cypress consolidated or combined group.
Accordingly, although the tax sharing agreement allocates tax liabilities
between Cypress and all its consolidated subsidiaries, for any period in which
the Company is included in Cypress’s consolidated group, the Company could be
liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the group.
Subject
to certain caveats, Cypress has obtained a ruling from the Internal Revenue
Service (“IRS”) to the effect that the distribution by Cypress of the Company’s
class B common stock to Cypress stockholders qualified as a tax-free
distribution under Section 355 of the Internal Revenue Code (the “Code”).
Despite such ruling, the distribution may nonetheless be taxable to Cypress
under Section 355(e) of the Code if 50% or more of the Company’s voting
power or economic value is acquired as part of a plan or series of related
transactions that includes the distribution of the Company’s stock. The tax
sharing agreement includes the Company’s obligation to indemnify Cypress for any
liability incurred as a result of issuances or dispositions of the Company’s
stock after the distribution, other than liability attributable to certain
dispositions of the Company’s stock by Cypress, that cause Cypress’s
distribution of shares of the Company’s stock to its stockholders to be taxable
to Cypress under Section 355(e) of the Code.
The tax
sharing agreement further provides for cooperation with respect to tax matters,
the exchange of information and the retention of records which may affect the
income tax liability of either party. Disputes arising between Cypress and the
Company relating to matters covered by the tax sharing agreement are subject to
resolution through specific dispute resolution provisions contained in the
agreement.
In connection with Cypress’ spin-off of
its shares of the Company’s class B common stock, the Company and Cypress, on
August 12, 2008, entered into an Amendment No. 1 to Tax Sharing
Agreement (the “Amended Tax Sharing Agreement”) to address certain transactions
that may affect the tax treatment of the spin-off and certain other
matters.
Under the Amended Tax Sharing
Agreement, the Company is required to provide notice to Cypress of certain
transactions that could give rise to the Company’s indemnification obligation
relating to taxes resulting from the application of Section 355(e) of the Code
or similar provision of other applicable law to the spin-off as a result of one
or more acquisitions (within the meaning of Section 355(e)) of the
Company’s stock after the spin-off. An acquisition for these purposes includes
any such acquisition attributable to a conversion of any or all of the Company’s
class B common stock to class A common stock or any similar
recapitalization transaction or series of related transactions (a
“Recapitalization”). The Company is not required to indemnify Cypress for any
taxes which would result solely from (A) issuances and dispositions of the
Company’s stock prior to the spin-off and (B) any acquisition of the
Company’s stock by Cypress after the spin-off.
Under the Amended Tax Sharing
Agreement, the Company also agreed that, for a period of 25 months
following the spin-off, it will not (i) effect a Recapitalization or
(ii) enter into or facilitate any other transaction resulting in an
acquisition (within the meaning of Section 355(e) of the Code) of the Company’s
stock without first obtaining the written consent of Cypress; provided, the
Company is not required to obtain Cypress’s consent unless such transaction
(either alone or when taken together with one or more other transactions entered
into or facilitated by the Company consummated after August 4, 2008 and
during the 25-month period following the spin-off) would involve the acquisition
for purposes of Section 355(e) of the Code after August 4, 2008 of more
than 25% of the Company’s outstanding shares of common stock. In addition, the
requirement to obtain Cypress’s consent does not apply to (A) any
acquisition of the Company’s stock that will qualify under Treasury
Regulation Section 1.355-7(d)(8) in connection with the performance of
services, (B) any acquisition of the Company’s stock for which it furnishes
to Cypress prior to such acquisition an opinion of counsel and supporting
documentation, in form and substance reasonably satisfactory to Cypress (a “Tax
Opinion”), that such acquisition will qualify under Treasury
Regulation Section 1.355-7(d)(9), (C) an acquisition of the
Company’s stock (other than involving a public offering) for which the Company
furnishes to Cypress prior to such acquisition a Tax Opinion to the effect that
such acquisition will qualify under the so-called “super safe harbor” contained
in Treasury Regulation Section 1.355-7(b)(2) or (D) the adoption
by the Company of a standard stockholder rights plan. The Company further agreed
that it will not (i) effect a Recapitalization during the 36 month
period following the spin-off without first obtaining a Tax Opinion to the
effect that such Recapitalization (either alone or when taken together with any
other transaction or transactions) will not cause the spin-off to become taxable
under Section 355(e), or (ii) seek any private ruling, including any
supplemental private ruling, from the IRS with regard to the spin-off, or any
transaction having any bearing on the tax treatment of the spin-off, without the
prior written consent of Cypress.
Note
3. BUSINESS COMBINATIONS,
GOODWILL AND INTANGIBLE ASSETS
Business
Combinations
PowerLight
In
January 2007, the Company completed the acquisition of PowerLight (subsequently
renamed SunPower Corporation, Systems). Of the total consideration issued for
the acquisition, approximately $23.7 million in cash and approximately
0.7 million shares of its class A common stock, with a total aggregate
value of $118.1 million as of December 30, 2007, were held in escrow
as security for the indemnification obligations of certain former PowerLight
stockholders.
In
January 2008, following the first anniversary of the acquisition date, the
Company authorized the release of approximately one-half of the original
escrow amount, leaving in escrow approximately $12.9 million in cash and
approximately 0.4 million shares of its class A common stock, with a
total aggregate value of $38.6 million as of September 28, 2008. The
Company’s rights to recover damages under several provisions of the acquisition
agreement also expired on the first anniversary of the acquisition date. As
a result, the Company is now entitled to recover only limited types of losses,
and any recovery will be limited to the amount available in the escrow fund at
the time of a claim. The remaining amount in the escrow fund will be
progressively reduced to zero on each anniversary of the acquisition date over a
period of four years.
Solar
Solutions
In
January 2008, the Company completed the acquisition of Solar Solutions, a solar
systems integration and product distribution company based in Italy. Solar
Solutions was a division of Combigas S.r.l., a petroleum products trading firm.
Active since 2002, Solar Solutions distributes components such as solar panels
and inverters, and offers turnkey solar power systems and standard system kits
via a network of dealers throughout Italy. Prior to the acquisition, Solar
Solutions had been a customer of the Company since fiscal 2006. As a result
of the acquisition, Solar Solutions became a wholly-owned subsidiary of the
Company. In connection with the acquisition, the Company changed Solar
Solutions’ name to SunPower Italia S.r.l. (“SunPower Italia”). The acquisition
of SunPower Italia was not material to the Company’s financial position or
results of operations.
Solar
Sales Pty. Ltd. (“Solar Sales”)
In July
2008, the Company completed the acquisition of Solar Sales, a solar systems
integration and product distribution company based in Australia. Solar Sales
distributes components such as solar panels and inverters via a national network
of dealers throughout Australia, and designs, builds and commissions large-scale
commercial systems. Prior to the acquisition, Solar Sales had been a
customer of the Company since fiscal 2005. As a result of the acquisition,
Solar Sales became a wholly-owned subsidiary of the Company. In connection with
the acquisition, the Company changed Solar Sales’ name to SunPower Corporation
Australia Pty. Ltd. (“SunPower Australia”). The acquisition of SunPower
Australia was not material to the Company’s financial position or results of
operations.
Goodwill
The
following table presents the changes in the carrying amount of goodwill under
the Company's reportable business segments:
(In
thousands)
|
|
Components
Business
Segment
|
|
|
Systems
Business
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill during the nine months ended September 28, 2008 resulted from the
acquisitions of SunPower Italia and SunPower Australia. Approximately $11.7
million had been allocated to goodwill within the components segment, which
represents the excess of the purchase price over the fair value of the
underlying net tangible and intangible assets of SunPower Italia and
SunPower Australia. SunPower Italia is a Euro functional currency subsidiary and
SunPower Australia is an Australian dollar functional currency subsidiary.
Therefore, the Company records a translation adjustment for the revaluation of
the subsidiary’s goodwill and intangible assets into U.S. dollar. As of
September 28, 2008, the cumulative translation adjustment decreased the balance
of goodwill by $0.2 million. Also during the nine months ended September 28,
2008, the Company recorded an adjustment to increase goodwill by $0.2 million to
adjust the value of acquired investments.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
(“SFAS No. 142”), goodwill will not be amortized but instead will be tested for
impairment at least annually, or more frequently if certain indicators are
present. The Company conducts its annual impairment test of goodwill as of the
Sunday closest to the end of the third calendar quarter of each year. Based on
its last impairment test as of September 28, 2008, the Company determined
there was no impairment. In the event that management determines that the value
of goodwill has become impaired, the Company will incur an accounting charge for
the amount of the impairment during the fiscal quarter in which the
determination is made.
Intangible
Assets
The
following tables present details of the Company's acquired identifiable
intangible assets:
(In
thousands)
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
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Patents
and purchased technology
|
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Customer
relationships and other
|
|
|
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Patents
and purchased technology
|
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Customer
relationships and other
|
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In
connection with the acquisitions of SunPower Italia and SunPower Australia, the
Company recorded $6.2 million of intangible assets less $0.4 million of
cumulative translation adjustment for acquired intangibles in the nine months
ended September 28, 2008. In connection with the acquisition of SP Systems, the
Company recorded $79.5 million of intangible assets in the first quarter of
fiscal 2007, of which $15.5 million was related to the PowerLight
tradename. The determination of the fair value and useful life of the tradename
was based on the Company’s strategy of continuing to market its systems products
and services under the PowerLight brand. Based on the Company’s change in
branding strategy and changing PowerLight’s name to SunPower Corporation,
Systems, during the quarter ended July 1, 2007, the Company recognized an
impairment charge of $14.1 million, which represented the net book value of the
PowerLight tradename.
All of
the Company’s acquired identifiable intangible assets are subject to
amortization. Aggregate amortization expense for intangible assets totaled $4.2
million and $12.6 million for the three and nine months ended September 28,
2008, respectively, and $6.9 million and $21.4 million for the three and nine
months ended September 30, 2007, respectively. As of September 28, 2008, the
estimated future amortization expense related to intangible assets is as follows
(in thousands):
2008
(remaining three months)
|
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Note
4. BALANCE SHEET
COMPONENTS
(In thousands)
|
|
September
28,
2008
|
|
|
December 30,
2007
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
|
|
|
|
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
|
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|
|
Less:
Allowance for sales returns
|
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|
|
Costs
and estimated earnings in excess of billings on contracts in progress and
billings in excess of costs and estimated earnings on contracts in
progress consists of the following:
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings on contracts in
progress
|
|
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings on contracts in
progress
|
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|
|
Estimated
earnings to date
|
|
|
|
|
|
|
|
|
Contract
revenue earned to date
|
|
|
|
|
|
|
|
|
Less:
Billings to date, including earned incentive rebates
|
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|
|
(1) In
addition to polysilicon and other raw materials for solar cell
manufacturing, raw materials includes solar panels purchased from
third-party vendors and installation materials for systems
projects.
|
|
|
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|
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|
|
Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
VAT
receivables, current portion
|
|
|
|
|
|
|
|
|
Deferred
tax assets, current portion
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
December 30,
2007
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
Construction-in-process
(manufacturing facility in the Philippines)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Total depreciation expense was $13.6 million and $35.6 million for the
three and nine months ended September 28, 2008, respectively, and
$6.2 million and $17.7 million for the three and nine months ended
September 30, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAT
receivable, net of current portion
|
|
|
|
|
|
|
|
|
Investments
in joint ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) In
June 2008, the Company loaned $10.0 million to a third-party private
company pursuant to a three-year interest-bearing note receivable that is
convertible into equity at the Company’s option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and employee benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
5. INVESTMENTS
On
December 31, 2007, the Company adopted SFAS No. 157, which refines the
definition of fair value, provides a framework for measuring fair value and
expands disclosures about fair value measurements. The Company’s adoption of
SFAS No. 157 was limited to its financial assets and financial liabilities, as
permitted by FSP 157-2. The Company does not have any nonfinancial assets or
nonfinancial liabilities that are recognized or disclosed at fair value in its
condensed consolidated financial statements on a recurring basis.
Assets
Measured at Fair Value on a Recurring Basis
SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy assigns the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level
3"). Level 2 measurements are inputs that are observable for assets or
liabilities, either directly or indirectly, other than quoted prices included
within Level 1. The following table presents information about the Company’s
available-for-sale securities under SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities” (“SFAS No. 115”) measured at fair
value on a recurring basis as of September 28, 2008 and indicates the fair value
hierarchy of the valuation techniques utilized by the Company to determine such
fair value in accordance with the provisions of SFAS
No. 157:
(In thousands)
|
|
Quoted
Prices in Active
Markets
for Identical
Instruments
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
as of
September
28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities utilizing Level 3 inputs to determine fair value are comprised of
investments in money market funds totaling $25.7 million and auction rate
securities held totaling $25.0 million at September 28, 2008. Investments in
money market funds consist of the Company’s investments in the Reserve Primary
Fund and the Reserve International Liquidity Fund (collectively referred to as
the "Reserve Funds"). The net asset value for the Reserve Funds fell below $1.00
because the funds had investments in Lehman, which filed for bankruptcy on
September 15, 2008. As a result of this event, the Reserve Funds wrote down
their investments in Lehman to zero. The Company has estimated the loss on the
Reserve Funds to be approximately $0.9 million based on an evaluation of the
fair value of the securities held by the Reserve Funds and the net asset value
that was last published by the Reserve Funds before the funds suspended
redemptions. The Company recorded an impairment charge of $0.9 million in
“Other, net” in its Condensed Consolidated Statements of Operations,
thereby establishing a new cost basis for each fund.
The
Company’s money market fund instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted prices for identical
instruments in active markets. However, the Company conducted its fair value
assessment of the Reserve Funds using Level 2 and Level 3
inputs. Management has reviewed the Reserve Funds' underlying securities
portfolios which are substantially comprised of discount notes, certificates of
deposit and commercial paper issued by highly-rated institutions. The Company
has used a pricing service to assist in its review of fair value of the
underlying portfolios, which estimates fair value of some instruments using
proprietary models based on assumptions as to term, maturity dates, rates,
credit risk, etc. Normally, the Company would classify such an investment within
Level 2 of the fair value hierarchy. However, management also evaluated the
fair value of its unit interest in the Reserve Funds itself, considering risk of
collection, timing and other factors. These assumptions are inherently
subjective and involve significant management judgment. As a result, the
Company has classified its holdings in the Reserve Funds within Level 3 of the
fair value hierarchy.
On October
31, 2008, the Company received a distribution of $11.9 million from the Reserve
Funds. The Company expects that the remaining distribution of $13.8 million from
the Reserve Funds will occur over the remaining twelve months as the investments
held in the funds mature. Therefore, the Company has changed the designation of
its $13.8 million investment in the Reserve Funds that was not received in the
subsequent period from cash and cash equivalents to short-term investments at
the new cost basis on the Condensed Consolidated Balance Sheets. This
re-designation is included in "purchases of available-for-sale securities" in
investing activities in the Company’s accompanying Condensed Consolidated
Statements of Cash Flows. While the Company expects to receive substantially all
of its current holdings in the Reserve Funds within the next twelve months, it
is possible the Company may encounter difficulties in receiving distributions
given the current credit market conditions. If market conditions were to
deteriorate even further such that the current fair value were not achievable,
the Company could realize additional losses in its holdings with the Reserve
Funds and distributions could be further delayed.
Auction
rate securities held are typically over-collateralized and secured by pools of
student loans originated under the Federal Family Education Loan Program
(“FFELP”) that are guaranteed and insured by the U.S. Department of Education.
In addition, all auction rate securities held are rated by one or more of the
Nationally Recognized Statistical Rating Organizations (“NRSRO”) as triple-A.
Historically, these securities have provided liquidity through a Dutch auction
at pre-determined intervals every seven to 49 days. At the end of each
reset period, investors can continue to hold the securities or sell the
securities at par through an auction process. The “stated” or “contractual”
maturities for these securities generally are between 20 to 30
years. Beginning in February 2008, the auction rate securities market
experienced a significant increase in the number of failed auctions, resulting
from a lack of liquidity, which occurs when sell orders exceed buy orders, and
does not necessarily signify a default by the issuer.
All
auction rate securities invested in at September 28, 2008 have failed to clear
at auctions. For failed auctions, the Company continues to earn interest on
these investments at the maximum contractual rate as the issuer is obligated
under contractual terms to pay penalty rates should auctions fail. Historically,
failed auctions have rarely occurred, however, such failures could continue to
occur in the future. In the event the Company needs to access these funds, the
Company will not be able to do so until a future auction is successful, the
issuer redeems the securities, a buyer is found outside of the auction process
or the securities mature. Accordingly, auction rate securities at September 28,
2008 and December 30, 2007 that were not sold in a subsequent period totaling
$25.0 million and $29.1 million, respectively, are classified as long-term
investments on the Condensed Consolidated Balance Sheets, because they are not
expected to be used to fund current operations and consistent with the stated
contractual maturities of the securities.
The
Company determined that use of a valuation model was the best available
technique for measuring the fair value of its auction rate securities. The
Company used an income approach valuation model to estimate the price that would
be received to sell its securities in an orderly transaction between market
participants ("exit price") as of September 28, 2008. The exit price was derived
as the weighted average present value of expected cash flows over various
periods of illiquidity, using a risk-adjusted discount rate that was based on
the credit risk and liquidity risk of the securities. While the valuation model
was based on both Level 2 (credit quality and interest rates) and Level 3
inputs, the Company determined that the Level 3 inputs were the most significant
to the overall fair value measurement, particularly the estimates of risk
adjusted discount rates and ranges of expected periods of illiquidity. The
valuation model also reflected the Company's intention to hold its auction rate
securities until they can be liquidated in a market that facilitates orderly
transactions. The following key assumptions were used in the valuation
model:
· 5
years to liquidity;
· continued
receipt of contractual interest which provides a premium spread for failed
auctions; and
· discount
rates ranging from 4.8% to 6.2%, which incorporate a spread for both credit and
liquidity risk.
Based on
these assumptions, the Company estimated that the auction rate securities would
be valued at approximately 96% of their stated par value, representing a decline
in value of approximately $1.0 million. The following table provides a
summary of changes in fair value of the Company’s available-for-sale securities
utilizing Level 3 inputs as of September 28, 2008:
(In thousands)
|
|
Money
Market
Funds
|
|
|
Auction
Rate Securities
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
— |
|
|
$ |
— |
|
Transfers
from Level 1 to Level 3
|
|
|
26,677 |
|
|
|
— |
|
Transfers
from Level 2 to Level 3
|
|
|
— |
|
|
|
29,050 |
|
|
|
|
— |
|
|
|
10,000 |
|
|
|
|
— |
|
|
|
(13,000
|
) |
Impairment
loss recorded in “Other, net”
|
|
|
(933
|
) |
|
|
— |
|
Unrealized
loss included in “Other comprehensive income”
|
|
|
— |
|
|
|
(1,033
|
) |
Balance
at September 28, 2008 (2)
|
|
$ |
25,744 |
|
|
$ |
25,017 |
|
(1) In
the second quarter of fiscal 2008, the Company sold auction rate
securities with a carrying value of $12.5 million for their stated par
value of $13.0 million to the issuer of the securities outside
of the auction process.
|
|
|
|
|
|
|
|
|
(2) On
October 31, 2008, the Company received a distribution of $11.9 million
from the Reserve Funds. |
|
|
|
|
|
|
|
|
The
following table summarizes unrealized gains and losses by major security type
designated as available-for-sale:
|
|
September 28, 2008
|
|
|
December 30, 2007
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
(In thousands)
|
|
Cost
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
Fair
Value
|
|
|
Cost
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
Fair
Value
|
|
|
|
|
131,048 |
|
|
|
— |
|
|
|
— |
|
|
|
131,048 |
|
|
|
281,458 |
|
|
|
— |
|
|
|
— |
|
|
|
281,458 |
|
|
|
|
253,936 |
|
|
|
15 |
|
|
|
(1,199
|
) |
|
|
252,752 |
|
|
|
92,395 |
|
|
|
6 |
|
|
|
(50
|
) |
|
|
92,351 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
78,163 |
|
|
|
2 |
|
|
|
(2
|
) |
|
|
78,163 |
|
Total
available-for-sale securities
|
|
$ |
384,984 |
|
|
$ |
15 |
|
|
$ |
(1,199 |
) |
|
$ |
383,800 |
|
|
$ |
452,016 |
|
|
$ |
8 |
|
|
$ |
(52 |
) |
|
$ |
451,972 |
|
In
accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments,” the following table summarizes the
fair value and gross unrealized losses of the Company’s available-for-sale
securities, aggregated by type of investment instrument and length of time that
individual securities have been in a continuous unrealized loss
position:
|
|
As
of September 28, 2008
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Gross Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 30, 2007
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Gross Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 28, 2008 and December 30, 2007, the Company did not have any
investments in available-for-sale securities that were in an unrealized loss
position for 12 months or greater. Of the $1.2 million gross unrealized losses
of the Company’s corporate securities, $1.0 million resulted from the decline in
the estimated fair value of auction rate securities primarily due to their lack
of liquidity. The decline in fair value for the remaining corporate securities
was primarily related to changes in interest rates. The Company
has concluded that no other-than-temporary impairment losses occurred in
the nine months ended September 28, 2008 in regards to the corporate securities
because the lack of liquidity in the market for auction rate securities and
changes in interest rates are considered temporary in nature for which the
Company has recorded an unrealized loss within comprehensive income, a component
of stockholders' equity. The Company has the ability and intent to hold these
corporate securities until a recovery of fair value. In addition, the Company
evaluated the near-term prospects of the corporate securities in relation to the
severity and duration of the impairment. Based on that evaluation and the
Company’s ability and intent to hold these corporate securities for a reasonable
period of time, the Company did not consider these investments to be
other-than-temporarily impaired. If it is determined that the fair value of
these corporate securities is other-than-temporarily impaired, the Company would
record a loss in its Condensed Consolidated Statements of Operations in the
future, which could be material.
The
classification and contractual maturities of available-for-sale securities is as
follows:
(In thousands)
|
|
September
28,
2008
|
|
|
December 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
restricted cash(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
restricted cash(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in less than one year
|
|
|
|
|
|
|
|
|
Due
from one to two years (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company provided security in the form of cash collateralized bank standby
letters of credit for advance payments received from
customers.
|
(2)
|
The
Company classifies all available-for-sale securities that are intended to
be available for use in current operations as short-term
investments.
|
Assets
Measured at Fair Value on a Nonrecurring Basis
The Company measures its
nonpublicly traded investments at fair value on a nonrecurring basis, of which
$5.0 million is accounted for using the cost method and $18.9 million is
accounted under APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock” (see Note 8). These assets are recognized at fair
value when they are deemed to be other-than-temporarily impaired. During the
three and nine months ended September 28, 2008, the Company did not record
any other-than-temporary impairments on those assets required to be measured at
fair value on a nonrecurring basis.
Note
6. ADVANCES TO
SUPPLIERS
The
Company has entered into agreements with various polysilicon, ingot, wafer,
solar cells and solar module vendors and manufacturers. These agreements specify
future quantities and pricing of products to be supplied by the vendors for
periods up to 12 years. Certain agreements also provide for penalties or
forfeiture of advanced deposits in the event the Company terminates the
arrangements (see Note 8). Under certain of these agreements, the Company is
required to make prepayments to the vendors over the terms of the arrangements.
In the nine months ended September 28, 2008, the Company paid advances totaling
$8.0 million in accordance with the terms of existing supply agreements. As of
September 28, 2008, advances to suppliers totaled $144.8 million, the current
portion of which is $60.1 million.
The
Company’s future prepayment obligations related to these agreements as of
September 28, 2008 are as follows (in thousands):
2008
(remaining three months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
October 2008, the Company paid advances of $44.9 million in accordance with the
terms of existing supply agreements.
Note
7. STOCK-BASED
COMPENSATION
During the preparation of its
condensed consolidated financial statements for the nine months ended September
28, 2008, the Company identified errors in its financial statements related to
the year ended December 30, 2007, which resulted in $1.3 million overstatement
of stock-based compensation expense. The Company corrected these errors in its
condensed consolidated financial statements for the nine months ended September
28, 2008, which resulted in a $1.3 million credit to income before income taxes
and net income. The out-of-period effect is not expected to be material to
estimated full-year 2008 results, and, accordingly has been recognized in
accordance with APB 28, Interim Financial Reporting, paragraph 29 as the error
is not material to any financial statements of prior periods.
The
following table summarizes the consolidated stock-based compensation expense by
line items in the Condensed Consolidated Statements of Operations:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of components revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net cash proceeds from the issuance of shares in connection with exercises of
stock options under the Company’s employee stock plans were $1.5 million and
$3.8 million for the three and nine months ended September 28, 2008,
respectively, and $1.9 million and $6.9 million for the three and nine months
ended September 30, 2007, respectively. The Company recognized an income tax
benefit from stock option exercises of $19.3 million and $33.9 million for the
three and nine months ended September 28, 2008, respectively. No income tax
benefit was realized from stock option exercises during the three and nine
months ended September 30, 2007. As required, the Company presents excess tax
benefits from the exercise of stock options, if any, as financing cash flows
rather than operating cash flows.
The
following table summarizes the consolidated stock-based compensation expense, by
type of awards:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards and units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
and options released from re-vesting restrictions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in stock-based compensation capitalized in inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the acquisition of SP Systems on January 10, 2007, 1.1 million
shares of the Company’s class A common stock and 0.5 million stock options
issued to employees of SP Systems, which were valued at $60.4 million, are
subject to certain transfer restrictions and a repurchase option held by the
Company. The Company is recognizing expense as the re-vesting restrictions of
these shares lapse over the two-year period beginning on the date of
acquisition. The value of shares released from such re-vesting restrictions is
included in stock-based compensation expense in the table above.
The
following table summarizes the unrecognized stock-based compensation cost by
type of awards:
(In
thousands, except years)
|
|
As
of
September
28,
2008
|
|
|
Weighted-Average
Amortization Period
(in
years)
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards and units
|
|
|
|
|
|
|
|
|
Shares
subject to re-vesting restrictions
|
|
|
|
|
|
|
|
|
Total
unrecognized stock-based compensation cost
|
|
|
|
|
|
|
|
|
For stock
options issued prior to the adoption of SFAS No. 123(revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”) and for certain performance based
awards, the Company recognizes its stock-based compensation cost using the
graded amortization method. For all other awards, stock-based compensation cost
is recognized on a straight-line basis. Additionally, the Company issues new
shares upon exercises of options by employees.
Valuation
Assumptions
The
determination of fair value of each stock option award on the date of grant
using the Black-Scholes valuation model (“Black-Scholes model") is affected by
the stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, expected
stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors. The following weighted average
assumptions were used for the three and nine months ended September 28, 2008 and
September 30, 2007:
|
|
Three
Months Ended*
|
|
Nine
Months Ended
|
|
|
|
September
28,
2008
|
|
September
28,
2008
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.48%
|
|
|
3.48%
|
|
|
4.60%
|
|
|
|
|
60%
|
|
|
60%
|
|
|
90%
|
|
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
No stock options were granted in the three months ended September 30,
2007.
|
|
Expected
Term:
The
Company continues to utilize the simplified method under the provisions of Staff
Accounting Bulletin No. 110 (“SAB No. 110”), an amendment to Staff
Accounting Bulletin No. 107 (“SAB No. 107”), for estimating expected
term, instead of its historical exercise data. The Company elected not to base
the expected term on historical data because of the significant difference in
its status before and after the effective date of SFAS No. 123(R). The Company
was a privately-held company until its IPO, and the only available liquidation
event for option holders was Cypress’s buyout of minority interests in November
2004. At all other times, optionees could not cash out on their vested options.
From the time of the Company’s IPO in November 2005 through May 2006 when
lock-up restrictions expired, a majority of the optionees were unable to
exercise and sell vested options.
Volatility:
In fiscal
2008, the Company computed the expected volatility for its equity awards based
on its historical volatility from traded options and class A common
stock. Prior to fiscal 2008, the Company computed the expected volatility
for its equity awards based on historical volatility rates for a publicly-traded
U.S.-based direct competitor. Because of the limited history of its stock
trading publicly, the Company did not believe that its historical volatility
would be representative of the expected volatility for its equity
awards.
Risk-Free
Interest Rate and Dividend Yield:
The
interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. Since the Company does not pay and does not expect to pay dividends, the
expected dividend yield is zero.
Equity
Incentive Programs
Second
Amended and Restated 2005 SunPower Corporation Stock Incentive
Plan:
In May
2008, the Company’s stockholders approved an increase of 1.7 million shares
and, beginning in fiscal 2009 through 2015, an automatic annual increase in the
number of shares available for grant under the Company’s Second Amended and
Restated 2005 SunPower Corporation Stock Incentive Plan under which the Company
may issue incentive or non-statutory stock options, restricted stock awards,
restricted stock units, or stock appreciation rights to directors, employees and
consultants. The automatic annual increase is equal to the lower of three
percent of the outstanding shares of all classes of the Company’s common stock
measured on the last day of the immediately preceding fiscal quarter, 6.0
million shares, or such other number of shares as determined by the Company’s
board of directors. As of September 28, 2008, approximately 1.4 million shares
were available for grant under the Company’s Second Amended and Restated 2005
SunPower Corporation Stock Incentive Plan.
The majority of shares issued are net
of the minimum statutory withholding requirements that the Company pays on
behalf of its employees. During the three and nine months ended September 28,
2008, the Company withheld approximately 15,000 shares and 67,000 shares,
respectively, to satisfy $1.7 million and $5.9 million, respectively, of
employees’ tax obligations. The Company paid this amount in cash to the
appropriate taxing authorities. Shares withheld are treated as common stock
repurchases for accounting and disclosure purposes and reduce the number of
shares outstanding upon vesting.
The
following table summarizes the Company’s stock option activities:
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Outstanding
as of December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of September 28, 2008
|
|
|
|
|
|
|
|
|
Exercisable
as of September 28, 2008
|
|
|
|
|
|
|
|
|
The
following table summarizes the Company’s non-vested stock options and restricted
stock activities thereafter:
|
|
Stock
Options
|
|
|
Restricted
Stock Awards and Units
|
|
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
|
Outstanding
as of December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restricted stock
awards and units vested include shares withheld on behalf of employees to
satisfy the minimum statutory tax withholding
requirements.
|
|
Information
regarding the Company’s outstanding stock options as of September 28, 2008
follows:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range of Exercise Price
|
|
|
Shares
(in
thousands)
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
|
Shares
(in
thousands)
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
$ |
0.04—1.77 |
|
|
|
498 |
|
|
|
3.74 |
|
|
$ |
0.51 |
|
|
$ |
41,164 |
|
|
|
361 |
|
|
|
3.99 |
|
|
$ |
0.52 |
|
|
$ |
29,800 |
|
|
2.00—7.00 |
|
|
|
1,565 |
|
|
|
6.21 |
|
|
|
3.67 |
|
|
|
124,418 |
|
|
|
865 |
|
|
|
6.20 |
|
|
|
3.50 |
|
|
|
68,930 |
|
|
9.50—17.00 |
|
|
|
149 |
|
|
|
7.06 |
|
|
|
10.19 |
|
|
|
10,864 |
|
|
|
59 |
|
|
|
7.06 |
|
|
|
10.22 |
|
|
|
4,298 |
|
|
17.46—43.01 |
|
|
|
283 |
|
|
|
7.75 |
|
|
|
25.33 |
|
|
|
16,375 |
|
|
|
53 |
|
|
|
7.67 |
|
|
|
27.74 |
|
|
|
2,955 |
|
|
44.50—67.93 |
|
|
|
117 |
|
|
|
9.60 |
|
|
|
61.89 |
|
|
|
2,476 |
|
|
|
3 |
|
|
|
8.61 |
|
|
|
56.20 |
|
|
|
86 |
|
|
|
|
|
|
2,612 |
|
|
|
|
|
|
|
|
|
|
$ |
195,297 |
|
|
|
1,341 |
|
|
|
|
|
|
|
|
|
|
$ |
106,069 |
|
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $83.16 at
September 28, 2008, which would have been received by the option holders had all
option holders exercised their options as of that date. The total number of
in-the-money options exercisable was 1.3 million shares as of September 28,
2008.
Stock
Unit Plan:
As of
September 28, 2008, the Company has granted approximately 236,000 stock units to
2,200 employees in the Philippines at an average unit price of $39.80 in
relation to its 2005 Stock Unit Plan, under which participants are awarded the
right to receive cash payments from the Company in an amount equal to the
appreciation in the Company’s common stock between the award date and the date
the employee redeems the award. A maximum of 300,000 stock units may be subject
to stock unit awards granted under the 2005 Stock Unit Plan. Pursuant to a
voluntary exchange offer that concluded in November 2007, approximately 53,000
stock units were exchanged for approximately 32,000 restricted stock units
issued under the Company’s Second Amended and Restated 2005 SunPower Corporation
Stock Incentive Plan. The Company conducted a second voluntary exchange offer
that concluded in May 2008, in which approximately 109,000 stock units were
exchanged for approximately 50,000 restricted stock units issued under the
Company’s Second Amended and Restated 2005 SunPower Corporation Stock Incentive
Plan. In both the three and nine months ended September 28, 2008, total
compensation expense associated with the 2005 Stock Unit Plan was $0.1 million
as compared to $0.7 million and $1.5 million in the three and nine months ended
September 30, 2007, respectively.
Note
8. COMMITMENTS AND
CONTINGENCIES
Operating
Lease Commitments
The
Company leases its San Jose, California facility under a non-cancelable
operating lease from Cypress, which expires in April 2011 (see Note 2). The
lease requires the Company to pay property taxes, insurance and certain other
costs. In addition, the Company leases its Richmond, California facility under a
non-cancelable operating lease from an unaffiliated third party, which expires
in September 2018. In December 2005, the Company entered into a 5-year operating
lease from an unaffiliated third party for a solar panel assembly facility in
the Philippines. The Company also has various lease arrangements, including its
European headquarters located in Geneva, Switzerland under a lease that expires
in September 2012, as well as sales and support offices in Southern California,
New Jersey, Australia, Canada, Germany, Italy, Spain and South Korea, all of
which are leased from unaffiliated third parties. Future minimum obligations
under all non-cancelable operating leases as of September 28, 2008 are as
follows (in thousands):
2008
(remaining three months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense, including the rent paid to Cypress for the San Jose, California
facility and the solar cell manufacturing facility in the Philippines (see
Note 2), was $1.9 million and $5.4 million for the three and
nine months ended September 28, 2008, respectively, and $0.8 million and
$2.2 million for the three and nine months ended September 30, 2007,
respectively.
Purchase
Commitments
The
Company purchases raw materials for inventory, services and manufacturing
equipment from a variety of vendors. During the normal course of business, in
order to manage manufacturing lead times and help assure adequate supply, the
Company enters into agreements with contract manufacturers and suppliers that
either allow them to procure goods and services based upon specifications
defined by the Company, or that establish parameters defining the Company’s
requirements. In certain instances, these agreements allow the Company the
option to cancel, reschedule or adjust the Company’s requirements based on its
business needs prior to firm orders being placed. Consequently, only a portion
of the Company’s recorded purchase commitments arising from these agreements are
firm, non-cancelable and unconditional commitments.
The
Company also has agreements with several suppliers, including joint ventures,
for the procurement of polysilicon, ingots, wafers, solar cells and solar panels
which specify future quantities and pricing of products to be supplied by the
vendors for periods up to 12 years and provide for certain consequences, such as
forfeiture of advanced deposits and liquidated damages relating to previous
purchases, in the event that the Company terminates the arrangements (see Note
6).
At
September 28, 2008, total obligations related to non-cancelable purchase orders
totaled approximately $134.6 million and long-term supplier agreements totaled
approximately $3.4 billion. In addition, the Company has entered into agreements
to purchase solar renewable energy certificates (“SRECs”) from solar
installation owners in New Jersey. The Company primarily sells SRECs to entities
that must either retire a certain volume of SRECs each year or face much higher
alternative compliance payments. At September 28, 2008, total obligations
related to future purchases of SRECs were $2.4 million.
Future
purchase obligations under non-cancelable purchase orders, long-term supplier
agreements and SRECs as of September 28, 2008 are as follows (in
thousands):
2008
(remaining three months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
future purchase commitments of $3.5 billion as of September 28, 2008 include
tolling agreements with suppliers in which the Company provides polysilicon
required for silicon ingot manufacturing and procures the manufactured silicon
ingots from the supplier. Annual future purchase commitments in the table above
are calculated using the gross price paid by the Company for silicon ingots and
are not reduced by the price paid by suppliers for polysilicon. Total future
purchase commitments as of September 28, 2008 would be reduced by $636.7 million
had the Company’s obligations under such tolling agreements been disclosed using
net cash outflows.
Joint Ventures
Woongjin
Energy Co., Ltd (“Woongjin Energy”)
In the
third quarter of fiscal 2006, the Company entered into an agreement with
Woongjin Coway Co., Ltd. (“Woongjin”), a provider of environmental products
located in Korea, to form Woongjin Energy, a joint venture to manufacture
monocrystalline silicon ingots. Under the joint venture, the Company and
Woongjin have funded the joint venture through capital investments. In addition,
Woongjin Energy obtained a $33.0 million loan originally guaranteed by Woongjin.
The Company supplies polysilicon and technology required for the silicon ingot
manufacturing to the joint venture, and the Company procures the manufactured
silicon ingots from the joint venture under a five-year agreement. Woongjin
Energy began manufacturing in the third quarter of fiscal 2007. For the
three and nine months ended September 28, 2008, the Company paid $21.7
million and $36.7 million, respectively, to Woongjin Energy for manufacturing
silicon ingots. As of September 28, 2008 and December 30, 2007, $3.7
million and $2.4 million, respectively, remained due and payable to Woongjin
Energy.
In
October 2007, the Company entered into an agreement with Woongjin and Woongjin
Holdings Co., Ltd. (“Woongjin Holdings”), whereby Woongjin transferred its
equity investment held in Woongjin Energy to Woongjin Holdings and Woongjin
Holdings assumed all rights and obligations formerly owned by Woongjin under the
joint venture agreement described above, including the $33.0 million loan
guarantee. In January 2008, the Company and Woongjin Holdings provided Woongjin
Energy with additional funding through capital investments in which the Company
invested an additional $5.4 million in the joint venture.
As of
September 28, 2008, the Company had a $13.9 million investment in the joint
venture on its Condensed Consolidated Balance Sheets which consisted of a 40.0%
equity investment. As of December 30, 2007, the Company had a $4.4 million
investment in the joint venture on its Condensed Consolidated Balance Sheets
which consisted of a 19.9% equity investment valued at $1.1 million and a $3.3
million convertible note that is convertible at the Company’s option into an
additional 20.1% equity ownership in the joint venture. The Company exercised
the option and converted the notes into equity in September 2008. The Company
accounts for this investment in Woongjin Energy using the equity method of
accounting, in which the entire investment is classified as “Other long-term
assets” in the Condensed Consolidated Balance Sheets and the Company’s share of
Woongjin Energy’s income totaling $2.2 million and $4.1 million for the three
and nine months ended September 28, 2008, respectively, and share of Woongjin
Energy’s losses totaling $0.2 million in both the three and nine months
ended September 30, 2007, is included in “Other, net” in the Condensed
Consolidated Statements of Operations. Neither party has contractual obligations
to provide any additional funding to the joint venture.
In the
nine months ended September 28, 2008, the Company conducted other
related-party transactions with Woongjin Energy. For the three and nine months
ended September 28, 2008, the Company recognized $4.1 million and $4.8 million,
respectively, in components revenue related to the sale of solar
modules. As of September 28, 2008 and December 30, 2007, zero and $3.2
million, respectively, remained due and receivable from Woongjin
Energy related to the sale of solar modules.
First
Philec Solar Corporation (“First Philec Solar”)
In
October 2007, the Company entered into an agreement with First Philippine
Electric Corporation (“First Philec”) to form First Philec Solar, a joint
venture to provide wafer slicing services of silicon ingots to the Company. The
Company and First Philec have funded the joint venture through capital
investments. The Company supplies to the joint venture silicon ingots and
technology required for the slicing of silicon, and the Company procures the
silicon wafers from the joint venture under a five-year wafering supply and
sales agreement. This joint venture is located in the Philippines and became
operational in the second quarter of fiscal 2008. As of September 28, 2008,
$4.4 million remained due and payable to First Philec Solar.
As of
September 28, 2008, the Company had a $5.0 million investment in the joint
venture on its Condensed Consolidated Balance Sheets which consisted of a 19.0%
equity investment. As of December 30, 2007, the Company had a $0.9 million
investment in the joint venture on its Condensed Consolidated Balance Sheets
which consisted of a 16.9% equity investment. The Company accounts for
this investment using the equity method of accounting, in which the entire
investment is classified as “Other long-term assets” in the Condensed
Consolidated Balance Sheets and the Company’s share of First Philec Solar’s
losses totaling $0.1 million in both the three and nine months ended
September 28, 2008, is included in “Other, net” in the Condensed Consolidated
Statements of Operations.
The
Company periodically evaluates the qualitative and quantitative attributes of
the joint ventures to determine whether the joint ventures need to be
consolidated into the Company’s financial statements in accordance with FSP FASB
Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FSP FIN
46(R)”).
NorSun AS
(“NorSun”)
In
January 2008, the Company entered into an Option Agreement with NorSun pursuant
to which the Company will deliver cash advance payments to NorSun for the
purchase of polysilicon under a long-term polysilicon supply agreement with
NorSun, which NorSun will use to partly fund its portion of the equity
investment in the joint venture with Swicorp Joussour Company and Chemical
Development Company for the construction of a new polysilicon manufacturing
facility in Saudi Arabia. The Company deposited funds in an escrow account to
secure NorSun’s right to such advance payments. NorSun will initially hold a
fifty percent equity interest in the joint venture. Under the terms of the
Option Agreement, the Company may exercise a call option and apply the
advance payments to purchase half, subject to certain adjustments, of NorSun’s
fifty percent equity interest in the joint venture. The Company may
exercise its option at any time until six months following the commercial
operation of the Saudi Arabian polysilicon manufacturing facility. The
Option Agreement also provides NorSun an option to put half, subject to certain
adjustments, of its fifty percent equity interest in the joint venture to the
Company. NorSun’s option is exercisable commencing July 1, 2009 through six
months following commercial operation of the polysilicon manufacturing
facility. The Company accounts for the put and call options as one
instrument, which are measured at fair value at each reporting period. The
changes in the fair value of the combined option are recorded as other
income in the Condensed Consolidated Statements of Operations. The fair value of
the combined option at September 28, 2008 was not material.
Product
Warranties
The
Company warrants or guarantees the performance of the solar panels that the
Company manufactures at certain levels of power output for extended periods,
usually 25 years. It also warrants that the solar cells will be free from
defects for at least ten years. In addition, it passes through to customers
long-term warranties from the original equipment manufacturers of certain system
components. Warranties of 20 to 25 years from solar panel suppliers are
standard, while inverters typically carry two-, five- or ten-year warranties.
The Company maintains warranty reserves to cover potential liabilities that
could result from these guarantees. The Company’s potential liability is
generally in the form of product replacement or repair. Warranty reserves are
based on the Company’s best estimate of such liabilities and are recognized as a
cost of revenue. The Company continuously monitors product returns for warranty
failures and maintains a reserve for the related warranty expenses based on
historical experience of similar products as well as various other assumptions
that are considered reasonable under the circumstances.
The
Company generally warrants or guarantees systems installed for a period of five
to ten years. The Company’s estimated warranty cost for each project is accrued
and the related costs are charged against the warranty accrual when incurred. It
is not possible to predict the maximum potential amount of future
warranty-related expenses under these or similar contracts due to the
conditional nature of the Company’s obligations and the unique facts and
circumstances involved in each particular contract. Historically, warranty costs
related to contracts have been within the range of management’s
expectations.
Provisions
for warranty reserves charged to cost of revenue were $4.2
million and $14.0 million for the three and nine months ended September 28,
2008, respectively, and $1.4 million and $7.0 million during the three and nine
months ended September 30, 2007, respectively. Activity within accrued warranty
for the three and nine months ended September 28, 2008 and September 30, 2007 is
summarized as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September 30,
2007
|
|
Balance
at the beginning of the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SP
Systems accrued balance at date of acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
for warranties issued during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
claims made during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the end of the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accrued warranty balance at September 28, 2008 and December 30, 2007 includes
$8.4 million and $6.7 million, respectively, of accrued costs primarily related
to servicing the Company’s obligations under long-term maintenance contracts
entered into under the systems segment and the balance is included in “Other
long-term liabilities” in the Condensed Consolidated Balance
Sheets.
FIN
48 Uncertain Tax Positions
As of
September 28, 2008 and December 30, 2007, total liabilities associated with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” (“FIN 48”), uncertain tax positions were $7.0
million and $4.1 million, respectively, and are included in "Other long-term
liabilities" on its Condensed Consolidated Balance Sheets at September 28, 2008
and December 30, 2007, respectively, as they are not expected to be paid within
the next twelve months. Due to the complexity and uncertainty associated with
its tax positions, the Company cannot make a reasonably reliable estimate of the
period in which cash settlement will be made for its liabilities associated with
uncertain tax positions in "Other long-term liabilities."
Royalty
Obligations
As of
January 10, 2007, the Company assumed certain royalty obligations related to
existing agreements entered into by PowerLight before the date of acquisition.
In September 2002, PowerLight entered into a Technology Assignment and Services
Agreement and other ancillary agreements, subsequently amended in December
2005, with Jefferson Shingleton and MaxTracker Services, LLC, a New York limited
liability company controlled by Mr. Shingleton. Under the agreements, the
PowerTracker®, now referred to as SunPower™ Tracker, was acquired through an
assignment and acquisition of the patents associated with the product from Mr.
Shingleton and the Company is obligated to pay Mr. Shingleton royalties on the
tracker systems that it sells. In addition, several of the systems segment’s
government awards require the Company to pay royalties based on specified
formulas related to sales of products developed or enhanced from such government
awards. The Company incurred royalty expense totaling $0.3 million and $1.3
million for the three and nine months ended September 28, 2008,
respectively, and $0.6 million and $1.9 million during the three and nine months
ended September 30, 2007, respectively, which were charged to cost of systems
revenue. As of September 28, 2008 and December 30, 2007, the
Company’s royalty liabilities totaled $0.3 million.
Indemnifications
The
Company is a party to a variety of agreements pursuant to which it may be
obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in connection with contracts and license
agreements or the sale of assets, under which the Company customarily agrees to
hold the other party harmless against losses arising from a breach of
warranties, representations and covenants related to such matters as title to
assets sold, negligent acts, damage to property, validity of certain
intellectual property rights, non-infringement of third-party rights and certain
tax related matters. In each of these circumstances, payment by the Company is
typically subject to the other party making a claim to the Company pursuant to
the procedures specified in the particular contract. These procedures usually
allow the Company to challenge the other party’s claims or, in case of breach of
intellectual property representations or covenants, to control the defense or
settlement of any third-party claims brought against the other party. Further,
the Company’s obligations under these agreements may be limited in terms of
activity (typically to replace or correct the products or terminate the
agreement with a refund to the other party), duration and/or amounts. In some
instances, the Company may have recourse against third parties and/or insurance
covering certain payments made by the Company.
Legal
Matters
From time
to time the Company is a party to litigation matters and claims that are normal
in the course of its operations. While the Company believes that the ultimate
outcome of these matters will not have a material adverse effect on the Company,
negative outcomes may adversely affect the Company’s financial position,
liquidity or results of operations.
Note
9. LINE OF
CREDIT
In July
2007, the Company entered into a credit agreement with Wells Fargo and has
entered into amendments to the credit agreement from time to time. As of
September 28, 2008, the credit agreement provides for a $50.0 million unsecured
revolving credit line, with a $50.0 million unsecured letter of credit
subfeature, and a separate $150.0 million secured letter of credit facility. The
Company may borrow up to $50.0 million and request that Wells Fargo issue up to
$50.0 million in letters of credit under the unsecured letter of credit
subfeature through April 4, 2009. Letters of credit issued under the subfeature
reduce the Company’s borrowing capacity under the revolving credit line. The
Company may request that Wells Fargo issue up to $150.0 million in letters of
credit under the secured letter of credit facility through July 31, 2012. As
detailed in the agreement, the Company will pay interest on outstanding
borrowings and a fee for outstanding letters of credit. At any time, the Company
can prepay outstanding loans. All borrowings must be repaid by April 4, 2009,
and all letters of credit issued under the unsecured letter of credit subfeature
expire on or before April 4, 2009 unless the Company provides by such date
collateral in the form of cash or cash equivalents in the aggregate amount
available to be drawn under letters of credit outstanding at such time. All
letters of credit issued under the secured letter of credit facility expire no
later than July 31, 2012. The Company concurrently entered into a security
agreement with Wells Fargo, granting a security interest in a securities account
and deposit account to secure its obligations in connection with any letters of
credit that might be issued under the credit agreement. In connection with the
credit agreement, SunPower North America, Inc., a wholly-owned subsidiary of the
Company, SP Systems, an indirect wholly-owned subsidiary of the Company, and
SunPower Systems SA, another indirect wholly-owned subsidiary of the Company,
entered into an associated continuing guaranty with Wells Fargo. The terms of
the credit agreement include certain conditions to borrowings, representations
and covenants, and events of default customary for financing transactions of
this type.
As of
September 28, 2008 and December 30, 2007, nine letters of credit totaling $47.1
million and four letters of credit totaling $32.0 million, respectively,
were issued by Wells Fargo under the unsecured letter of credit subfeature. In
addition, 23 letters of credit totaling $68.7 million and 8 letters of
credit totaling $47.9 million were issued by Wells Fargo under the secured
letter of credit facility as of September 28, 2008 and December 30, 2007,
respectively. On September 28, 2008 and December 30, 2007, cash available to be
borrowed under the unsecured revolving credit line was $2.9 million and $18.0
million, respectively, and includes letter of credit capacities available to be
issued by Wells Fargo under the unsecured letter of credit subfeature of $2.9
million and $8.0 million, respectively. Letters of credit available under the
secured letter of credit facility at September 28, 2008 and December 30, 2007
totaled $81.3 million and $2.1 million, respectively.
Note
10. SENIOR CONVERTIBLE
DEBENTURES AND SHARE LENDING ARRANGEMENTS
February
2007 and July 2007 Debt Issuance
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures. Interest on the February 2007 debentures is
payable on February 15 and August 15 of each year, commencing
August 15, 2007. The February 2007 debentures will mature on
February 15, 2027. Holders may require the Company to repurchase all or a
portion of their February 2007 debentures on each of February 15,
2012, February 15, 2017 and February 15, 2022, or if the Company
experiences certain types of corporate transactions constituting a fundamental
change. In addition, the Company may redeem some or all of the February 2007
debentures on or after February 15, 2012. The February 2007 debentures are
initially convertible, subject to certain conditions, into cash up to the lesser
of the principal amount or the conversion value. If the conversion value is
greater than $1,000, then the excess conversion value will be convertible into
common stock. The initial effective conversion price of the February 2007
debentures is approximately $56.75 per share, which represented a premium of
27.5% to the closing price of the Company's common stock on the date of
issuance. The applicable conversion rate will be subject to customary
adjustments in certain circumstances.
In July
2007, the Company issued $225.0 million in principal amount of its 0.75% senior
convertible debentures. Interest on the July 2007 debentures is payable on
February 1 and August 1 of each year, commencing February 1,
2008. The July 2007 debentures will mature on August 1, 2027. Holders may
require the Company to repurchase all or a portion of their July 2007 debentures
on each of August 1, 2010, August 1, 2015, August 1, 2020, and August 1, 2025,
or if the Company is involved in certain types of corporate transactions
constituting a fundamental change. In addition, the Company may redeem some or
all of the July 2007 debentures on or after August 1, 2010. The July 2007
debentures are initially convertible, subject to certain conditions, into cash
up to the lesser of the principal amount or the conversion value. If the
conversion value is greater than $1,000, then the excess conversion value will
be convertible into cash, common stock or a combination of cash and common
stock, at the Company’s election. The initial effective conversion price of the
February 2007 debentures is approximately $82.24 per share, which represented a
premium of 27.5% to the closing price of the Company's common stock on the
date of issuance. The applicable conversion rate will be subject to customary
adjustments in certain circumstances.
The
February 2007 debentures and July 2007 debentures are senior, unsecured
obligations of the Company, ranking equally with all existing and future senior
unsecured indebtedness of the Company. The February 2007 debentures and July
2007 debentures are effectively subordinated to the Company’s secured
indebtedness to the extent of the value of the related collateral and
structurally subordinated to indebtedness and other liabilities of the Company’s
subsidiaries. The February 2007 debentures and July 2007 debentures do not
contain any covenants or sinking fund requirements.
For the
year ended December 30, 2007, the closing price of the Company’s class A common
stock equaled or exceeded 125% of the $56.75 per share initial effective
conversion price governing the February 2007 debentures and the closing price of
the Company’s class A common stock equaled or exceeded 125% of the $82.24 per
share initial effective conversion price governing the July 2007 debentures, for
20 out of 30 consecutive trading days ending on December 30, 2007, thus
satisfying the market price conversion trigger pursuant to the terms of the
debentures. As of the first trading day of the first quarter in fiscal 2008,
holders of the February 2007 debentures and July 2007 debentures were able to
exercise their right to convert the debentures any day in that fiscal quarter.
Therefore, since holders of the February 2007 debentures and July 2007
debentures were able to exercise their right to convert the debentures in the
first quarter of fiscal 2008, the Company classified the $425.0 million in
aggregate convertible debt as short-term debt in its Condensed Consolidated
Balance Sheets as of December 30, 2007. In addition, the Company wrote off $8.2
million and $1.0 million of unamortized debt issuance costs in the fourth fiscal
quarter of 2007 and first fiscal quarter of 2008, respectively. No holders
of the February 2007 debentures and July 2007 debentures exercised their right
to convert the debentures in the first quarter of fiscal 2008.
For the
quarter ended September 28, 2008, the closing price of the Company’s class A
common stock equaled or exceeded 125% of the $56.75 per share initial effective
conversion price governing the February 2007 debentures for 20 out of 30
consecutive trading days ending on September 28, 2008, thus satisfying the
market price conversion trigger pursuant to the terms of the February 2007
debentures. As of the first trading day of the fourth quarter in fiscal
2008, holders of the February 2007 debentures are able to exercise their right
to convert the debentures any day in that fiscal quarter. Therefore, since
holders of the February 2007 debentures are able to exercise their right to
convert the debentures in the fourth quarter of fiscal 2008, the Company
classified the $200.0 million in aggregate convertible debt as short-term debt
in its Condensed Consolidated Balance Sheets as of September 28, 2008. As of
October 31, 2008, the Company has received notices for the conversion of
approximately $1.4 million of the February 2007 debentures which the Company has
settled for approximately $1.2 million in cash and 1,000 shares of class A
common stock. If the full $200.0 million in aggregate convertible debt was
called for conversion prior to December 28, 2008, the Company would likely not
have sufficient unrestricted cash and cash equivalents on hand to satisfy the
conversion without additional liquidity. If necessary, the Company may seek to
restructure its obligations under the convertible debt, or raise additional cash
through sales of investments, assets or common stock, or from borrowings.
However, there can be no assurance that the Company would be successful in these
efforts in the current market conditions.
Because
the closing stock price did not equal or exceed 125% of the initial effective
conversion price governing the July 2007 debentures for 20 out of 30 consecutive
trading days during the quarter ended September 28, 2008, holders of the
debentures did not have the right to convert the debentures, based on the market
price conversion trigger, any day in the fourth fiscal quarter beginning on
September 29, 2008. Accordingly, the Company classified the $225.0 million in
aggregate convertible debt as long-term debt in its Condensed Consolidated
Balance Sheets as of September 28, 2008. This test is repeated each fiscal
quarter, therefore, if the market price conversion trigger is satisfied in a
subsequent quarter, the debentures may again be re-classified as short-term
debt.
The
following table summarizes the Company’s outstanding convertible
debt:
|
|
As
of
|
|
|
|
September
28, 2008
|
|
|
December
30, 2007
|
|
(In
thousands)
|
|
Carrying
Value
|
|
|
Fair
Value*
|
|
|
Carrying
Value
|
|
|
Fair
Value*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The
fair value of the convertible debt was determined based on quoted market
prices as reported by Bloomberg.
As of
October 31, 2008, the estimated fair value of the February 2007 debentures and
July 2007 debentures was approximately $152.2 million and $139.3 million,
respectively.
February
2007 Amended and Restated Share Lending Arrangement and July 2007 Share Lending
Arrangement
Concurrent
with the offering of the February 2007 debentures, the Company lent
approximately 2.9 million shares of its class A common stock to LBIE, an
affiliate of Lehman Brothers, one of the underwriters of the February 2007
debentures. Concurrent with the offering of the July 2007 debentures, the
Company also lent approximately 1.8 million shares of its class A common
stock to CSI, an affiliate of Credit Suisse, one of the underwriters of the July
2007 debentures. The loaned shares are to be used to facilitate the
establishment by investors in the February 2007 debentures and July 2007
debentures of hedged positions in the Company’s class A common stock. Under the
share lending agreement, LBIE had the ability to offer the shares that remain in
LBIE’s possession to facilitate hedging arrangements for subsequent purchasers
of both the February 2007 debentures and July 2007 debentures and, with the
Company’s consent, purchasers of securities the Company may issue in the future.
The Company did not receive any proceeds from these offerings of class A
common stock, but received a nominal lending fee of $0.001 per share for each
share of common stock that is loaned pursuant to the share lending agreements
described below.
Share
loans under the share lending agreement terminate and the borrowed shares must
be returned to the Company under the following circumstances: (i) LBIE and
CSI may terminate all or any portion of a loan at any time; (ii) the
Company may terminate any or all of the outstanding loans upon a default by LBIE
and CSI under the share lending agreement, including a breach by LBIE and CSI of
any of its representations and warranties, covenants or agreements under the
share lending agreement, or the bankruptcy or administrative proceeding of LBIE
and CSI; or (iii) if the Company enters into a merger or similar business
combination transaction with an unaffiliated third party (as defined in the
agreement). In addition, CSI has agreed to return to the Company any borrowed
shares in its possession on the date anticipated to be five business days before
the closing of certain merger or similar business combinations described in the
share lending agreement. Except in limited circumstances, any such shares
returned to the Company cannot be re-borrowed.
Any
shares loaned to LBIE and CSI are considered issued and outstanding for
corporate law purposes and, accordingly, the holders of the borrowed shares have
all of the rights of a holder of the Company’s outstanding shares, including the
right to vote the shares on all matters submitted to a vote of the Company’s
stockholders and the right to receive any dividends or other distributions that
the Company may pay or make on its outstanding shares of class A common
stock. The shares are listed for trading on The Nasdaq Global Select
Market.
While the
share lending agreement does not require cash payment upon return of the shares,
physical settlement is required (i.e., the loaned shares must be returned at the
end of the arrangement). In view of this share return provision and other
contractual undertakings of LBIE and CSI in the share lending agreement, which
have the effect of substantially eliminating the economic dilution that
otherwise would result from the issuance of the borrowed shares, historically
the loaned shares were not considered issued and outstanding for the purpose of
computing and reporting the Company’s basic and diluted weighted average shares
or earnings per share. However, on September 15, 2008, Lehman filed a petition
for protection under Chapter 11 of the U.S. bankruptcy code, and LBIE commenced
administration proceedings (analogous to bankruptcy) in the United Kingdom.
After reviewing the circumstances of the Lehman bankruptcy and LBIE
administration proceedings, the Company has determined that it will record the
shares lent to LBIE as issued and outstanding starting on September 15, 2008,
the date on which LBIE commenced administration proceedings, for the purpose of
computing and reporting the Company’s basic and diluted weighted average shares
and earnings per share.
The
shares lent to CSI will continue to be excluded for the purpose of computing and
reporting the Company’s basic and diluted weighted average shares or earnings
per share. If Credit Suisse or its affiliates, including CSI, were to file
bankruptcy or commence similar administrative, liquidating, restructuring or
other proceedings, the Company may have to consider approximately 1.8 million
shares lent to CSI as issued and outstanding for purposes of calculating
earnings per share.
Note
11. COMPREHENSIVE
INCOME
Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Comprehensive income includes unrealized gains and losses on the
Company’s available-for-sale investments, foreign currency derivatives
designated as cash flow hedges and cumulative translation adjustments. The
components of comprehensive income, net of tax, were as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investments, net of tax
|
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
12. FOREIGN CURRENCY
DERIVATIVES
The
Company has non-U.S. subsidiaries that operate and sell the Company’s products
in various global markets, primarily in Europe. As a result, the Company is
exposed to risks associated with changes in foreign currency exchange rates. It
is the Company’s policy to use various hedge instruments to manage the exposures
associated with purchases of foreign sourced equipment, net asset or liability
positions of its subsidiaries and forecasted revenues and expenses. The
counterparties to these hedging transactions are creditworthy multinational
banks and the risk of counterparty nonperformance associated with these
contracts is not expected to be material. In connection with its global tax
planning the Company recently changed the functional currency of certain
European subsidiaries from U.S. dollar to Euro, resulting in greater exposure to
changes in the value of the Euro. Implementation of this tax strategy had, and
will continue to have, the ancillary effect of limiting the Company’s ability to
fully hedge certain Euro-denominated revenue. The Company currently does not
enter into foreign currency derivative financial instruments for speculative or
trading purposes.
Under
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), the Company is required to recognize all
derivative instruments as either assets or liabilities at fair value in the
Condensed Consolidated Balance Sheets. The Company calculates the fair value of
its forward contracts based on market volatilities, spot rates and interest
differentials from published sources. The following table presents information
about the Company’s hedge instruments measured at fair value on a recurring
basis as of September 28, 2008 and indicates the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair value in
accordance with the provisions of SFAS No. 157 (in thousands):
(In thousands)
|
Balance
Sheet Location
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
|
|
|
|
Cash
Flow Hedges
In
accordance with SFAS No. 133, the Company accounts for its hedges of
forecasted foreign currency revenue and cost of revenue as cash flow hedges.
Changes in fair value of the effective portion of hedge contracts are recorded
in accumulated other comprehensive income in stockholders’ equity in the
Condensed Consolidated Balance Sheets. Amounts deferred in accumulated other
comprehensive income are reclassified to other, net in the Condensed
Consolidated Statements of Operations in the periods in which the hedged
exposure impacts earnings. At September 28, 2008, the Company had zero
outstanding cash flow hedge forward contracts. At December 30, 2007, the Company
had outstanding cash flow hedge forward contracts with an aggregate notional
value of $140.1 million and the effective portion of unrealized losses recorded
in accumulated other comprehensive income, net of tax, were losses of $3.9
million. In the second quarter of fiscal 2008, the Company discontinued a
portion of an existing cash flow hedge of foreign currency revenue when it
determined it was probable that the original forecasted transaction would not
occur by the end of the originally specified time period. The amount of
derivative loss, $0.8 million, was reclassified from accumulated other
comprehensive income to other, net in the Condensed Consolidated Statements
of Operations as a result of the discontinuance of the cash flow
hedge.
Cash flow
hedges are tested for effectiveness each period on a spot to spot basis using
the dollar-offset method. Both the excluded time value and any ineffectiveness,
which were not significant for all periods, are recorded in other,
net.
Other
Derivatives
Other
derivatives not designated as hedging instruments under SFAS No. 133
consist of forward contracts used to hedge the net balance sheet effect of
foreign currency denominated assets and liabilities primarily for intercompany
transactions, receivables from customers, prepayments to suppliers and advances
received from customers. The Company records its hedges of foreign currency
denominated monetary assets and liabilities at fair value with the related gains
or losses recorded in other, net. The gains or losses on these contracts are
substantially offset by transaction gains or losses on the underlying balances
being hedged. As of September 28, 2008 and December 30, 2007, the Company held
forward contracts with an aggregate notional value of $50.3 million and $62.7
million, respectively, to hedge the risks associated with foreign currency
denominated assets and liabilities.
Note
13. INCOME
TAXES
The
Company’s effective rate of income tax provision was 58% and 44% for the three
and nine months ended September 28, 2008, respectively, and the effective rate
of income tax provision (benefit) was 14% and (205%) for the three and nine
months ended September 30, 2007, respectively. The tax provision for the three
and nine months ended September 28, 2008 was primarily attributable to the
consumption of non-stock net operating loss carryforwards, net of foreign income
taxes in profitable jurisdictions where the tax rates are less than the U.S.
statutory rate, and the spin-off from Cypress. The tax provision (benefit) for
the three and nine months ended September 30, 2007 was primarily the result of
recognition of deferred tax assets to the extent of deferred tax liabilities
created by the acquisition of SP Systems, net of foreign income taxes in
profitable jurisdictions where the tax rates are less than the U.S. statutory
rate.
Unrecognized
Tax Benefits
On
January 1, 2007, the Company adopted the provisions for FIN 48, which is an
interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
FIN 48 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition issues. FIN 48 contains
a two-step approach to recognizing and measuring uncertain tax positions
accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.
The total
amount of unrecognized tax benefits recorded in the Condensed Consolidated
Balance Sheets at the date of adoption was approximately $1.1 million, which, if
recognized, would affect the Company’s effective tax rate. The additional amount
of unrecognized tax benefits accrued during the year ended December 30, 2007 was
$3.1 million. A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the nine months ended September 28, 2008
is as follows:
(In
thousands)
|
|
September
28,
2008
|
|
Balance
at December 30, 2007
|
|
|
|
|
Additions
based on tax positions related to the current period
|
|
|
|
|
Balance
at September 28, 2008
|
|
|
|
|
Management
believes that events that could occur in the next 12 months and cause a change
in unrecognized tax benefits include, but are not limited to, the
following:
|
•
|
commencement,
continuation or completion of examinations of the Company’s tax returns by
the U.S. or foreign taxing authorities;
and
|
|
•
|
expiration
of statutes of limitation on the Company’s tax
returns.
|
The
calculation of unrecognized tax benefits involves dealing with uncertainties in
the application of complex global tax regulations. Uncertainties include, but
are not limited to, the impact of legislative, regulatory and judicial
developments, transfer pricing and the application of withholding taxes.
Management regularly assesses the Company’s tax positions in light of
legislative, bilateral tax treaty, regulatory and judicial developments in the
countries in which the Company does business. Management determined that an
estimate of the range of reasonably possible change in the amounts of
unrecognized tax benefits within the next 12 months cannot be made.
Classification
of Interest and Penalties
The
Company accrues interest and penalties on tax contingencies as required by FIN
48 and SFAS No. 109. This interest and penalty accrual is classified as
income tax provision (benefit) in the Condensed Consolidated Statements of
Operations and was not material.
Tax
Years and Examination
The
Company files tax returns in each jurisdiction in which they are registered to
do business. In the U.S. and many of the state jurisdictions, and in many
foreign countries in which the Company files tax returns, a statute of
limitations period exists. After a statute of limitations period expires, the
respective tax authorities may no longer assess additional income tax for the
expired period. Similarly, the Company is no longer eligible to file claims for
refund for any tax that it may have overpaid. The following table summarizes the
Company’s major tax jurisdictions and the tax years that remain subject to
examination by these jurisdictions as of December 31,
2007:
Tax Jurisdictions
|
Tax Years
|
|
|
|
|
|
|
|
|
Additionally,
while years prior to 2003 for the U.S. corporate tax return are not open for
assessment, the IRS can adjust net operating loss and research and development
carryovers that were generated in prior years and carried forward to
2003.
The IRS
is currently conducting an audit of SP Systems’ federal income tax returns for
fiscal 2005 and 2004. As of September 28, 2008, no material adjustments have
been proposed by the IRS. If material tax adjustments are proposed by the IRS
and acceded to by the Company, an adjustment to goodwill and income taxes
payable may result.
Note
14. NET INCOME PER
SHARE
Basic net
income per share is computed using the weighted-average of the combined class A
and class B common shares outstanding. Diluted net income per share is computed
using the weighted-average common shares outstanding plus any potentially
dilutive securities outstanding during the period using the treasury stock
method, except when their effect is anti-dilutive. Potentially dilutive
securities include stock options, restricted stock and senior convertible
debentures.
Holders
of the Company’s senior convertible debentures may, under certain circumstances
at their option, convert the senior convertible debentures into cash and, if
applicable, shares of the Company’s class A common stock at the applicable
conversion rate, at any time on or prior to maturity (see Note 10). Pursuant to
EITF 90-19, the senior convertible debentures are included in the calculation of
diluted net income per share if their inclusion is dilutive under the treasury
stock method.
The
following is a summary of all outstanding anti-dilutive potential common
shares:
|
|
As
of
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards and units
|
|
|
|
|
|
|
|
|
The
following table sets forth the computation of basic and diluted weighted-average
common shares:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September
28,
2008
|
|
|
September
30,
2007
|
|
|
September
28,
2008
|
|
|
September 30,
2007
|
|
Basic
weighted-average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards and units and shares subject to re-vesting
restrictions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted-average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 15, 2008, the date on which LBIE commenced administrative proceedings
regarding the Lehman bankruptcy, approximately 2.9 million shares of class A
common stock lent to LBIE in connection with the February 2007 debentures are
included in basic weighted-average common shares. Basic weighted-average common
shares exclude approximately 1.8 million shares of class A common stock lent to
CSI in connection with the July 2007 debentures. If Credit Suisse or its
affiliates, including CSI, were to file bankruptcy or commence similar
administrative, liquidating, restructuring or other proceedings, the Company may
have to include approximately 1.8 million shares lent to CSI in basic
weighted-average common shares (see Note 10).
Dilutive
potential common shares includes approximately 1.0 million shares in each
of the three and nine months ended September 28, 2008 for the impact of the
February 2007 debentures, and approximately 20,000 shares in the nine months
ended September 28, 2008 for the impact of the July 2007 debentures, as the
Company has experienced a substantial increase in its common stock
price. Similarly, dilutive potential common shares includes approximately
0.7 million shares and 0.3 million shares for the three and nine months
ended September 30, 2007, respectively, for the impact of the February 2007
debentures. Under the treasury stock method, such senior convertible
debentures will generally have a dilutive impact on net income per share if the
Company’s average stock price for the period exceeds the conversion price for
the senior convertible debentures.
Note
15. SEGMENT AND GEOGRAPHICAL
INFORMATION
The
Company operates in two business segments: systems and components. The systems
segment generally represents sales directly to systems owners of engineering,
procurement, construction and other services relating to solar electric power
systems that integrate the Company’s solar panels and balance of systems
components, as well as materials sourced from other manufacturers. The
components segment primarily represents sales of the Company’s solar cells,
solar panels and inverters to solar systems installers and other resellers. The
Chief Operating Decision Maker (“CODM”), as defined by SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (“SFAS No.
131”), is the Company’s Chief Executive Officer. The CODM assesses the
performance of both operating segments using information about their revenue and
gross margin.
The
following tables present revenue by geography and segment, gross margin by
segment, revenue by significant customer and property, plant and equipment
information based on geographic region. Revenue is based on the destination of
the shipments. Property, plant and equipment are based on the physical location
of the assets:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(As
a percentage of total revenue)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
% |
|
|
56
|
% |
|
|
29
|
% |
|
|
46
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
% |
|
|
25
|
% |
|
|
44
|
% |
|
|
28
|
% |
|
|
|
10
|
% |
|
|
10
|
% |
|
|
8
|
% |
|
|
10
|
% |
|
|
|
13
|
% |
|
|
7
|
% |
|
|
10
|
% |
|
|
12
|
% |
|
|
|
12
|
% |
|
|
2
|
% |
|
|
9
|
% |
|
|
4
|
% |
|
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
% |
|
|
67
|
% |
|
|
62
|
% |
|
|
62
|
% |
|
|
|
49
|
% |
|
|
33
|
% |
|
|
38
|
% |
|
|
38
|
% |
|
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
% |
|
|
14
|
% |
|
|
20
|
% |
|
|
15
|
% |
|
|
|
39
|
% |
|
|
21
|
% |
|
|
31
|
% |
|
|
24
|
% |
Significant
Customers:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
(As
a percentage of total revenue)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
September 28,
2008
|
|
September 30,
2007
|
|
|
Business
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* denotes
less than 10% during the period
(In thousands)
|
|
September
28,
2008
|
|
|
December 30,
2007
|
|
Property,
plant and equipment by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
16. SUBSEQUENT EVENTS
Cypress
Completed Tax-Free Distribution of the Company’s Class B Common
Stock
After the
close of trading on September 29, 2008, Cypress completed a spin-off of all of
its shares of the Company’s class B common stock, in the form of a pro rata
dividend to the holders of record as of September 17, 2008 of Cypress common
stock. As a result, the Company’s class B common stock now trades publicly and
is listed on the Nasdaq Global Select Market, along with the Company’s class A
common stock.
Dennis
V. Arriola Named CFO
On
October 20, 2008, the Company announced the appointment of Dennis V. Arriola,
47, as its next Chief Financial Officer. Mr. Arriola is expected to assume
the role of Senior Vice President and Chief Financial Officer on November 10,
2008. In such role, he will serve as SunPower’s principal financial officer
and principal accounting officer. Emmanuel Hernandez, SunPower’s current
Chief Financial Officer, is expected to assist in the transition through January
2009.
Daniel
S. Shugar Announces Personal Leave of Absence in 2009
On
October 24, 2008, Daniel S. Shugar announced that he plans to take a personal
leave of absence for 9 to 12 months to pursue personal interests commencing in
March, 2009. Mr. Shugar currently serves as President of SP
Systems. He joined SP Systems (formerly known as PowerLight) in 1996 prior
to the Company’s acquisition of the subsidiary in January 2007.
Amended
and Restated By-laws
On
November 7, 2008, the Company’s board of directors amended and restated the
By-laws of the Company. The amendments to the By-laws provide, among other
things, that stockholders must give advance notice to the Company of any
business that they propose to bring before an annual meeting or of any person
that they propose to be nominated as a director and must follow the other
procedures set forth in the amended and restated By-Laws.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as ““may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential” and “continue” and similar expressions to
identify forward-looking statements. Forward-looking statements in this
Quarterly Report on Form 10-Q include, but are not limited to, our plans and
expectations regarding our ability to obtain polysilicon ingots or wafers,
future financial results, operating results, business strategies, projected
costs, products, competitive positions and management’s plans and
objectives for future operations, and industry trends. These forward-looking
statements are based on information available to us as of the date of this
Quarterly Report on Form 10-Q and current expectations, forecasts and
assumptions and involve a number of risks and uncertainties that could cause
actual results to differ materially from those anticipated by these
forward-looking statements. Such risks and uncertainties include a variety of
factors, some of which are beyond our control. Please see “PART II. OTHER
INFORMATION, Item 1A: Risk Factors” and our other filings with the Securities
and Exchange Commission for additional information on risks and uncertainties
that could cause actual results to differ. These forward-looking statements
should not be relied upon as representing our views as of any subsequent date,
and we are under no obligation, and expressly disclaim any responsibility, to
update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise.
The
following information should be read in conjunction with the Condensed
Consolidated Financial Statements and the accompanying Notes to Condensed
Consolidated Financial Statements included in this Quarterly Report on Form
10-Q. Our fiscal quarters end on the Sunday closest to the end of the applicable
calendar quarter. All references to fiscal periods apply to our fiscal quarters
or fiscal year which end on the Sunday closest to the calendar quarter
end.
Adjustments
to Previously Announced Preliminary Quarterly Results
On October 16, 2008, we
issued a press release announcing our preliminary results for the three
and nine months ended September 28, 2008. In the press release, we reported
net income of $22.4 million and $63.8 million for the three and nine months
ended September 28, 2008, respectively, in the Condensed Consolidated Statements
of Operations. Subsequent to the issuance of our press release, we recorded
certain adjustments to our reported results relating to: (1) reversal of
impairment of long-lived assets, (2) additional loss from foreign
exchange, and (3) related tax effects of the adjustments. These
adjustments totaled $1.0 million, which reduced our net income to
$21.4 million and $62.7 million for the three and nine months ended
September 28, 2008, respectively.
Reversal
of impairment of long-lived assets: In the first quarter of
fiscal 2008, we replaced certain solar product manufacturing equipment with new
processes, which resulted in a $3.3 million impairment charge to cost of
revenue. In October 2008, we entered into an agreement with the vendor for
the return of the equipment to the vendor and the application of cash paid for
the returned equipment as prepayments for future purchases of equipment from the
vendor. As a result of the agreement, the impairment of long-lived assets
incurred in the first quarter of fiscal 2008 was reversed as of the third
quarter of fiscal 2008.
Foreign
currency exchange loss: We recorded an
additional foreign currency exchange loss of $1.5 million in the three and
nine months ended September 28, 2008.
Addition in tax
provision: We recorded a $2.8 million addition in our tax provision as a
result of the above adjustments and the change in our full year projected
earnings.
The
following table presents a reconciliation of the preliminary net income and net
income per share announced in our press release on October 16, 2008 to the final
results reported in this Quarterly Report on Form 10-Q:
|
|
September
28, 2008
|
|
(In
thousands, except per share data)
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
Net
income announced on October 16, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of impairment of long-lived assets
|
|
|
|
|
|
|
|
|
Foreign
currency exchange loss
|
|
|
|
|
|
|
|
|
Addition
in tax provision
|
|
|
|
|
|
|
|
|
Net
Income reported in Quarterly Report on Form
10-Q
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
– announced on October 16, 2008
|
|
|
|
|
|
|
|
|
Basic
– reported in Quarterly Report on Form 10-Q
|
|
|
|
|
|
|
|
|
Diluted
– announced on October 16, 2008
|
|
|
|
|
|
|
|
|
Diluted
– reported in Quarterly Report on Form 10-Q
|
|
|
|
|
|
|
|
|
Company
Overview
We are a
vertically integrated solar products and services company that designs,
manufactures, markets and installs high-performance solar electric power
technologies. Our solar cells and solar panels are manufactured using
proprietary processes and technologies based on more than 15 years of
research and development. We believe our solar cells have the highest conversion
efficiency, a measurement of the amount of sunlight converted by the solar cell
into electricity, of all the solar cells available for the mass market. Our
solar power products are sold through our components business segment, or our
components segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our systems segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other
suppliers.
Components
segment: Our components segment sells solar power products,
including solar cells, solar panels and inverters, which convert sunlight to
electricity compatible with the utility network. We believe our solar cells
provide the following benefits compared with conventional solar
cells:
|
·
|
superior
performance, including the ability to generate up to 50% more power per
unit area;
|
|
·
|
superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
|
|
·
|
efficient
use of silicon, a key raw material used in the manufacture of solar
cells.
|
We sell
our solar components products to installers and resellers, including our global
dealer network, for use in residential and commercial applications where the
high efficiency and superior aesthetics of our solar power products provide
compelling customer benefits. We also sell products for use in multi-megawatt
solar power plant applications. In many situations, we offer a materially lower
area-related cost structure for our customers because our solar panels require a
substantially smaller roof or land area than conventional solar technology and
half or less of the roof or land area of commercial solar thin film
technologies. We sell our products primarily in Asia, Europe and North America,
principally in regions where government incentives have accelerated solar power
adoption.
We
manufacture our solar cells at our two solar cell manufacturing facilities in
the Philippines. We currently operate ten cell manufacturing lines in our solar
cell manufacturing facilities, with a total rated manufacturing capacity of 334
megawatts per year. By the end of 2008, we plan to operate 12 solar cell
manufacturing lines with an aggregate manufacturing capacity of 414 megawatts
per year. We plan to begin production as soon as the first quarter of 2010 on
the first line of our third solar cell manufacturing facility in Malaysia, which
is expected to have an aggregate manufacturing capacity of more than 1 gigawatt
per year when completed.
We
manufacture our solar panels at our solar panel assembly facility located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate five solar panel manufacturing
lines with a rated manufacturing capacity of 150 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
Systems
segment: Our systems segment generally sells solar power
systems directly to system owners and developers. When we sell a solar power
system it may include services such as development, engineering, procurement of
permits and equipment, construction management, access to financing, monitoring
and maintenance. We believe our solar systems provide the following benefits
compared with competitors’ systems:
|
·
|
superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
|
|
·
|
superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast roof installation technologies;
and
|
|
·
|
superior
channel breadth and delivery capability including turnkey
systems.
|
Our
systems segment is comprised primarily of the business we acquired from SP
Systems in January 2007. Our customers include commercial and governmental
entities, investors, utilities and production home builders. We work with
development, construction, system integration and financing companies to deliver
our solar power systems to customers. Our solar power systems are designed to
generate electricity over a system life typically exceeding 25 years and
are principally designed to be used in large-scale applications with system
ratings of typically more than 500 kilowatts. Worldwide, more than 500 SunPower
solar power systems have been constructed or are under contract, rated in
aggregate at more than 400 megawatts of peak capacity.
We have
solar power system projects completed or in the process of being completed in
various countries including Germany, Italy, Portugal, South Korea, Spain and the
United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. Distributed solar power systems
are typically rated at more than 500 kilowatts of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. Many
customers choose to purchase solar electricity from our systems under a power
purchase agreement with a financing company which buys the system from us. In
Europe, South Korea and the United States, our products and systems are
typically purchased by a financing company and operated as a central station
solar power plant. These power plants are rated with capacities of approximately
one to 20 megawatts, and generate electricity for sale under tariff to private
and public utilities.
We
manufacture certain of our solar power system products at our manufacturing
facilities in Richmond, California and at other facilities located close to our
customers. Some of our solar power system products are also manufactured for us
by third-party suppliers.
Relationship
with Cypress Semiconductor Corporation, or Cypress
Cypress
made a significant investment in SunPower in 2002. On November 9, 2004,
Cypress completed a reverse triangular merger with us in which all of the
outstanding minority equity interest of SunPower was retired, effectively giving
Cypress 100% ownership of all of our then outstanding shares of capital stock
but leaving our unexercised warrants and options outstanding. After completion
of our initial public offering in November 2005, Cypress held, in the aggregate,
52.0 million shares of class B common stock. On May 4, 2007 and August
18, 2008, Cypress completed the sale of 7.5 million shares and 2.5 million
shares, respectively, of class B common stock in offerings pursuant to Rule 144
of the Securities Act. Such shares converted to 10.0 million shares of class A
common stock upon the sale.
As of
September 28, 2008, Cypress owned approximately 42.0 million shares of class B
common stock, which represented approximately 50.1% of the total outstanding
shares of our common stock, or approximately 47.4% of such shares on a fully
diluted basis after taking into account outstanding stock options (or 46.5% of
such shares on a fully diluted basis after taking into account outstanding stock
options and approximately 1.8 million shares lent to an affiliate of Credit
Suisse), and 88.5% of the voting power of our total outstanding common
stock.
After the
close of trading on September 29, 2008, Cypress completed a spin-off of all of
its shares of our class B common stock, in the form of a pro rata dividend to
the holders of record as of September 17, 2008 of Cypress common stock. As a
result, our class B common stock now trades publicly and is listed on the Nasdaq
Global Select Market, along with our class A common stock.
Critical
Accounting Policies
Our
critical accounting policies are disclosed in our Form 10-K for the year ended
December 30, 2007 and have not changed materially as of September 28, 2008,
with the exception of the following:
Fair Value of
Financial Instruments: Effective December 31, 2007, we adopted the
provisions of Statement of Financial Accounting Standards, or
SFAS, No. 157, “Fair Value Measurements,” or SFAS No. 157, which
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. Our financial assets and financial liabilities that
require recognition under SFAS No. 157 include available-for-sale investments
and foreign currency derivatives. In determining fair value, we use various
valuation techniques, including market and income approaches to value
available-for-sale investments and foreign currency derivatives. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of us.
Unobservable inputs are inputs that reflect our assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. As such,
fair value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
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·
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Level
1—Valuations based on quoted prices in active markets for identical assets
or liabilities that we have the ability to access. Since valuations are
based on quoted prices that are readily and regularly available in an
active market, valuation of these products does not entail a significant
degree of judgment. Financial assets utilizing Level 1 inputs include most
money market funds and corporate
securities.
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·
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Level
2—Valuations based on quoted prices in markets that are not active or for
which all significant inputs are observable, directly or indirectly.
Financial assets utilizing Level 2 inputs include foreign currency forward
exchange contracts and some corporate
securities.
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·
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Level
3—Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. Financial assets utilizing Level 3 inputs
include money market funds comprised of the Reserve Primary Fund and the
Reserve International Liquidity Fund, collectively referred to as the
Reserve Funds, and corporate securities comprised of auction rate
securities. We use the market approach to estimate the price that would be
received to sell our Reserve Funds in an orderly transaction between
market participants ("exit price"). We reviewed the underlying holdings
and estimated the price of underlying fund holdings to estimate the fair
value of these funds. We use an income approach valuation model to
estimate the exit price of the auction rate securities, which is derived
as the weighted average present value of expected cash flows over various
periods of illiquidity, using a risk adjusted discount rate that is based
on the credit risk and liquidity risk of the
securities.
|
Availability
of observable inputs can vary from instrument to instrument and to the
extent that valuation is based on inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by our management in
determining fair value is greatest for instruments categorized in Level 3. In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. In
regards to our Reserve Funds, the market approach was based on both Level 2
(term, maturity dates, rates and credit risk) and Level 3 inputs. We determined
that the Level 3 inputs, particularly the liquidity premium, were the most
significant to the overall fair value measurement. In regards to our
auction rate securities, the income approach valuation model was based on both
Level 2 (credit quality and interest rates) and Level 3 inputs. We determined
that the Level 3 inputs were the most significant to the overall fair value
measurement, particularly the estimates of risk adjusted discount rates and
ranges of expected periods of illiquidity.
Results
of Operations for the Three Months and Nine Months Ended September 28, 2008 and
September 30, 2007
Correction
of Errors Identified in our Financial Statements for the Year Ended December 30,
2007
During
the preparation of our condensed consolidated financial statements for the nine
months ended September 28, 2008, we identified errors in our financial
statements related to the year ended December 30, 2007, which resulted in $1.3
million overstatement of stock-based compensation expense. We corrected these
errors in our condensed consolidated financial statements for the nine months
ended September 28, 2008, which resulted in a $1.3 million credit to income
before income taxes and net income. The out-of-period effect is not expected to
be material to estimated full-year 2008 results, and, accordingly has been
recognized in accordance with APB 28, Interim Financial Reporting, paragraph 29
as the error is not material to any financial statements of prior
periods.
Revenue
Revenue
and the year-over-year change were as follows:
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Three
Months Ended
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Nine
Months Ended
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(Dollars
in thousands)
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September 28,
2008
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September 30,
2007
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Year-over-
Year Change
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September 28,
2008
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September 30,
2007
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Year-over-
Year Change
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We
generate revenue from two business segments, as follows:
Systems
Segment Revenue: Our systems revenue represents sales of engineering,
procurement and construction, or EPC, projects and other services relating to
solar electric power systems that integrate our solar panels and balance of
systems components, as well as materials sourced from other manufacturers. In
the United States, where customers often utilize rebate and tax credit programs
in connection with projects rated one megawatt or less of capacity, we typically
sell solar systems rated up to one megawatt of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. In
Europe, South Korea and the United States, our systems are often purchased by
third-party investors as central station solar power plants, typically rated
from one to 20 megawatts, which generate electricity for sale under tariff to
regional and public utilities. We also sell our solar systems under
materials-only sales contracts in Asia, Europe and the United States. The
balance of our systems revenues are generally derived from sales to new home
builders for residential applications and maintenance revenue from servicing
installed solar systems.
Systems
segment revenue for the three and nine months ended September 28, 2008 were
$193.3 million and $642.8 million, respectively, and accounted for 51% and 62%,
respectively, of our total revenue. Systems segment revenue for the three and
nine months ended September 30, 2007 were $157.7 million and $340.3
million, respectively, and accounted for 67% and 62%, respectively, of our total
revenue. Our systems segment revenue is largely dependent on the timing of
revenue recognition on large construction projects and, accordingly, will
fluctuate from period to period. During the three months ended September 28,
2008, we rebalanced our product allocation between the systems segment and
components segment after the systems segment’s business surged in Spain during
the second quarter of fiscal 2008. For the three months ended September 28,
2008, our systems segment revenue reflects a geographical shift in revenue from
Spain to North America. For the nine months ended September 28, 2008, our
systems segment benefited from strong power plant scale demand in Europe,
primarily in Spain, and reflected the completion of Spain based projects in the
third quarter of fiscal 2008 before the expiration of the pre-existing feed-in
tariff in September 2008.
Components
Segment Revenue: Our components revenue represents sales of our solar
cells, solar panels and inverters to solar systems installers and other
resellers. Factors affecting our components revenue include unit volumes of
solar cells and modules produced and shipped, average selling prices, product
mix, product demand and the percentage of our construction projects sourced with
SunPower solar panels sold through the systems segment which reduces the
inventory available to sell through our components segment. We have experienced
quarter-over-quarter unit volume increases in shipments of our solar power
products since we began commercial production in the fourth quarter of 2004.
From fiscal 2005 through the third quarter of fiscal 2008, we have experienced
increases in average selling prices for our solar power products primarily due
to the strength of end-market demand and favorable currency exchange rates.
Accordingly, our components segment's average selling prices were slightly
higher during the three and nine months ended September 28, 2008 compared
to the same period of 2007. Over the next several years, we expect average
selling prices for our solar power products to decline as the market becomes
more competitive, as certain products mature and as manufacturers are able to
lower their manufacturing costs and pass on some of the savings to their
customers.
Components
segment revenue for the three and nine months ended September 28, 2008 were
$184.2 million and $391.2 million, respectively, and accounted for 49% and 38%,
respectively, of our total revenue. Components segment revenue for the three and
nine months ended September 30, 2007 were $76.6 million and $210.2 million,
respectively, and accounted for 33% and 38%, respectively, of our total revenue.
For the three and nine months ended September 28, 2008, our components
segment benefited from strong demand in the residential and small commercial
roof-top markets through our dealer network in both Europe and the United
States. During the third quarter of fiscal 2008, we grew our worldwide
dealer network by more than 25 percent which is now over 300
dealers.
Total
Revenue: During the three and nine months ended September 28,
2008, our total revenue of approximately $377.5 million and $1,034.0 million,
respectively, represented an increase of 61% and 88%, respectively, from total
revenue reported in the comparable period of 2007. The increase in total revenue
during the three and nine months ended September 28, 2008 compared to the same
period of 2007 is attributable to the systems business segment’s
installation of more than 40 megawatts for several large-scale solar power
plants in Spain in the nine months ended September 28, 2008, the components
business segment’s continued increase in the demand for our solar cells and
solar panels and the continued increases in unit production and unit
shipments of both solar cells and solar panels as we have expanded our solar
manufacturing capacity. In the first quarter of fiscal 2007, we had four solar
cell manufacturing lines in operation with annual production capacity of 108
megawatts. Since then, we began commercial production on lines five through ten
with lines five and six having a rated solar cell production capacity of 33
megawatts per year and lines seven through ten having a rated solar cell
production capacity of 40 megawatts per year.
International
sales comprise the majority of revenue for both our systems and components
segments. Sales outside the United States represented approximately 51% and 71%
of our total revenue for the three and nine months ended September 28,
2008, respectively, as compared to 44% and 54% of our total revenue for the
three and nine months ended September 30, 2007, respectively, and we expect
international sales to remain a significant portion of overall sales for the
foreseeable future. International sales as a percentage of our total revenue
increased approximately 8% and 17% for the three and nine months ended
September 28, 2008, respectively, compared to the same period of 2007, as our
systems business segment installed more than 40 megawatts for several
large-scale solar power plants in Spain in the nine months ended September 28,
2008, and our components business segment continues to expand our global dealer
network, with an emphasis on European expansion. With the recent extension of
the U.S. Investment Tax Credit, we now have a national solar market in the U.S.
with long-term visibility and significant additional demand potential in all
three market segments – residential, commercial and utility. As a result, we
expect domestic revenues to increase in absolute dollars, however, not
necessarily as a percentage of revenue by geography.
Concentrations: We
have five customers that each accounted for more than 10 percent of our total
revenue in one or more of the three and nine months ended September 28, 2008 and
September 30, 2007, as follows:
Significant
Customers:
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Three
Months Ended
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Nine
Months Ended
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(As
a percentage of total revenue)
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September 28,
2008
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September 30,
2007
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September 28,
2008
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September 30,
2007
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Business
Segment
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*
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denotes
less than 10% during the period
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Effective
February 6, 2008, the New York Stock Exchange, or NYSE, delisted the common
stock of MuniMae, or MMA, the parent company of one of our systems segment
customers, MMA Renewable Ventures, because MMA did not expect to file its
audited 2006 financial statements by March 3, 2008, the deadline imposed by the
NYSE. In connection with completing the restatement and filing their Annual
Report on Form 10-K for the year ended December 31, 2006, MMA has disclosed
that it incurred substantial accounting costs. In addition, MMA has disclosed
that recent credit market disruption has negatively affected many aspects of
MMA’s business. MMA Renewable Ventures accounted for less than 10% of our total
revenue in the three and nine months ended September 28, 2008. MMA
Renewable Ventures accounted for 30% and 17% of our total revenue for the three
and nine months ended September 30, 2007, respectively.
Naturener
Group, Sedwick Corporate, S.L., SolarPack and MMA Renewable Ventures purchased
systems from us as central station power plants which generate electricity for
sale to commercial customers and under tariff to regional and public utilities
customers. In the three and nine months ended September 28, 2008,
approximately 22% and 41%, respectively, of our total revenue was derived from
such sales of systems to financing companies that engage in power purchase
agreements with end-users of electricity, as compared to 51% and 34% of our
total revenue for the three and nine months ended September 30, 2007,
respectively. Due to the recent tightening of credit markets and concerns
regarding the availability of credit, our customers may be delayed in obtaining,
or may not be able to obtain, necessary financing for their purchases of solar
power systems. If customers are unwilling or unable to finance the cost of our
products, or if the parties that have historically provided this financing cease
to do so, or only do so on terms that are substantially less favorable for us or
these customers, our revenue and growth will be adversely affected.
Cost
of Revenue
Cost of
revenue as a percentage of revenue and the year-over-year change were as
follows:
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Three
Months Ended
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Nine
Months Ended
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(Dollars
in thousands)
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September 28,
2008
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September 30,
2007
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Year-over-
Year Change
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September 28,
2008
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September30,
2007
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Year-over-
Year Change
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Cost
of components revenue
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Total
cost of revenue as a percentage of revenue
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Total
gross margin percentage
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Details
to cost of revenue by segment and the year-over-year change were as
follows:
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Systems
Segment
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Components
Segment
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Three
Months Ended
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Three
Months Ended
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(Dollars
in thousands)
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September
28,
2008
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September
30,
2007
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Year-over-
Year Change
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September
28,
2008
|
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September
30,
2007
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Year-over-
Year Change
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Amortization
of purchased intangible assets
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Impairment
of long-lived assets
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Factory
pre-operating costs
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All
other cost of revenue
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Total
cost of revenue as a percentage of revenue
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Total
gross margin percentage
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Systems
Segment
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Components
Segment
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Nine
Months Ended
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Nine
Months Ended
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(Dollars
in thousands)
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September
28,
2008
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September
30,
2007
|
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Year-over-
Year Change
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September
28,
2008
|
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September
30,
2007
|
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Year-over-
Year Change
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Amortization
of purchased intangible assets
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Impairment
of long-lived assets
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Factory
pre-operating costs
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All
other cost of revenue
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Total
cost of revenue as a percentage of revenue
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Total
gross margin percentage
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Systems
Segment Cost of Revenue: Our cost of systems revenue consists
primarily of solar panels, mounting systems, inverters and subcontractor costs.
The cost of solar panels is the single largest cost element in our cost of
systems revenue. Our systems segment sourced approximately 69% and 58% of
its solar panel installations with SunPower products in the three and
nine months ended September 28, 2008, respectively, compared to 25% and 27%
for the three and nine months ended September 30, 2007, respectively. We
expect that our systems segment will continue to source at or about 69% of its
projects with SunPower solar panels during the fourth quarter of fiscal 2008.
Our systems segment generally experiences higher gross margin on construction
projects that utilize SunPower solar panels compared to construction projects
that utilize solar panels purchased from third parties. For the three and
nine months ended September 28, 2008, gross margin for the systems segment
was $34.6 million and $131.7 million, respectively, or 18% and 20% of systems segment revenue,
respectively. Gross margin for the systems segment was $22.6 million and $51.2
million for the three and nine months ended September 30, 2007,
respectively, or 14% and 15% of systems segment revenue, respectively. Gross
margin in our systems segment increased four percentage points in the
three months ended September 28, 2008 as compared to the three months
ended September 30, 2007 and five percentage points in the nine months
ended September 28, 2008 as compared to the nine months ended September 30,
2007 due to higher percentage of SunPower solar panels used in its projects as
well as cost savings we realized from more efficient field implementation of our
systems trackers.
In
connection with the acquisition of SP Systems in January 2007, there were $79.5
million of identifiable purchased intangible assets, of which $56.8 million was
being amortized to cost of systems revenue on a straight-line basis over periods
ranging from one to five years. As a result of our new branding strategy, during
the quarter ended July 1, 2007, the PowerLight tradename asset with a net book
value of $14.1 million was written off as an impairment of acquisition-related
intangible assets. As such, the remaining balance of $41.2 million relating to
purchased patents, technology and backlog will be amortized to cost of systems
revenue on a straight-line basis over periods ranging from one to four
years.
Our cost
of systems revenue will also fluctuate from period to period due to the mix of
projects completed and recognized as revenue, in particular between large
projects and large commercial installation projects. Our gross profit each
quarter is affected by a number of factors, including the types of projects in
process and their various stages of completion, the gross margins estimated for
those projects in progress and the actual system group department overhead
costs. Historically, revenues from materials-only sales contracts generate a
higher gross margin percentage for our systems segment than revenue generated
from turnkey contracts which generate higher revenue per watt from providing
both materials as well as engineering, procurement and construction management
services.
Almost
all of our systems segment construction contracts are fixed price contracts.
However, we have in several instances obtained change orders that reimburse us
for additional unexpected costs due to various reasons. The systems segment also
has long-term agreements for solar cell and panel purchases with several major
solar panel manufacturers, some with liquidated damages and/or take-or pay-type
arrangements. An increase in project costs, including solar panel, inverter and
subcontractor costs, over the term of a construction contract could have a
negative impact on our systems segment’s overall gross profit. Our systems
segment gross profit may also be impacted by certain adjustments for inventory
reserves. We are seeking to improve gross profit over time as we implement cost
reduction efforts, improve manufacturing processes, and seek better and less
expensive materials globally, as we grow the business to attain economies of
scale on fixed costs. Any increase in gross profit based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenues in line with expectations, and other
competitive pressures on gross margin.
Components
Segment Cost of Revenue: Our cost of components revenue consists
primarily of silicon ingots and wafers used in the production of solar cells,
along with other materials such as chemicals and gases that are needed to
transform silicon wafers into solar cells. For our solar panels, our cost of
revenue includes the cost of solar cells and raw materials such as glass, frame,
backing and other materials, as well as the assembly costs we pay to our
third-party subcontractor in China.
Our
components segment gross profit each quarter is affected by a number of factors,
including average selling prices for our products, our product mix, our actual
manufacturing costs, the utilization rate of our solar cell manufacturing
facility and changes in amortization of intangible assets. Gross margin for the
components segment was $71.0 million and $120.3 million for the three and nine
months ended September 28, 2008, respectively, or 39% and 31% of components
segment revenue, respectively. Gross margin for the components segment was $15.8
million and $49.5 million for the three and nine months ended September 30,
2007, respectively, or 21% and 24% of components segment revenue, respectively.
Gross margin in our components segment increased eighteen percentage points in
the three months ended September 28, 2008 as compared to the
three months ended September 30, 2007 and seven percentage points in the
nine months ended September 28, 2008 as compared to the nine months
ended September 30, 2007 benefiting from higher average solar cell conversion
efficiency and better silicon utilization, continued reduction in silicon costs,
higher volume, and slightly higher average selling prices.
From time
to time, we enter into agreements whereby the selling price for certain of our
solar power products is fixed over a defined period. An increase in our
manufacturing costs over such a defined period could have a negative impact on
our overall gross profit. Our gross profit may also be impacted by fluctuations
in manufacturing yield rates and certain adjustments for inventory reserves. We
expect our gross profit to increase over time as we improve our manufacturing
processes and as we grow our business and leverage certain of our fixed costs.
An expected increase in gross profit based on manufacturing efficiencies,
however, could be partially or completely offset by increased raw material costs
or decreased revenue.
Total
Cost of Revenue: Other factors contributing to cost of revenue
include depreciation, provisions for estimated warranty, salaries,
personnel-related costs, freight, royalties, facilities expenses and
manufacturing supplies associated with contracting revenues and solar cell
fabrication as well as factory pre-operating costs associated with our new
solar cell manufacturing facility and solar panel assembly facility. Such
pre-operating costs included compensation and training costs for factory workers
as well as utilities and consumable materials associated with preproduction
activities. Additionally, within our own solar panel assembly facility in the
Philippines we incur personnel-related costs, depreciation, utilities and other
occupancy costs. To date, demand for our solar power products has been robust
and our production output has increased allowing us to spread a significant
amount of our fixed costs over relatively high production volume, thereby
reducing our per unit fixed cost. Our solar panel assembly facility began
production in the first quarter of 2007 and our second solar cell manufacturing
facility began production in the third quarter of 2007. We currently operate ten
solar cell manufacturing lines with total production capacity of 334 megawatts
per year with lines five through ten located in our second building in the
Philippines that is expected to eventually house 12 solar cell production lines
with a total factory output capacity of 466 megawatts per year. As we build
additional manufacturing lines or facilities, our fixed costs will increase, and
the overall utilization rate of our solar cell manufacturing and solar panel
assembly facilities could decline, which could negatively impact our gross
profit. This decline may continue until a line’s manufacturing output reaches
its rated practical capacity.
During
the three and nine months ended September 28, 2008, our total cost of
revenue was approximately $271.9 million and $782.0 million, respectively,
which represented increases of 39% and 74%, respectively, compared to total cost
of revenue reported in the comparable periods of 2007. The increase in total
cost of revenue resulted from increased costs in all cost of revenue spending
categories and corresponds with an increase of 61% and 88% in total revenue
during the three and nine months ended September 28, 2008, respectively,
from total revenue reported in the comparable periods of 2007. As a percentage
of total revenue, our total cost of revenue decreased to 72% and 76% in the
three and nine months ended September 28, 2008, respectively, compared to 84%
and 82% for the three and nine months ended September 30, 2007, respectively.
This decrease in total cost of revenue as a percentage of total revenue is
reflective of decreased costs of polysilicon beginning in the second quarter of
fiscal 2008 and improved manufacturing economies of scale associated with
markedly higher production volume. This decrease in total cost of revenue as a
percentage of total revenue in the nine months ended September 28, 2008 as
compared to the nine months ended September 30, 2007 was partially offset by (i)
a one-time asset impairment charge of $2.2 million in the nine months ended
September 28, 2008 relating to the wind-down of our imaging detector
product line (the $3.3 million write-down of certain solar product
manufacturing equipment taken in the first quarter was reversed in the third
quarter of fiscal 2008); (ii) a more favorable mix of business in our systems
segment that benefited gross margin by approximately four percentage points
during the nine months ended September 30, 2007; and (iii) the $2.7 million
settlement received from one of our suppliers in the components segment during
the nine months ended September 30, 2007 in connection with defective materials
sold to us during 2006 that was reflected as a reduction to total cost of
revenue.
Research
and Development
Research
and development expense as a percentage of revenue and the year-over-year change
were as follows:
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
& development as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and nine months ended September 28, 2008, our research and
development expense was $6.0 million and $15.5 million, respectively, which
represents an increase of 55% and 61%, respectively, from research and
development expense reported in the comparable period of fiscal 2007. Research
and development expense consists primarily of salaries and related personnel
costs, depreciation and the cost of solar cell and solar panel materials and
services used for the development of products, including experiment and testing.
The increase in research and development spending during the three and nine
months ended September 28, 2008 compared to the same period of fiscal 2007
resulted primarily from: (i) increases in salaries, benefits and
stock-based compensation costs as a result of increased headcount; and (ii)
additional material and equipment costs incurred for the development of our next
generation of more efficient solar cells and thinner polysilicon wafers for
solar cell manufacturing, as well as development of new processes to automate
solar panel assembly operations. These increases were partially offset by cost
reimbursements received from various government entities in the United
States.
Research
and development expense is reported net of any funding received under
contracts with governmental agencies because such contracts are considered
collaborative arrangements. In the third quarter of 2007, we signed a Solar
America Initiative agreement with the U.S. Department of Energy in which we were
awarded $8.5 million in the first budgetary period. Total funding for the
three-year effort is estimated to be $24.7 million. Our cost share requirement
under this program, including lower-tier subcontract awards, is anticipated to
be $27.9 million. Subject to final negotiations and settlement with the
government agencies involved, our existing governmental contracts are expected
to offset approximately $7.0 million to $10.0 million of our research and
development expense in each of 2007, 2008 and 2009. This contract replaced our
three-year cost-sharing research and development project with the National
Renewable Energy Laboratory, entered into in March 2005, to fund up to $3.0
million or half of the project costs to design our next generation solar panels.
Funding from government contracts offset our research and development expense by
approximately $1.6 million and $5.3 million in the three and nine months
ended September 28, 2008, respectively, as compared to approximately $0.7
million and $1.1 million in the three and nine months ended September 30,
2007, respectively.
As a
percentage of total revenue, research and development expense totaled two
percent and one percent in the three and nine months ended September 28,
2008, respectively, compared to two percent in each of the three and
nine months ended September 30, 2007, because these expenses increased at
approximately the same rate of growth in our revenue. We expect our research and
development expense to continually increase in absolute dollars as we continue
to develop new processes to further improve the conversion efficiency of our
solar cells and reduce their manufacturing cost, and as we develop new products
to diversify our product offerings.
Sales,
General and Administrative
Sales,
general and administrative expense as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
Sales,
general & administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general & administrative as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and nine months ended September 28, 2008, our sales, general and
administrative expense was $46.1 million and $123.1 million, respectively, which
represents an increase of 66% and 62%, respectively, from sales, general and
administrative expense reported in the comparable period of fiscal 2007. Sales,
general and administrative expense for our business consists primarily of
salaries and related personnel costs, professional fees, insurance and other
selling and marketing expenses. The increase in our sales, general and
administrative expense during the three and nine months ended September 28,
2008 compared to the same period of fiscal 2007 resulted primarily from higher
spending in all areas of sales, marketing, finance and information technology to
support the growth of our business, particularly increased headcount and payroll
related expenses, including stock-based compensation, as well as increased
expenses associated with deployment of a new enterprise resource planning
system, legal and accounting services. During the three and nine months
ended September 28, 2008, stock-based compensation included in our sales,
general and administrative expense was approximately $13.0 million and $35.5
million, respectively, as compared to approximately $9.4 million and $26.9
million in the three and nine months ended September 30, 2007,
respectively. Also contributing to our increased sales, general and
administrative expense in the three and nine months ended September 28,
2008 compared to the same period of fiscal 2007 are substantial increases in
headcount and sales and marketing spending to expand our value added reseller
channel primarily in Europe and global branding initiatives.
As a
percentage of total revenue, sales, general and administrative expense totaled
twelve percent in each of the three and nine months ended September 28,
2008, compared to twelve percent and fourteen percent in the three and
nine months ended September 30, 2007, respectively, because these expenses
increased at approximately the same rate of growth in our revenue. We
expect our sales, general and administrative expense to increase in absolute
dollars as we expand our sales and marketing efforts, hire additional personnel
and improve our information technology infrastructure to support our
growth. However, assuming our revenue increases as we expect, over time we
anticipate that our sales, general and administrative expense will continue to
decrease as a percentage of revenue.
Purchased
In-Process Research and Development, or IPR&D
Purchased
in-process research and development expense as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
Purchased
in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
in-process research and development as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
nine months ended September 30, 2007, we recorded an IPR&D charge of
$9.6 million in connection with the acquisition of SP Systems in January 2007,
as technological feasibility associated with the IPR&D projects had not been
established and no alternative future use existed. No in-process research and
development expense was recorded for the nine months ended September 28,
2008.
These
IPR&D projects consisted of two components: design automation tool and
tracking systems and other. In assessing the projects, we considered key
characteristics of the technology as well as its future prospects, the rate
technology changes in the industry, product life cycles and the various
projects’ stage of development.
The value
of IPR&D was determined using the income approach method, which calculated
the sum of the discounted future cash flows attributable to the projects once
commercially viable using a 40% discount rate, which were derived from a
weighted-average cost of capital analysis and adjusted to reflect the stage of
completion and the level of risks associated with the projects. The percentage
of completion for each project was determined by identifying the research and
development expenses invested in the project as a ratio of the total estimated
development costs required to bring the project to technical and commercial
feasibility. The following table summarizes certain information related to
each project:
|
|
Stage
of Completion
|
|
|
Total Cost
Incurred to Date
|
|
Total
Remaining Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 10, 2007 (acquisition date)
|
|
|
8 |
% |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
100 |
% |
|
$ |
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tracking System and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 10, 2007 (acquisition date)
|
|
|
25 |
% |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
100 |
% |
|
$ |
|
|
|
|
|
|
|
|
$ |
— |
|
Status
of IPR&D Projects:
At the
close of the first quarter in fiscal 2008, the first release of the design
automation tool software was deployed to production. As of September 28, 2008,
we have incurred total project costs of $1.4 million, of which $1.2 million was
incurred after the acquisition, and total costs to complete the project was $1.2
million less than the original estimate of $2.6 million. We completed the design
automation tool project approximately two years and three quarters earlier than
the original estimated completion date of December 2010.
We
completed the tracking systems project in June 2007 and incurred total project
costs of $0.8 million, of which $0.6 million was incurred after the
acquisition. Both the actual completion date and the total projects costs
were in line with the original estimates.
Impairment
of Acquisition-Related Intangible Assets
Impairment
of acquisition-related intangible assets as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Year-over-
Year Change
|
Impairment
of acquisition-related intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of acquisition-related intangible assets as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
nine months ended September 30, 2007, we recognized a charge for the impairment
of acquisition-related intangible assets of $14.1 million. In June 2007, we
changed our branding strategy and consolidated all of our product and service
offerings under the SunPower tradename. To reinforce the new branding
strategy, we formally changed the name of PowerLight to SunPower Corporation,
Systems. The fair value of PowerLight tradenames was valued at $15.5
million at the date of acquisition and ascribed a useful life of 5 years. The
determination of the fair value and useful life of the tradename was based on
our previous strategy of continuing to market our systems products and services
under the PowerLight brand. As a result of the change in our branding
strategy, during the quarter ended July 1, 2007, the net book value of the
PowerLight tradename of $14.1 million was written off as an impairment of
acquisition-related intangible assets. As a percentage of revenues, impairment
of acquisition related intangible assets was three percent in the nine
months ended September 30, 2007.
Other
Income (Expense), Net
Interest
income, interest expense, and other, net as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
|
Year-over-
Year Change
|
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
|
Year-over-
Year Change
|
|
|
|
$ |
2,650 |
|
|
$ |
4,609 |
|
|
|
(43 |
%) |
|
$ |
9,086 |
|
|
$ |
8,789 |
|
|
|
3 |
% |
Interest
income as a percentage of revenue
|
|
|
1
|
% |
|
|
2
|
% |
|
|
|
|
|
|
1
|
% |
|
|
2
|
% |
|
|
|
|
|
|
$ |
(1,411 |
) |
|
$ |
(1,372 |
) |
|
|
(3 |
%) |
|
$ |
(4,286 |
) |
|
$ |
(3,576 |
) |
|
|
(20 |
%) |
Interest
expense as a percentage of revenue
|
|
|
—
|
% |
|
|
1
|
% |
|
|
|
|
|
|
—
|
% |
|
|
1
|
% |
|
|
|
|
|
|
$ |
(3,560 |
) |
|
$ |
(205 |
) |
|
|
(1,637 |
%) |
|
$ |
(5,513 |
) |
|
$ |
(448 |
) |
|
|
(1,131 |
%) |
Other,
net as a percentage of revenue
|
|
|
1
|
% |
|
|
—
|
% |
|
|
|
|
|
|
1
|
% |
|
|
—
|
% |
|
|
|
|
Interest
income during the three and nine months ended September 28, 2008 and
September 30, 2007, primarily represents interest income earned on our cash,
cash equivalents, restricted cash and investments during these periods. The
decrease in interest income of 43% during the three months ended September 28,
2008 compared to the same period of fiscal 2007 resulted primarily from the
decrease in available-for-sale securities year-over-year used to fund our
capital expenditures for our manufacturing capacity expansion. The increase in
interest income of 3% during the nine months ended September 28, 2008
compared to the same period of fiscal 2007 is primarily the effect of interest
earned on $581.5 million in net proceeds from our class A common stock and
convertible debenture offerings in February and July 2007.
Interest
expense during the three and nine months ended September 28, 2008 and September
30, 2007 relates to interest due on convertible debt and customer advance
payments. The increase in our interest expense of 3% and 20% in the three and
nine months ended September 28, 2008, respectively, compared to the same
period of fiscal 2007 is primarily due to interest related to the aggregate of
$425.0 million in convertible debentures issued in February and July 2007. Our
convertible debt was used in part to fund our capital expenditures for our
manufacturing capacity expansion.
In May
2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff
Position, or FSP, APB 14-1, which clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our convertible debt by requiring us to
separately account for the liability and equity components of the convertible
debt in a manner that reflects interest expense equal to our non-convertible
debt borrowing rate. FSP APB 14-1 may result in significantly higher non-cash
interest expense on our convertible debt. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
The
following table summarizes the components of other, net:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Dollars
in thousands)
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
|
September 28,
2008
|
|
|
September 30,
2007
|
|
Write-off
of unamortized debt issuance costs
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(972 |
) |
|
$ |
— |
|
Amortization
of debt issuance costs
|
|
|
— |
|
|
|
(519
|
) |
|
|
— |
|
|
|
(999
|
) |
Impairment
of investments
|
|
|
(933
|
) |
|
|
— |
|
|
|
(933
|
) |
|
|
— |
|
Share
in earnings of joint venture
|
|
|
2,131 |
|
|
|
(214
|
) |
|
|
4,005 |
|
|
|
(214
|
) |
Gain
(loss) on derivatives and foreign exchange
|
|
|
(4,579
|
) |
|
|
400 |
|
|
|
(7,407
|
) |
|
|
570 |
|
Other
income (expense), net
|
|
|
(179
|
) |
|
|
128 |
|
|
|
(206
|
) |
|
|
195 |
|
|
|
$ |
(3,560 |
) |
|
$ |
(205 |
) |
|
$ |
(5,513 |
) |
|
$ |
(448 |
) |
Other,
net during the three and nine months ended September 28, 2008 consists
primarily of losses from derivatives and foreign exchange, the write-off of
unamortized debt issuance costs as a result of the market price conversion
trigger on our senior convertible debentures being met in December 2007 and the
impairment of certain money market securities, offset slightly by our share in
the earnings of joint ventures. Other, net during the three and
nine months ended September 30, 2007 consists primarily of amortization of
debt issuance costs and our share in the net loss of Woongjin Energy Co., Ltd, a
joint venture, offset slightly by gains from derivatives and foreign
exchange.
Historically
through December 30, 2007, intercompany accounts payable denominated in U.S.
dollars and held by our Euro functional currency entities were not expected to
be settled in the foreseeable future. In accordance with SFAS No. 52,
“Foreign Currency Translation,” or SFAS No. 52, gains and losses on the foreign
currency translation of the intercompany accounts payable were recorded in
accumulated other comprehensive income in stockholders’ equity in the Condensed
Consolidated Balance Sheets. Beginning in the first quarter of fiscal 2008,
management has determined that intercompany accounts payable denominated in U.S.
dollars and held by our Euro functional currency entities will be settled within
the foreseeable future as a result of our new intercompany agreements.
Therefore, gains and losses on the foreign currency translation of the
intercompany accounts payable will be recognized as a component of other, net in
the Condensed Consolidated Statements of Operations.
Income
Taxes
Income
tax provision (benefit) as a percentage of revenue and the year-over-year change
were as follows:
|
Three
Months Ended
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
(Dollars
in thousands)
|
September 28,
2008
|
|
September 30,
2007
|
|
|
Year-over-
Year Change
|
|
September 28,
2008
|
|
September 30,
2007
|
|
|
Year-over-
Year Change
|
|
Income
tax provision (benefit)
|
|
$ |
29,797 |
|
|
$ |
1,396 |
|
|
|
2,034 |
% |
|
$ |
49,869 |
|
|
$ |
(8,429 |
) |
|
|
692 |
% |
Income
tax provision (benefit) as a percentage of revenue
|
|
|
8
|
% |
|
|
1
|
% |
|
|
|
|
|
|
5
|
% |
|
|
(2 |
)
% |
|
|
|
|
In the
three and nine months ended September 28, 2008, our income tax expense was
provided primarily for foreign income taxes in certain jurisdictions where our
operations are profitable. Our interim period tax provision is estimated based
on the expected annual worldwide tax rate and takes into account the tax effect
of discrete items. In the three and nine months ended September 30, 2007, our
income tax expense (benefit) was primarily the result of recognition of deferred
tax assets to the extent of deferred tax liabilities created by the acquisition
of SP Systems in January 2007, net of foreign income taxes in profitable
jurisdictions where the tax rates are less than the U.S. statutory
rate.
For
financial reporting purposes, income tax expense and deferred income tax
balances were calculated as if we were a separate entity and had prepared our
own separate tax return. Deferred tax assets and liabilities are recognized for
temporary differences between financial statement and income tax bases of assets
and liabilities. We recorded a valuation allowance to the extent our net
deferred tax asset on all items except comprehensive income exceeded our net
deferred tax liability. We expect it is more likely than not that we will not
realize our net deferred tax asset as of September 28, 2008. In assessing the
need for a valuation allowance, we consider historical levels of income,
expectations and risks associated with the estimates of future taxable income
and ongoing prudent and feasible tax planning strategies. In the event we
determine that we would be able to realize additional deferred tax assets in the
future in excess of the net recorded amount, or if we subsequently determine
that realization of an amount previously recorded is unlikely, we would record
an adjustment to the deferred tax asset valuation allowance, which would change
income in the period of adjustment.
As
described in Note 2 of Notes to Condensed Consolidated Financial Statements, we
will pay federal and state income taxes in accordance with the tax sharing
agreement with Cypress. Effective with the closing of our public offering of
common stock in June 2006, we are no longer eligible to file federal and most
state consolidated tax returns with Cypress. As of September 29 2008, Cypress
distributed the shares of SunPower to its shareholders, so we are no longer
eligible to file any state combined returns. Accordingly, we will be required to
pay Cypress for any federal income tax credit or net operating loss
carryforwards utilized in our federal tax returns in subsequent periods. Any
payments we make to Cypress when we utilize certain tax attributes will be
accounted for as an equity transaction with Cypress. As of December 30,
2007, we had federal net operating loss carryforwards of approximately $147.6
million. These federal net operating loss carryforwards will expire at various
dates from 2011 to 2027. We had California state net operating loss
carryforwards of approximately $73.5 million as of December 30, 2007, which
expire at various dates from 2011 to 2017. We also had research and development
credit carryforwards of approximately $3.9 million for both federal and state
tax purposes.
Liquidity
and Capital Resources
In
February 2007, we raised $194.0 million net proceeds from the issuance of 1.25%
senior convertible debentures. In July 2007, we raised $220.1 million net
proceeds from the issuance of 0.75% senior convertible debentures and $167.4
million net proceeds from the completion of a follow-on offering of 2.7 million
shares of our class A common stock.
Cash
Flows
A summary
of the sources and uses of cash and cash equivalents is as follows:
|
|
Nine
Months Ended
|
|
(In
thousands)
|
|
September 28,
2008
|
|
|
September
30,
2007
|
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Net
cash provided by (used in) operating activities
|
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|
|
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|
|
|
Net
cash used in investing activities
|
|
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Net
cash provided by financing activities
|
|
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|
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|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
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|
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|
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Net
increase (decrease) in cash and cash equivalents
|
|
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|
|
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|
|
Operating
Activities
Net cash
provided by operating activities of $107.9 million for the nine months ended
September 28, 2008 was primarily the result of net income of $62.7 million, plus
non-cash charges totaling $104.3 million for depreciation, impairment of
investments and long-lived assets, amortization, write-off of debt issuance
costs and stock-based compensation expense, less non-cash income of $4.0 million
for our equity share in earnings of joint ventures, as well as increases in
accounts payable and other accrued liabilities, including accounts payable to
Cypress, of $76.5 million and customer advances of $45.9 million, primarily for
future polysilicon purchases by customers that manufacture ingots which are sold
back to us under an ingot supply agreement. These items were partially offset by
decreases in billings in excess of costs and estimated earnings of $60.1 million
related to contractual timing of system project billings, as well as increases
in accounts receivable of $55.3 million, inventories of $44.6 million and other
changes in operating assets and liabilities totaling $17.5 million. The
significant increases in substantially all of our current assets and current
liabilities resulted from our substantial revenue increase in the nine months
ended September 28, 2008 compared to previous quarters which impacted net
income and working capital.
Net cash
used in operating activities of $26.4 million for the nine months ended
September 30, 2007 was primarily the result of increases in costs and estimated
earnings in excess of billings of $69.8 million, inventories of $48.0 million,
advance payments to suppliers of $33.6 million related to our existing supply
agreements, as well as decreases in billings in excess of costs and estimated
earnings of $17.5 million. These items were partially offset by net income of
$4.3 million, plus non-cash charges totaling $101.2 million for depreciation,
amortization, impairment of acquisition-related intangibles, purchased
in-process research and development expense, stock-based compensation expense
and equity share in loss of joint venture. In addition, these items were
offset by increases in advances from customers of $29.8 million and other
changes in operating assets and liabilities totaling $7.2 million. The
significant increases in substantially all of our current assets and current
liabilities resulted from the acquisition of SP Systems in January 2007, as well
as our substantial revenue increase in the nine months ended September 30, 2007
compared to previous quarters which impacted net income and working
capital.
Investing
Activities
Net cash
used in investing activities was $167.2 million for the nine months ended
September 28, 2008, which primarily relates to capital expenditures of $150.3
million incurred during the nine months ended September 28, 2008. Capital
expenditures were mainly associated with manufacturing capacity expansion in the
Philippines. Also during the nine months ended September 28, 2008, (i)
restricted cash increased by $42.2 million for advanced payments received from
customers that we provided security in the form of cash collateralized bank
standby letters of credit; (ii) we paid cash of $18.3 million for the
acquisitions of SunPower Italia and SunPower Australia, net of cash acquired;
and (iii) we invested an additional $24.6 million in joint ventures and other
private companies. Cash used in investing activities was partially offset by
$68.2 million in proceeds received from the sales of available-for-sale
securities, net of available-for-sale securities purchased during the period and
investment in the Reserve Funds re-designated from cash and cash equivalents to
short-term investments at adjusted cost.
Net cash
used in investing activities was $319.8 million for the nine months ended
September 30, 2007, which primarily relates to (i) capital expenditures of
$154.6 million; (ii) cash paid of $98.6 million for the acquisition of SP
Systems, net of cash acquired; (iii) purchases of available-for-sale securities
totaling $42.1 million, net of proceeds received from sales of
available-for-sale securities during the period; and (iv) restricted cash
increased by $24.5 million.
Financing
Activities
Net cash
provided by financing activities for the nine months ended September 28, 2008
reflects proceeds received of $3.8 million from stock option exercises and
excess tax benefits totaling $33.9 million from the exercise of stock options,
partially offset by cash paid of $5.9 million for treasury stock purchases that
were used to pay withholding taxes on vested restricted stock. Net cash
provided by financing activities for the nine months ended September 30, 2007
primarily reflects (i) $194.0 million in net proceeds from the issuance of
$200.0 million in principal amount of 1.25% senior convertible debentures in
February 2007; (ii) $220.1 million in net proceeds from the issuance of $225.0
million in principal amount of 0.75% senior convertible debentures in July 2007;
and (iii) $167.4 million in net proceeds from our follow-on public offering of
2.7 million shares of our class A common stock in July 2007. Also during the
nine months ended September 30, 2007, we paid $3.6 million on an outstanding
line of credit and received $6.9 million in proceeds from stock option
exercises.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
We have
changed our Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 to exclude the impact of purchases of property, plant
and equipment that remain unpaid and as such are included in “accounts payable
and other accrued liabilities” at the end of the reporting period. Historically,
changes in “accounts payable and other accrued liabilities” related to such
purchases were included in cash flows from operations, while the investing
activity caption "Purchase of property, plant and equipment" included these
purchases. As these unpaid purchases do not reflect cash transactions, we have
revised our cash flow presentations to exclude them. The correction resulted in
an increase to the previously reported amount of cash used for operating
activities of $7.9 million in the nine months ended September 30, 2007,
resulting from a reduction in the amount of cash provided from the change in
accounts payable and other accrued liabilities in that period. The corresponding
correction in the investing section was to decrease cash used for investing
activities by $7.9 million in the nine months ended September 30, 2007, as a
result of the reduction in the amount of cash used for purchases of property,
plant and equipment in that period. These corrections had no impact on our
previously reported results of operations, working capital or stockholders’
equity. We concluded that these corrections were not material to any of our
previously issued condensed consolidated financial statements, based on SEC
Staff Accounting Bulletin No. 99-Materiality.
Debt
and Credit Sources
In
July 2007, we entered into a credit agreement with Wells Fargo Bank,
National Association, or Wells Fargo, that was amended from time to time,
providing for a $50.0 million unsecured revolving credit line, with a $50.0
million unsecured letter of credit subfeature, and a separate $150.0 million
secured letter of credit facility as of September 28, 2008. We may borrow up to
$50.0 million and request that Wells Fargo issue up to $50.0 million in letters
of credit under the unsecured letter of credit subfeature through April 4, 2009.
Letters of credit issued under the subfeature reduce our borrowing capacity
under the revolving credit line. Additionally, we may request that Wells Fargo
issue up to $150.0 million in letters of credit under the secured letter of
credit facility through July 31, 2012. As detailed in the agreement, we will pay
interest on outstanding borrowings and a fee for outstanding letters of credit.
At any time, we can prepay outstanding loans. All borrowings must be repaid by
April 4, 2009, and all letters of credit issued under the unsecured letter of
credit subfeature expire on or before April 4, 2009 unless we provide by such
date collateral in the form of cash or cash equivalents in the aggregate amount
available to be drawn under letters of credit outstanding at such time. All
letters of credit issued under the secured letter of credit facility expire no
later than July 31, 2012. We concurrently entered into a security agreement with
Wells Fargo, granting a security interest in a securities account and deposit
account to secure our obligations in connection with any letters of credit that
might be issued under the credit agreement. In connection with the credit
agreement, SunPower North America, Inc., our wholly-owned subsidiary, SP
Systems, an indirect wholly-owned subsidiary of ours, and SunPower Systems SA,
another indirect wholly-owned subsidiary of ours, entered into an associated
continuing guaranty with Wells Fargo. The terms of the credit agreement include
certain conditions to borrowings, representations and covenants, and events of
default customary for financing transactions of this type.
As of
September 28, 2008 and December 30, 2007, nine letters of credit totaling $47.1
million and four letters of credit totaling $32.0 million, respectively,
were issued by Wells Fargo under the unsecured letter of credit subfeature. In
addition, 23 letters of credit totaling $68.7 million and 8 letters of
credit totaling $47.9 million, were issued by Wells Fargo under the secured
letter of credit facility as of September 28, 2008 and December 30, 2007,
respectively. On September 28, 2008 and December 30, 2007, cash available to be
borrowed under the unsecured revolving credit line was $2.9 million and $18.0
million, respectively, and includes letter of credit capacities available to be
issued by Wells Fargo under the unsecured letter of credit subfeature of $2.9
million and $8.0 million, respectively. Letters of credit available under the
secured letter of credit facility at September 28, 2008 and December 30, 2007
totaled $81.3 million and $2.1 million, respectively.
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures, or the February 2007 debentures, and received net
proceeds of $194.0 million. Interest on the February 2007 debentures is payable
on February 15 and August 15 of each year, commencing August 15,
2007. The February 2007 debentures will mature on February 15, 2027.
Holders may require us to repurchase all or a portion of their February 2007
debentures on each of February 15, 2012, February 15, 2017 and
February 15, 2022, or if we experience certain types of corporate
transactions constituting a fundamental change. Any repurchase of the February
2007 debentures pursuant to these provisions will be for cash at a price equal
to 100% of the principal amount of the February 2007 debentures to be
repurchased plus accrued and unpaid interest. In addition, we may redeem some or
all of the February 2007 debentures on or after February 15, 2012 for cash
at a redemption price equal to 100% of the principal amount of the February 2007
debentures to be redeemed plus accrued and unpaid interest. See Note 10 of Notes
to our Condensed Consolidated Financial Statements.
In July
2007, we issued $225.0 million in principal amount of our 0.75% senior
convertible debentures, or the July 2007 debentures, and received net proceeds
of $220.1 million. Interest on the July 2007 debentures is payable on
February 1 and August 1 of each year, commencing February 1, 2008. The
July 2007 debentures will mature on August 1, 2027. Holders may require us
to repurchase all or a portion of their July 2007 debentures on each of
August 1, 2010, August 1, 2015, August 1, 2020 and August 1,
2025, or if we experience certain types of corporate transactions constituting a
fundamental change. Any repurchase of the July 2007 debentures pursuant to these
provisions will be for cash at a price equal to 100% of the principal amount of
the July 2007 debentures to be repurchased plus accrued and unpaid interest. In
addition, we may redeem some or all of the July 2007 debentures on or after
August 1, 2010 for cash at a redemption price equal to 100% of the
principal amount of the July 2007 debentures to be redeemed plus accrued and
unpaid interest. See Note 10 of Notes to our Condensed Consolidated Financial
Statements.
Liquidity
For the
year ended December 30, 2007, the closing price of our class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the February 2007 debentures and the closing price of our class
A common stock equaled or exceeded 125% of the $82.24 per share initial
effective conversion price governing the July 2007 debentures, for 20 out of 30
consecutive trading days ending on December 30, 2007, thus satisfying the market
price conversion trigger pursuant to the terms of the debentures. As of the
first trading day of the first quarter in fiscal 2008, holders of the February
2007 debentures and July 2007 debentures were able to exercise their right to
convert the debentures any day in that fiscal quarter. Therefore, since holders
of the February 2007 debentures and July 2007 debentures were able to exercise
their right to convert the debentures in the first quarter of fiscal 2008, we
classified the $425.0 million in aggregate convertible debt as short-term debt
in our Condensed Consolidated Balance Sheets as of December 30, 2007. In
addition, we wrote off $8.2 million and $1.0 million of unamortized debt
issuance costs in the fourth fiscal quarter of 2007 and first fiscal quarter of
2008, respectively. No holders of the February 2007 debentures and July
2007 debentures exercised their right to convert the debentures in the first
quarter of fiscal 2008.
For the
quarter ended September 28, 2008, the closing price of our class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the February 2007 debentures for 20 out of 30 consecutive
trading days ending on September 28, 2008, thus satisfying the market price
conversion trigger pursuant to the terms of the February 2007
debentures. As of the first trading day of the fourth quarter in fiscal
2008, holders of the February 2007 debentures are able to exercise their right
to convert the debentures any day in that fiscal quarter. Therefore, since
holders of the February 2007 debentures are able to exercise their right to
convert the debentures in the fourth quarter of fiscal 2008, we classified the
$200.0 million in aggregate convertible debt as short-term debt in our Condensed
Consolidated Balance Sheets as of September 28, 2008.
As of October
31, 2008, we have received notices for the conversion of approximately $1.4
million of the February 2007 debentures which we have settled for approximately
$1.2 million in cash and 1,000 shares of class A common stock. The current
capital market conditions and credit environment could create incentives for
additional holders to convert their debentures that did not exist in prior
quarters. If the full $200.0 million in aggregate convertible debt was called
for conversion prior to December 28, 2008, we would likely not have sufficient
unrestricted cash and cash equivalents on hand to satisfy the conversion without
additional liquidity. If necessary, we may seek to restructure our
obligations under the convertible debt, or raise additional cash through sales
of investments, assets or common stock, or from borrowings. However, there can
be no assurance that we would be successful in these efforts in the current
market conditions.
Because
the closing stock price did not equal or exceed 125% of the initial effective
conversion price governing the July 2007 debentures for 20 out of 30 consecutive
trading days during the quarter ended September 28, 2008, holders of the
debentures did not have the right to convert the debentures, based on the market
price conversion trigger, any day in the fourth fiscal quarter beginning on
September 29, 2008. Accordingly, we classified the $225.0 million in aggregate
convertible debt as long-term debt in our Condensed Consolidated Balance Sheets
as of September 28, 2008. This test is repeated each fiscal quarter;
therefore, if the market price conversion trigger is satisfied in a subsequent
quarter, the debentures may again be re-classified as short-term
debt.
In
addition, the holders of our February 2007 debentures and July 2007 debentures
would be able to exercise their right to convert the debentures during the five
consecutive business days immediately following any five consecutive trading
days in which the trading price of our senior convertible debentures is less
than 98% of the average of the closing sale price of a share of class A common
stock during the five consecutive trading days, multiplied by the applicable
conversion rate. On October 31, 2008, our February 2007 debentures and July 2007
debentures traded significantly below their historic trading prices, with our
February 2007 debentures trading slightly above their conversion value. We
believe the decline in trading prices is due primarily to the declining market
price of our class A common stock, the lack of liquidity in the current market,
a need for investors to raise capital by selling debentures, public concerns
regarding the availability of credit, and the end of our share lending
arrangement with Lehman Brothers International (Europe) Limited as a result of
LBIE’s administrative proceeding and the related Chapter 11 filing by Lehman
Brothers Holdings Inc. and certain of its affiliates. If the trading
prices of our debentures continue to decline, holders of the debentures may have
the right to convert the debentures in the future.
As
of September 28, 2008, we had cash and cash equivalents of $256.6 million as
compared to $285.2 million as of December 30, 2007. In addition, we had
short-term investments and long-term investments of $39.0 million and $25.0
million as of September 28, 2008, respectively, as compared to $105.4 million
and $29.1 million as of December 30, 2007, respectively. Of these
investments, we held $25.7 million in Reserve Funds at September 28, 2008. The
net asset value for the Reserve Funds fell below $1.00 because the funds had
investments in Lehman, which filed for bankruptcy on September 15, 2008. As a
result of this event, the Reserve Funds wrote down their investments in Lehman
to zero. We have estimated the loss on the Reserve Funds to be approximately
$0.9 million based on an evaluation of the fair value of the securities held by
the Reserve Funds and the net asset value that was last published by the Reserve
Funds before the funds suspended redemptions. We recorded an impairment
charge of $0.9 million in “Other, net” in our Condensed Consolidated
Statements of Operations, thereby establishing a new cost basis for each
fund.
On October
31, 2008, we received a distribution of $11.9 million from the Reserve Funds. We
expect that the remaining distribution of $13.8 million from the Reserve Funds
will occur over the remaining twelve months as the investments held in the funds
mature. Therefore, we have changed the designation of our $13.8 million
investment in the Reserve Funds that was not received in the subsequent period
from cash and cash equivalents to short-term investments at the new cost
basis on the Condensed Consolidated Balance Sheets. While we expect to
receive substantially all of our current holdings in the Reserve Funds within
the next twelve months, it is possible we may encounter difficulties in
receiving distributions given the current credit market conditions. If market
conditions were to deteriorate even further such that the current fair value
were not achievable, we could realize additional losses in our holdings with the
Reserve Funds and distributions could be further delayed.
In
addition, we held five auction rate securities totaling $25.0 million as of
September 28, 2008 as compared to ten auction rate securities totaling $50.8
million as of December 30, 2007. These auction rate securities are typically
over-collateralized and secured by pools of student loans originated under
the Federal Family Education Loan Program, or FFELP, and are guaranteed and
insured by the U.S. Department of Education. In addition, all auction rate
securities held are rated by one or more of the Nationally Recognized
Statistical Rating Organizations, or NRSROs, as triple-A. Beginning in February
2008, the auction rate securities market experienced a significant increase in
the number of failed auctions, resulting from a lack of liquidity, which occurs
when sell orders exceed buy orders, and does not necessarily signify a default
by the issuer. All auction rate securities invested in at September 28, 2008
have failed to clear at auctions. For failed auctions, we continue to earn
interest on these investments at the maximum contractual rate as the issuer is
obligated under contractual terms to pay penalty rates should auctions fail.
Historically, failed auctions have rarely occurred, however, such failures could
continue to occur in the future. In the event we need to access these funds, we
will not be able to do so until a future auction is successful, the issuer
redeems the securities, a buyer is found outside of the auction process or the
securities mature. Accordingly, auction rate securities at September 28,
2008 and December 30, 2007 that were not sold in a subsequent period totaling
$25.0 million and $29.1 million, respectively, are classified as long-term
investments on the Condensed Consolidated Balance Sheets, because they are not
expected to be used to fund current operations and consistent with the stated
contractual maturities of the securities.
In the
second quarter of fiscal 2008, we sold auction rate securities with a carrying
value of $12.5 million for their stated par value of $13.0 million to the issuer
of the securities outside of the auction process. We have concluded
that no other-than-temporary impairment losses occurred in the three and nine
months ended September 28, 2008 in regards to the auction rate securities
because the lack of liquidity in the market is considered temporary in nature.
If it is determined that the fair value of these auction rate securities is
other-than-temporarily impaired, we would record a loss in our Condensed
Consolidated Statements of Operations in the fourth quarter of 2008, which could
be material.
We
believe that our current cash and cash equivalents and funds available from the
credit agreement with Wells Fargo will be sufficient to meet our working capital
and capital expenditure commitments for at least the next 12 months. However,
there can be no assurance that our liquidity will be adequate over time. For
instance, we expect to continue to make significant capital expenditures in our
manufacturing facilities, including through building purchases or long-term
leases, and, in May 2008, we announced plans to construct our third solar cell
manufacturing facility in Malaysia with an expected nameplate rating in excess
of one gigawatt of annual generating capacity. The Malaysian Industrial
Development Authority, or MIDA, is arranging an incentive package for us to
promote our investment in the new manufacturing plant. The incentive
package is conditional upon us meeting certain capital investment, employment,
and research and development expenditure commitments. We expect
total capital expenditures in the range of $250.0 million to $300.0 million
in 2008 as we continue to increase our solar cell and solar panel manufacturing
capacity. These expenditures would be greater if we decide to
bring capacity on line more rapidly. If our capital resources are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity securities or debt securities or obtain other debt financing.
The sale of additional equity securities or convertible debt securities would
result in additional dilution to our stockholders. Additional debt would result
in increased expenses and would likely impose new restrictive covenants like the
covenants under the credit agreement with Wells Fargo. Financing arrangements
may not be available to us, or may not be available in amounts or on terms
acceptable to us.
We expect
to experience growth in our operating expenses, including our research and
development, sales and marketing and general and administrative expenses, for
the foreseeable future to execute our business strategy. We may also be required
to purchase polysilicon in advance to secure our wafer supplies or purchase
third-party solar modules and materials in advance to support systems projects.
We intend to fund these activities with existing cash and cash equivalents, cash
generated from operations and, if necessary, borrowings under our credit
agreement with Wells Fargo. These anticipated increases in operating expenses
may not result in an increase in our revenue and our anticipated revenue may not
be sufficient to support these increased expenditures. We anticipate that
operating expenses, working capital and capital expenditures will constitute a
significant use of our cash resources.
Contractual
Obligations
The
following summarizes our contractual obligations at September 28,
2008:
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Payments Due by Period
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(In thousands)
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Total
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2008
(remaining
3
months)
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2009 – 2010
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2011 – 2012
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Beyond
2012
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Interest
on customer advances
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Interest
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Non-cancelable
purchase orders
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Purchase
commitments under agreements
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Customer
advances and interest on customer advances relate to advance payments received
from customers for future purchases of solar power products or supplies.
Convertible debt and interest on convertible debt relate to the aggregate of
$425.0 million in principal amount of our senior convertible debentures. For the
purpose of the table above, we assume that (1) no holders of the February 2007
debentures will exercise their right to convert the debentures as a result
of the market price conversion trigger being met in the third quarter of
fiscal 2008 and (2) all holders of the convertible debt will hold the debentures
through the date of maturity in fiscal 2027 and upon conversion, the values of
the convertible debt are equal to the aggregate principal amount of $425.0
million with no premiums. Lease commitments primarily relate to our 5-year lease
agreement with Cypress for our headquarters in San Jose, California, an 11-year
lease agreement with an unaffiliated third party for our administrative,
research and development offices in Richmond, California, a 5-year lease
agreement with an unaffiliated third party for a solar panel assembly facility
in the Philippines and other leases for various office space. Utility
obligations relate to our 11-year lease agreement with an unaffiliated third
party for our administrative, research and development offices in Richmond,
California. Royalty obligations result from several of the systems segment
government awards and existing agreements. Non-cancelable purchase orders relate
to purchases of raw materials for inventory, services and manufacturing
equipment from a variety of vendors. Purchase commitments under agreements
relate to arrangements entered into with suppliers of polysilicon, ingots,
wafers, solar cells and solar modules as well as agreements to purchase solar
renewable energy certificates from solar installation owners in New Jersey.
These agreements specify future quantities and pricing of products to be
supplied by the vendors for periods up to 12 years and there are certain
consequences, such as forfeiture of advanced deposits and liquidated
damages relating to previous purchases, in the event that we terminate the
arrangements.
As of
September 28, 2008 and December 30, 2007, total liabilities associated with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” or FIN 48, uncertain tax positions were $7.0
million and $4.1 million, respectively, and are included in other long-term
liabilities on our Condensed Consolidated Balance Sheets at September 28, 2008
and December 30, 2007, respectively, as they are not expected to be paid within
the next twelve months. Due to the complexity and uncertainty associated with
our tax positions, we cannot make a reasonably reliable estimate of the period
in which cash settlement will be made for our liabilities associated with
uncertain tax positions in other long-term liabilities, therefore, they have
been excluded from the table above.
Recent
Accounting Pronouncements
See Note
1 of Notes to our Condensed Consolidated Financial Statements for a description
of certain other recent accounting pronouncements including the expected dates
of adoption and effects on our results of operations and financial
condition.
|
Quantitative and Qualitative
Disclosure About Market Risk
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Interest
Rate Risk
We are
exposed to interest rate risk because many of our customers depend on debt
financing to purchase our solar power systems. An increase in interest rates
could make it difficult for our customers to secure the financing necessary to
purchase our solar power systems on favorable terms, or at all, and thus lower
demand for our solar power products, reduce revenue and adversely impact our
operating results. An increase in interest rates could lower an investor’s
return on investment in a system or make alternative investments more attractive
relative to solar power systems, which, in each case, could cause our customers
to seek alternative investments that promise higher returns or demand higher
returns from our solar power systems, reduce gross margin and adversely impact
our operating results. This risk is becoming more significant to our systems
segment, which is placing increasing reliance upon direct sales to financial
institutions which sell electricity to end customers under a power purchase
agreement. This sales model is highly sensitive to interest rate fluctuations
and the availability of liquidity, and would be adversely affected by increases
in interest rates or liquidity constraints.
In
addition, our investment portfolio consists of a variety of financial
instruments that exposes us to interest rate risk, including, but not limited
to, money market funds and corporate securities. These investments are generally
classified as available-for-sale and, consequently, are recorded on our balance
sheet at fair market value with their related unrealized gain or loss reflected
as a component of accumulated other comprehensive income in stockholders’
equity. Due to the relatively short-term nature of our investment portfolio, we
do not believe that an immediate 10% increase in interest rates would have a
material effect on the fair market value of our portfolio. Since we believe we
have the ability to liquidate this portfolio, we do not expect our operating
results or cash flows to be materially affected to any significant degree by a
sudden change in market interest rates on our investment portfolio.
Reserve
Funds
At
September 28, 2008, we had $25.7 million invested in Reserve Funds. The net
asset value for the Reserve Funds fell below $1.00 because the funds had
investments in Lehman, which filed for bankruptcy on September 15, 2008. As a
result of this event, the Reserve Funds wrote down their investments in Lehman
to zero. We have estimated the loss on the Reserve Funds to be approximately
$0.9 million based on an evaluation of the fair value of the securities held by
the Reserve Funds and the net asset value that was last published by the Reserve
Funds before the funds suspended redemptions. We recorded an impairment
charge of $0.9 million in “Other, net” in our Condensed Consolidated
Statements of Operations, thereby establishing a new cost basis for each
fund.
On October
31, 2008, we received a distribution of $11.9 million from the Reserve Funds. We
expect that the remaining distribution of $13.8 million from the Reserve Funds
will occur over the remaining twelve months as the investments held in the funds
mature. While we expect to receive substantially all of our current
holdings in the Reserve Funds within the next twelve months, it is possible we
may encounter difficulties in receiving distributions given the current credit
market conditions. If market conditions were to deteriorate even further such
that the current fair value were not achievable, we could realize additional
losses in our holdings with the Reserve Funds and distributions could be
further delayed.
Auction
Rate Securities
At
September 28, 2008, we had $25.0 million invested in auction rate securities.
Auction rate securities are variable rate debt instruments with interest rates
that, unless they fail to clear at auctions, are reset approximately every seven
to 49 days. The “stated” or “contractual” maturities for these securities
generally are between 20 to 30 years. The auction rate securities are classified
as available for sale under SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” or SFAS No. 115, and are recorded at fair value.
Typically, the carrying value of auction rate securities approximates fair value
due to the frequent resetting of the interest rates. All auction rate securities
invested in at September 28, 2008 have failed to clear at auctions. These
auction rate securities are typically over-collateralized and secured by
pools of student loans originated under the FFELP and are guaranteed and
insured by the U.S. Department of Education. In addition, all auction rate
securities held are rated by one or more of the NRSROs as triple-A. We continue
to earn interest on these investments at the maximum contractual rate as the
issuer is obligated under contractual terms to pay penalty rates should auctions
fail. In the second quarter of fiscal 2008, we sold auction rate securities with
a carrying value of $12.5 million for their stated par value of $13.0 million to
the issuer of the securities outside of the auction process. We have
concluded that no other-than-temporary impairment losses occurred in the three
and nine months ended September 28, 2008 in regards to the auction rate
securities because the lack of liquidity in the market is considered temporary
in nature. We will continue to analyze our auction rate securities each
reporting period for impairment and may be required to record an impairment
charge if the issuer of the auction rate securities is unable to successfully
close future auctions or does not redeem the securities.
Convertible
Debt
The fair
market value of our 1.25% senior convertible debentures issued in February 2007
and 0.75% senior convertible debentures issued in July 2007 is subject to
interest rate risk, market price risk and other factors due to the convertible
feature of the debentures. The fair market value of the senior convertible
debentures will generally increase as interest rates fall and decrease as
interest rates rise. In addition, the fair market value of the senior
convertible debentures will generally increase as the market price of our common
stock increases and decrease as the market price falls. The interest and market
value changes affect the fair market value of the senior convertible debentures
but do not impact our financial position, cash flows or results of operations
due to the fixed nature of the debt obligations. As of September 28, 2008, the
estimated fair value of the senior convertible debentures was approximately
$625.1 million based on quoted market prices as reported by Bloomberg. A 10%
increase in quoted market prices would increase the estimated fair value of the
senior convertible debentures to approximately $687.6 million as of September
28, 2008 and a 10% decrease in the quoted market prices would decrease the
estimated fair value of the senior convertible debentures to $562.6
million.
On
October 31, 2008, our senior convertible debentures traded significantly below
their historic trading prices, with our February 2007 debentures trading
slightly above their conversion value. We believe the decline in trading
prices is due primarily to the declining market price of our class A common
stock, the lack of liquidity in the current market, a need for investors to
raise capital by selling debentures, public concerns regarding the availability
of credit, and the end of our share lending arrangement with Lehman Brothers
International (Europe) Limited as a result of LBIE’s administrative proceeding
and the related Chapter 11 filing by Lehman Brothers Holdings Inc. and certain
of its affiliates.
Investments
in Privately Held Companies
Our
investments held in private companies exposes us to equity price risk. As
of September 28, 2008, nonpublicly traded investments of $5.0 million are
accounted for using the cost method and $18.9 million are accounted under APB
Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock.” These strategic investments in third parties are subject to risk of
changes in market value, which if determined to be other than
temporary, could result in realized impairment losses. We generally do
not attempt to reduce or eliminate our market exposure in these cost and equity
method investments. We periodically review the carrying value of such
investments to determine if any valuation adjustments are appropriate under
the applicable accounting pronouncements. If the recent credit market conditions
continue or worsen, we may be required to record an impairment charge in our
Condensed Consolidated Statements of Operations, which could be material. There
can be no assurance that our private investments, particularly in this
unfavorable market and economic environment, will not face similar risks of loss
as our public investments noted above.
Foreign
Currency Exchange Risk
Our exposure
to adverse movements in foreign currency exchange rates is primarily related to
sales to European customers that are denominated in Euros. Revenue generated
from European customers represented approximately 39% and 62% of our total
revenue for the three and nine months ended September 28, 2008,
respectively. A 10% change in the Euro exchange rate would have impacted our
revenue by $60.4 million in the nine months ended September 28, 2008. In
connection with our global tax planning we recently changed the functional
currency of certain European subsidiaries from U.S. dollar to Euro, resulting in
greater exposure to changes in the value of the Euro. Implementation of this tax
strategy had, and will continue to have, the ancillary effect of limiting our
ability to fully hedge certain Euro-denominated revenue. From September 28, 2008
to October 31, 2008, the exchange rate to convert one Euro to U.S. dollars
decreased from approximately $1.46 to $1.31. This decrease in the value of the
Euro relative to the U.S. dollar is expected to have an adverse impact on our
revenue, gross margin and profitability in the foreseeable future.
In the past,
we have experienced an adverse impact on our revenue, gross margin and
profitability as a result of foreign currency fluctuations. For example, when
foreign currencies appreciate against the U.S. dollar, inventory and expenses
denominated in foreign currencies become more expensive. An increase in the
value of the U.S. dollar relative to foreign currencies could make our solar
power products more expensive for international customers, thus potentially
leading to a reduction in demand, our sales and profitability. Furthermore, many
of our competitors are foreign companies that could benefit from such a currency
fluctuation, making it more difficult for us to compete with those companies.
Historically, we have conducted, with varying degrees of success, hedging
activities that involve the use of currency forward contracts and options to
address our exposure to changes in the foreign exchange rate between the U.S.
dollar and other currencies. We cannot predict the impact of future exchange
rate fluctuations on our business and results of operations.
Evaluation
of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective.
Changes
in Internal Control over Financial Reporting
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance that our books and records accurately reflect
our transactions and that our established policies and procedures are followed.
There were no material changes in our internal control over financial reporting
that occurred during the three and nine months ended September 28, 2008
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
In the
third quarter of fiscal 2008, we implemented a new enterprise resource planning
(“ERP”) system in our subsidiaries around the world, which resulted in a
material update to our system of internal control over financial reporting.
Issues encountered subsequent to implementation caused us to further revise our
internal control process and procedures in order to correct and supplement our
processing capabilities within the new system in that quarter. Throughout the
ERP system stabilization period, which we expect to last for the remainder of
the year, we will continue to improve and enhance our system of internal control
over financial reporting. We believe that the ERP system will simplify and
strengthen our system of internal control over financial reporting. See
also “Risk Factors - We have implemented a new enterprise
resource planning system, or ERP system, and disruptions of the system could
adversely affect our operations and financial results.”
PART II. OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time
to time we are a party to litigation matters and claims that are normal in the
course of our operations. While we believe that the ultimate outcome of these
matters will not have a material adverse effect on us, the outcome of these
matters is not determinable and negative outcomes may adversely affect our
financial position, liquidity or results of operations.
The
following discussion of risk factors contains “forward-looking statements” as
discussed in “Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” These risk factors may be important to
understanding any statement in this Quarterly Report on Form 10-Q or elsewhere.
The following information should be read in conjunction with “PART I. FINANCIAL
INFORMATION, Item 2: Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “PART I. FINANCIAL INFORMATION, Item 1: Financial
Statements” and the accompanying Notes to Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.
Our
operations and financial results are subject to various risks and uncertainties,
including those described below, that could adversely affect our business,
financial condition, results of operations, cash flows, and trading price of our
common stock. Although we believe that we have identified and discussed below
the key risk factors affecting our business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that may also adversely affect our business, financial condition,
results of operations, cash flows, and trading prices of our class A and class B
common stock as well as our February 2007 debentures and July 2007
debentures.
Risks
Related to Our Business
The
solar power industry is currently experiencing an industry-wide shortage of
polysilicon. This shortage poses several risks to our business, including
possible constraints on revenue growth and possible decreases in our gross
margins and profitability.
Polysilicon
is an essential raw material in our production of solar cells. Polysilicon is
created by refining quartz or sand. Polysilicon is melted and grown into
crystalline ingots by companies specializing in ingot growth. We procure silicon
ingots from these suppliers on a contractual basis and then slice the ingots
into wafers. The ingots are sliced and the wafers are processed into solar cells
in our Philippines manufacturing facility. We also purchase wafers and
polysilicon from third-party vendors.
There is
currently an industry-wide shortage of polysilicon, which has resulted in
significant price increases. Increases in polysilicon prices have in the past
increased our manufacturing costs and may impact our manufacturing costs and net
income in the future. With these price increases, demand for solar cells has
also increased, and many of our principal competitors have announced plans to
add additional manufacturing capacity. As this additional solar cell
manufacturing capacity becomes operational, it may increase the demand for
polysilicon in the near-term and further exacerbate the current shortage of
polysilicon. Polysilicon is also used in the semiconductor industry generally
and any increase in demand from that sector will compound the shortage of
polysilicon. The production of polysilicon is capital intensive and adding
additional capacity requires significant lead time. We are aware that several
new facilities for the manufacture of polysilicon are under construction, but we
believe that the supply imbalance will not be remedied in the near-term. In
addition, the current credit market crisis may undermine the ability of third
parties to finance the construction or expansion of polysilicon manufacturing
facilities. We expect that polysilicon demand will continue to outstrip supply
through 2008 and potentially for a longer period, but we expect that the average
market price of polysilicon will decrease over time as new manufacturers enter
the market.
Although
we have arrangements with vendors for the supply of what we believe will be an
adequate amount of silicon ingots through 2010, our purchase orders
are sometimes non-binding in nature. Our estimates regarding our supply
needs may not be correct and our purchase orders or our contracts may be
cancelled by our suppliers. Additionally, the volume and pricing associated with
these purchase orders and contracts may be changed by our suppliers based on
market conditions or for other reasons. If our suppliers were to cancel our
purchase orders or change the volume or pricing associated with them, we may be
unable to meet customer demand for our products, which could cause us to lose
customers, market share and revenue. This would have a material negative impact
on our business and operating results. If our manufacturing yields decrease
significantly, we add manufacturing capacity faster than currently planned or
our suppliers cancel or fail to deliver, we may not have made adequate provision
for our polysilicon needs for our manufacturing plans through 2010.
In
addition, since some of our silicon ingot and wafer arrangements are with
suppliers who do not themselves manufacture polysilicon but instead purchase
their requirements from other vendors, these suppliers may not be able to obtain
sufficient polysilicon to satisfy their contractual obligations to
us.
There are
a limited number of polysilicon suppliers. Many of our competitors also purchase
polysilicon from our suppliers. Some of them also have inter-locking board
members with their polysilicon suppliers or have entered into joint ventures or
binding supply contracts with their suppliers. Additionally, a substantial
amount of our future polysilicon requirements are expected to be sourced by new
suppliers that have not yet proven their ability to manufacture large volumes of
polysilicon. In some cases we expect that new entrants will provide us with
polysilicon, ingots and wafers. The failure of these new entrants to produce
adequate supplies of polysilicon, ingots and/or wafers in the
quantities and quality we require could adversely affect our ability to grow
production volumes and revenues and could also result in a decline in our gross
profit margins. Since we have committed to significantly increase our
manufacturing output, an inadequate supply of polysilicon would harm us more
than it would harm some of our competitors.
Additionally,
the steps we have taken to further increase the efficiency of our polysilicon
utilization are unproven at volume production levels and may not enable us to
realize the cost reductions we anticipate. Given the current polysilicon
shortage, we believe the efficient use of polysilicon will be critical to our
ability to reduce our manufacturing costs. We continue to implement several
measures to increase the efficient use of polysilicon in our manufacturing
process. For example, we are developing processes to utilize thinner wafers
which require less polysilicon and improved wafer-slicing technology to reduce
the amount of material lost while slicing wafers, otherwise known as kerf loss.
Although we have implemented production using thinner wafers and anticipate
further reductions in wafer thickness, these methods may have unforeseen
negative consequences on our yields or our solar cell efficiency or reliability
once they are put into large-scale commercial production, or they may not enable
us to realize the cost reductions we hope to achieve.
Our
inability to obtain sufficient polysilicon, ingots or wafers at commercially
reasonable prices or at all for any of the foregoing reasons, or otherwise,
would adversely affect our ability to meet existing and future customer demand
for our products and could cause us to make fewer shipments, lose customers and
market share and generate lower than anticipated revenue, thereby seriously
harming our business, financial condition and results of
operations.
As
polysilicon supply increases, the corresponding increase in the global supply of
solar cells and panels may cause substantial downward pressure on the prices of
SunPower products, resulting in lower revenues and earnings.
The
scarcity of polysilicon has resulted in the underutilization of solar panel
manufacturing capacity at many competitors or potential competitors to SunPower,
particularly in China. If additional polysilicon becomes available over the
next 3 to 24 months, we expect solar panel production globally to
increase. Decreases in polysilicon pricing and increases in solar panel
production could each result in substantial downward pressure on the price of
solar cells and panels, including SunPower products. Such price reductions
could have a negative impact on our revenue and earnings, and materially
adversely affect our business and financial condition.
Long-term,
firm commitment supply agreements with polysilicon, ingot or wafer suppliers
could result in insufficient or excess inventory or place us at a competitive
disadvantage.
We
manufacture our solar cells utilizing ingots and wafers manufactured by third
parties, which in turn use polysilicon for their manufacturing process. We are
seeking to address the current polysilicon shortage by negotiating multi-year,
binding contractual commitments directly with polysilicon suppliers, and
supplying such polysilicon to third parties which provide us ingots and wafers.
Under such polysilicon agreements, we may be required to purchase a specified
quantity of polysilicon, ingots or wafers at fixed prices, in some cases subject
to upward inflation-related adjustments over a set period of time, which is
often a period of several years. We also may be required to make substantial
prepayments to these suppliers against future deliveries. For example, in
July 2007 we entered into a long-term supply agreement with Hemlock
Semiconductor Corporation, or Hemlock, a manufacturer of polysilicon. The
agreement requires us to purchase an amount of silicon that is expected to
support more than two gigawatts of solar cell production at fixed prices from
2010 to 2019. We are also required to make material aggregate cash prepayments
to Hemlock prior to 2010 in three equal installments. Such prepayments will be
used to fund the expansion of Hemlock’s polysilicon manufacturing capacity and
will be credited against future deliveries of polysilicon to us. The Hemlock
agreement, or any other “take or pay” agreement we enter into, allows the
supplier to invoice us for the full purchase price of polysilicon we are under
contract to purchase each year, whether or not we actually order the required
volume. If for any reason we fail to order the required annual volume under the
Hemlock or similar agreements, the resulting monetary damages could have a
material adverse effect on our business and results of operations.
We do not
obtain contracts or commitments from customers for all of the solar panels
manufactured with the polysilicon purchased under such firm commitment
contracts. Instead, we rely on our long-term internal forecasts to determine the
timing of our production schedules and the volume and mix of products to be
manufactured, including the estimated quantity of polysilicon, ingots and wafers
needed. The level and timing of orders placed by customers may vary for many
reasons. As a result, at any particular time, we may have insufficient or excess
inventory, which could render us unable to fulfill customer orders or increase
our cost of production. In addition, we have negotiated the fixed prices under
these supply contracts based on our long-term projections of the future price of
polysilicon. If the market price of polysilicon in future periods is less than
the price we have committed to pay either because of new technological
developments or any other reason, our cost of production could be comparatively
higher than that of competitors who buy polysilicon on the open market. This
would place us at a competitive disadvantage to these competitors, and could
materially and adversely affect our business and results of
operations.
Long-term
contractual commitments also expose us to specific counter-party risk, which can
be magnified when dealing with suppliers without a long, stable production and
financial history. For example, if one or more of our contractual counterparties
is unable or unwilling to provide us with the contracted amount of polysilicon,
wafers or ingots, we could be required to attempt to obtain polysilicon in the
open market, which could be unavailable at that time, or only available at
prices in excess of our contracted prices. In addition, in the event any such
supplier experiences financial difficulties, it may be difficult or impossible,
or may require substantial time and expense, for us to recover any or all of our
prepayments. Any of the foregoing could materially harm our financial condition
and results of operations.
The
reduction, modification or elimination of government and economic incentives
could cause our revenue to decline and harm our financial results.
The
market for on-grid applications, where solar power is used to supplement a
customer’s electricity purchased from the utility network or sold to a utility
under tariff, depends in large part on the availability and size of government
and economic incentives that vary by geographic market. Because our sales are
into the on-grid market, the reduction, modification or elimination of
government and economic incentives in one or more of these markets would
adversely affect the growth of this market or result in increased price
competition, either of which could cause our revenue to decline and harm our
financial results.
Today,
the cost of solar power exceeds retail electric rates in many locations. As a
result, federal, state and local government bodies in many countries, most
notably Spain, the United States, Germany, Italy, South Korea, Canada, Japan,
Portugal, Greece and France, have provided incentives in the form of feed-in
tariffs, rebates, tax credits and other incentives and mandates to end users,
distributors, system integrators and manufacturers of solar power products to
promote the use of solar energy in on-grid applications and to reduce dependency
on other forms of energy. These government economic incentives could be reduced,
expire or be eliminated altogether reducing demand for our products in the
affected markets. In fact, some solar program incentives expire, decline over
time, are limited in total funding or require renewal of authority.
In
California, the California Solar Initiative is designed to lower the stated
rebate level as market penetration increases. If system ASPs do not
decline as the rebate levels decline, demand may decline in California. Net
metering and other operational policies in California or other markets could
limit the amount of solar power installed there.
Reductions
in, or eliminations or expirations of, governmental incentives such as these
could result in decreased demand for and lower revenue from our products.
Changes in the level or structure of a renewable portfolio standard and similar
mandates could also result in decreased demand for and lower revenue or revenue
growth from our products.
Due
to the general economic environment and other factors, we may be unable to
generate sufficient cash flows or obtain access to external financing necessary
to fund our operations and make adequate capital investments as
planned.
We
anticipate that our expenses will increase substantially in the foreseeable
future. To develop new products, support future growth, achieve operating
efficiencies and maintain product quality, we must make significant capital
investments in manufacturing technology, facilities and capital equipment,
research and development, and product and process technology. We also anticipate
increased costs as we expand our manufacturing operations, hire additional
personnel, pay more or make advance payments for raw material, especially
polysilicon, increase our sales and marketing efforts, invest in joint
ventures and acquisitions, and continue our research and development
efforts with respect to our products and manufacturing technologies. For
instance, we expect to continue to make significant capital expenditures in our
manufacturing facilities, including through building purchases or long-term
leases, and, on May 19, 2008, we announced plans to construct our third solar
cell manufacturing facility in Malaysia with an expected nameplate rating in
excess of one gigawatt of annual generating capacity. The Malaysian Industrial
Development Authority, or MIDA, is arranging an incentive package for SunPower
to promote SunPower’s investment in the new manufacturing plant. The
incentive package is conditional upon SunPower meeting certain capital
investment, employment, and research and development expenditure commitments. We
expect total capital expenditures in the range of $250.0 million to $300.0
million in 2008 as we continue to increase our solar cell and solar panel
manufacturing capacity. These expenditures would be greater if we decide to
bring capacity on line more rapidly.
We
believe that our current cash and cash equivalents, cash generated from
operations and, if necessary, borrowings under our credit agreement with Wells
Fargo Bank, N.A., or Wells Fargo, and/or potential availability of future
sources of funding will be sufficient to fund our capital and operating
expenditures over the next 12 months. Our cash flows from operations depend
primarily on the volume of components sold and systems installed, average
selling prices, per unit manufacturing costs and other operating
costs.
If our
financial results or operating plans change from our current assumptions, or if
the holders of our outstanding convertible debentures elect to convert the
debentures, we may not have sufficient resources to support our business plan.
The current economic environment and the adverse conditions in the credit
markets could result in customers delaying purchases, difficulties in collecting
revenues from customers facing liquidity challenges, and difficulties for our
customers obtaining third-party financing, each of which could result in lower
than anticipated sales volume and cash flows to support operations. For more
information on our credit agreement with Wells Fargo and our outstanding
convertible debentures, please see “Debt and Credit Sources” and “Liquidity”
within “Item 2: Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” If our capital resources are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity securities or
debt securities or obtain other debt financing. However, the current economic
environment could also limit our ability to raise capital by issuing new equity
or debt securities on acceptable terms, and lenders may be unwilling to lend
funds on acceptable terms that would be required to supplement cash flows to
support operations. In addition, following the spin-off of our shares by
Cypress on September 29, 2008, our ability to issue equity for financing
purposes is subject to limits as described in “Our agreements with Cypress require us to indemnify
Cypress for certain tax liabilities. These
indemnification obligations and related contractual restrictions may limit our ability to obtain
additional financing, participate in future acquisitions or pursue other
business initiatives.” Furthermore, additional debt would result in
increased expenses and could require us to abide by covenants that would
restrict our operations. Our credit facilities contain customary covenants and
defaults, including, among others, limitations on dividends, incurrence of
indebtedness and liens and mergers and acquisitions and may restrict our
operating flexibility. In addition, the current economic environment and credit
markets could limit our suppliers’ ability to raise capital if required to
expand their production or satisfy their operating capital requirements; as a
result, they could be unable to supply necessary raw materials, inventory and
capital equipment to us which we would require to support our planned sales
operations which would in turn negatively impact our sales volumes and cash
flows.
There can
be no assurance that we will be able to generate sufficient cash flows or find
other sources of capital to fund our operations, make adequate capital
investments to remain competitive in terms of technology development and cost
efficiency, or access capital markets. If adequate funds and alternative
resources are not available on acceptable terms, our ability to fund our
operations, develop and expand our manufacturing operations and
distribution network, maintain our research and development efforts or
otherwise respond to competitive pressures would be significantly impaired. Our
inability to do the foregoing could have a material adverse effect on our
business and results of operations. See also “Risk Factors - We currently have a significant
amount of debt outstanding. Our substantial indebtedness, along with our other
contractual commitments, could adversely affect our business, financial
condition and results of operations, as well as our ability to meet any of our
payment obligations under the debentures and our other
debt.”
The
execution of our growth strategy for our systems segment is dependent upon the
continued availability of third-party financing arrangements for our
customers.
For many
of our projects, our customers have entered into agreements to finance the power
systems over an extended period of time based on energy savings generated by our
solar power systems, rather than pay the full capital cost of purchasing the
solar power systems up front. For these types of projects, many of our customers
choose to purchase solar electricity under a power purchase agreement with a
financing company that purchases the system from us. In the three and
nine months ended September 28, 2008, approximately 22% and 41%,
respectively, of our total revenue was derived from sales of systems to
financing companies that engage in power purchase agreements with end-users of
electricity, as compared to 51% and 34% of our total revenue for the three and
nine months ended September 30, 2007, respectively.
Of such
systems sales to financing companies that engage in power purchase agreements
with end-users of electricity, 89% and 10% of systems sales were derived in the
United States and Spain, respectively, in the three months ended September
28, 2008 as compared to 58% and 42%, respectively, of systems sales for the
three months ended September 30, 2007. For the nine months ended
September 28, 2008, 22% and 78% of systems sales to financing companies that
engage in power purchase agreements with end-users of electricity were derived
in the United States and Spain, respectively, as compared to 50% and 42%,
respectively, of systems sales for the nine months ended September 30,
2007. These structured finance arrangements are complex and may not be feasible
in many situations. In addition, customers opting to finance a solar power
system may forgo certain tax advantages associated with an outright purchase on
an accelerated basis which may make this alternative less attractive for certain
potential customers. Due to the recent tightening of credit markets and concerns
regarding the availability of credit, our customers may be delayed in obtaining,
or may not be able to obtain, necessary financing for their purchases of solar
power systems. Continued distress in the credit markets could materially
adversely impact our results of operations and financial condition as sales of
our solar systems to new homebuilders, residential and commercial customers are
affected by the availability of credit financing and the general strength of the
housing market and the overall economy. If customers are unwilling or unable to
finance the cost of our products, or if the parties that have historically
provided this financing cease to do so, or only do so on terms that are
substantially less favorable for us or these customers, our revenue and growth
will be adversely affected.
The
success of our systems segment will depend in part on the continuing formation
of such financing companies and the potential revenue source they represent. In
deciding whether to form and invest in such financing companies, potential
investors weigh a variety of considerations, including their projected return on
investment. Such projections are based on current and proposed federal, state
and local laws, particularly tax legislation and interest rates. Changes to
these laws, including amendments to existing tax laws or the introduction of new
tax laws, tax court rulings as well as changes in administrative guidelines,
ordinances and similar rules and regulations could result in different tax
consequences which may adversely affect an investor’s projected return on
investment, which could have a material adverse effect on our business and
results of operations. In addition, increases in interest rates could make it
difficult for our customers to secure the financing necessary to purchase our
solar power systems on favorable terms, or at all, and thus lower demand for our
solar power products, reduce revenue and adversely impact our operating results.
An increase in interest rates could also lower an investor’s return on
investment in a system or make alternative investments more attractive relative
to solar power systems, which, in each case, could cause our customers to seek
alternative investments that promise higher returns or demand higher returns
from our solar power systems, reduce gross margin and adversely impact our
operating results.
For
example, MMA Renewable Ventures (a subsidiary of MuniMae, or MMA), is a customer
of our systems segment, accounting for less than 10% of our total revenue in the
three and nine months ended September 28, 2008. MMA Renewable Ventures
accounted for 30% and 17% of our total revenue for the three and
nine months ended September 30, 2007, respectively. MMA Renewable Ventures
is a financing company that purchases systems from us and engages in power
purchase agreements with end-users of electricity. Effective February 6, 2008,
the New York Stock Exchange, or NYSE, delisted the common stock of MMA because
MMA did not expect to file its audited 2006 financial statements by March 3,
2008, the deadline imposed by the NYSE. In connection with completing the
restatement and filing the Annual Report on Form 10-K for the year ended
December 31, 2006, MMA has disclosed that it incurred substantial accounting
costs. In addition, MMA has disclosed that recent credit market disruption has
negatively affected many aspects of MMA’s business.
We
may be unable to achieve our goal of reducing the cost of installed solar
systems by 50 percent by 2012, which may negatively impact our ability to sell
our products in a competitive environment, resulting in lower revenues, gross
margins and earnings.
To reduce
the cost of installed solar systems by 50 percent by 2012, as compared against
the cost in 2006, we will have to achieve cost savings across the entire value
chain from designing to manufacturing to distributing to selling and ultimately
to installing solar systems. We have identified specific areas of potential
savings and are pursuing targeted goals. However, such cost savings are
dependent upon decreasing silicon prices and lowering manufacturing costs. As
part of our announced strategy, we have entered into long-term silicon supply
agreements to promote an adequate supply of raw material as well as to reduce
the overall cost of such raw material. Additionally, we are increasing
production capacity at our existing manufacturing facilities while seeking to
improve efficiencies. We also expect to develop additional manufacturing
capacity. As a result, we expect these improvements will decrease our per unit
production costs. However, if we are unsuccessful in our efforts to reduce the
cost of installed solar systems by 50 percent by 2012, our revenues, gross
margins and earnings may be negatively impacted in the competitive environment
and particularly in the event that governmental and fiscal incentives are
reduced or an increase in the global supply of solar cells and solar panels
causes substantial downward pressure on prices of our products.
Currency
fluctuations in the Euro, Philippine peso, South Korean won or the Australian
dollar relative to the U.S. dollar could decrease revenue or increase
expenses.
We
presently have currency exposure arising from sales, capital equipment
purchases, prepayments and customer advances denominated in foreign currencies.
For example, our prepayments to Wacker-Chemie AG, a polysilicon supplier, and
our customer advances from Solon are denominated in Euros. In addition, a
portion of our costs are incurred and paid in Euros, Philippine pesos and
Japanese yen. Changes in exchange rates between foreign currencies and the U.S.
dollar may adversely affect our total revenue, gross margin and profitability.
For example, when foreign currencies appreciate against the U.S. dollar,
inventory and expenses denominated in foreign currencies become more expensive.
An increase in the value of the U.S. dollar relative to foreign currencies could
make our solar power products more expensive for international customers, thus
potentially leading to a reduction in demand, our sales and profitability.
Furthermore, many of our competitors are foreign companies that could benefit
from such a currency fluctuation, making it more difficult for us to compete
with those companies. Historically, we have conducted, with varying degrees of
success, hedging activities that involve the use of currency forward contracts
and options to address our exposure to changes in the foreign exchange rate
between the U.S. dollar and other currencies. We cannot predict the impact of
future exchange rate fluctuations on our business and results of
operations.
Revenue
generated from European customers represented approximately 39% and 62% of our
total revenue for the three and nine months ended September 28, 2008,
respectively. A 10% change in the Euro exchange rate would have impacted our
revenue by $60.4 million in the nine months ended September 28, 2008. In
connection with our global tax planning we recently changed the functional
currency of certain European subsidiaries from U.S. dollar to Euro, resulting in
greater exposure to changes in the value of the Euro. Implementation of this tax
strategy had, and will continue to have, the ancillary effect of limiting our
ability to fully hedge certain Euro-denominated revenue. From September 28, 2008
to October 31, 2008, the exchange rate to convert one Euro to U.S. dollars
decreased from approximately $1.46 to $1.31. This decrease in the value of the
Euro relative to the U.S. dollar is expected to have an adverse impact on our
revenue, gross margin and profitability in the foreseeable future.
We
may not be able to increase or sustain our recent growth rate, and we may not be
able to manage our future growth effectively.
We may
not be able to continue to expand our business or manage future growth. We plan
to significantly increase our production capacity between 2008 and 2010. To do
so will require successful execution of expanding our existing manufacturing
facilities, developing new manufacturing facilities, ensuring delivery of
adequate polysilicon and ingots, developing more efficient wafer-slicing
methods, maintaining adequate liquidity and financial resources, and continuing
to increase our revenues from operations. Expanding our manufacturing facilities
or developing facilities may be delayed by difficulties such as unavailability
of equipment or supplies or equipment malfunction. Ensuring delivery of adequate
polysilicon and ingots is subject to many market risks including scarcity,
significant price fluctuations and competition. Maintaining adequate liquidity
is dependent upon a variety of factors including continued revenues from
operations and compliance with our indentures and credit agreements. In
addition, following the spin-off of our shares by Cypress on September 29, 2008,
our ability to issue equity for financing purposes will be subject to limits as
described in “Our agreements
with Cypress require us to indemnify
Cypress for certain tax liabilities. These
indemnification obligations and related contractual restrictions may limit our ability to obtain
additional financing, participate in future acquisitions or pursue other
business initiatives.” If we are unsuccessful in any of these areas,
we may not be able to achieve our growth strategy and increase production
capacity as planned during the foreseeable future.
Prior to
our acquisition, SP Systems experienced significant revenue growth due primarily
to the development and market acceptance of its PowerGuard® roof system, the
acquisition and introduction of its PowerTracker® ground and elevated parking
systems, its development of other technologies and increasing global interest
and demand for renewable energy sources, including solar power generation. As a
result, SP Systems increased its revenues in a relatively short period of time.
Its annual revenue increased from $50.9 million in 2003 to $87.6 million in 2004
to $107.8 million in 2005 to $243.4 million in 2006. As a result of our
acquisition involving SP Systems, our systems segment revenue for the year ended
December 30, 2007 was $464.2 million and for the three and nine months
ended September 28, 2008 was $193.3 million and $642.8 million, respectively. We
may not experience similar growth of our total revenue or even similar growth of
our systems segment revenue in future periods. Accordingly, investors should not
rely on the results of any prior quarterly or annual period as an indication of
our future operating performance.
Our
recent expansion has placed, and our planned expansion and any other future
expansion will continue to place, a significant strain on our management,
personnel, systems and resources. We plan to purchase additional equipment to
significantly expand our manufacturing capacity and to hire additional employees
to support an increase in manufacturing, research and development and our sales
and marketing efforts. We had approximately 5,450 full-time employees as of
September 28, 2008, and we anticipate that we will need to hire a significant
number of highly skilled technical, manufacturing, sales, marketing,
administrative and accounting personnel. The competition for qualified personnel
is intense in our industry. We may not be successful in attracting and retaining
sufficient numbers of qualified personnel to support our anticipated growth. To
successfully manage our growth and handle the responsibilities of being a public
company, we believe we must effectively:
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hire,
train, integrate and manage additional qualified engineers for research
and development activities, sales and marketing personnel, and financial
and information technology
personnel;
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retain
key management and augment our management team, particularly if we lose
key members;
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continue
to enhance our customer resource management and manufacturing management
systems;
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implement
and improve additional and existing administrative, financial and
operations systems, procedures and controls, including the need to update
and integrate our financial internal control systems in SP Systems and in
our Philippines facility with those of our San Jose, California
headquarters;
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expand
and upgrade our technological capabilities;
and
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manage
multiple relationships with our customers, suppliers and other third
parties.
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We may
encounter difficulties in effectively managing the budgeting, forecasting and
other process control issues presented by rapid growth. If we are unable to
manage our growth effectively, we may not be able to take advantage of market
opportunities, develop new solar cells and other products, satisfy customer
requirements, execute our business plan or respond to competitive
pressures.
Since
we cannot test our solar panels for the duration of our standard 25-year
warranty period, we may be subject to unexpected warranty expense; if we are
subject to warranty and product liability claims, such claims could adversely
affect our business and results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. We have agreed to indemnify our
customers and our distributors in some circumstances against liability from
defects in our solar cells. A successful indemnification claim against us could
require us to make significant damage payments, which would negatively affect
our financial results.
In our
components segment, our current standard product warranty for our solar panels
includes a 10-year warranty period for defects in materials and workmanship and
a 25-year warranty period for declines in power performance as well as a
one-year warranty on the functionality of our solar cells. We believe our
warranty periods are consistent with industry practice. Due to the long warranty
period and our proprietary technology, we bear the risk of extensive warranty
claims long after we have shipped product and recognized revenue. We have sold
solar cells only since late 2004. Any increase in the defect rate of our
products would cause us to increase the amount of warranty reserves and have a
corresponding negative impact on our results. Although we conduct accelerated
testing of our solar cells and have several years of experience with our all
back contact cell architecture, our solar panels have not and cannot be tested
in an environment simulating the 25-year warranty period. As a result, we may be
subject to unexpected warranty expense, which in turn would harm our financial
results.
Like
other retailers, distributors and manufacturers of products that are used by
consumers, we face an inherent risk of exposure to product liability claims in
the event that the use of the solar power products into which our solar cells
and solar panels are incorporated results in injury. We may be subject to
warranty and product liability claims in the event that our solar power systems
fail to perform as expected or if a failure of our solar power systems results,
or is alleged to result, in bodily injury, property damage or other damages.
Since our solar power products are electricity producing devices, it is possible
that our products could result in injury, whether by product malfunctions,
defects, improper installation or other causes. In addition, since we only began
selling our solar cells and solar panels in late 2004 and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether or not product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We have evaluated the potential risks we face and
believe that we have appropriate levels of insurance for product liability
claims. We rely on our general liability insurance to cover product liability
claims and have not obtained separate product liability insurance. However, a
successful warranty or product liability claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to
make significant payments of damages. In addition, quality issues can have
various other ramifications, including delays in the recognition of revenue,
loss of revenue, loss of future sales opportunities, increased costs associated
with repairing or replacing products, and a negative impact on our goodwill and
reputation, which could also adversely affect our business and operating
results.
Warranty
and product liability claims may result from defects or quality issues in
certain third-party technology and components that our systems segment
incorporates into its solar power systems, particularly solar cells and panels,
over which it has no control. While its agreements with its suppliers generally
include warranties, such provisions may not fully compensate us for any loss
associated with third-party claims caused by defects or quality issues in such
products. In the event we seek recourse through warranties, we will also be
dependent on the creditworthiness and continued existence of these
suppliers.
Our
current standard warranty for our solar power systems differs by geography and
end-customer application and includes either a one, two or five year
comprehensive parts and workmanship warranty, after which the customer may
typically extend the period covered by its warranty for an additional fee. Due
to the warranty period, we bear the risk of extensive warranty claims long after
we have completed a project and recognized revenues. Future product failures
could cause us to incur substantial expenses to repair or replace defective
products. While we generally pass through manufacturer warranties we receive
from our suppliers to our customers, we are responsible for repairing or
replacing any defective parts during our warranty period, often including those
covered by manufacturers’ warranties. If the manufacturer disputes or otherwise
fails to honor its warranty obligations, we may be required to incur substantial
costs before we are compensated, if at all, by the manufacturer. Furthermore,
our warranties may exceed the period of any warranties from our suppliers
covering components included in our systems, such as inverters.
Prior to
our acquisition of SP Systems, one of SP System’s major panel suppliers at the
time, AstroPower, Inc., filed for bankruptcy in February 2004. SP Systems had
installed solar systems incorporating over 30,000 AstroPower panels, of which
approximately 10,000 panels were still under warranty as of September 28, 2008.
The majority of these warranties expire by 2022. While we have not experienced a
significant number of warranty or other claims related to the installed
AstroPower panels, we may in the future incur significant unreimbursable
expenses in connection with the repair or replacement of these panels, which
could have a material adverse effect on our business and results of operations.
In addition, another major supplier of solar panels notified us of a product
defect that may affect a substantial number of panels installed by SP Systems
between 2002 and September 2006. If the supplier does not perform its
contractual obligations to remediate the defective panels, we will be exposed to
those costs it would incur under the warranty with SP Systems’
customers.
The
competitive environment in which our systems business operates often requires us
to arrange financing for our customer’s projects and/or undertake post-sale
customer obligations. If we are unable to arrange adequate financing or if
our post-sale customer obligations are more costly than expected, our revenue
and financial results could be materially adversely affected.
We
arrange third-party financing for most of our end customer’s solar projects that
we install through our systems segment. Additionally, we are often required as a
condition of financing or at the request of our end customer to undertake
certain post-sale obligations such as:
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System
output performance guaranties;
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Liquidated
damage payments or customer termination rights if the system we are
constructing is not commissioned within specified
timeframes;
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Guaranties
of certain minimum residual value of the system at specified future dates;
and
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System
put-rights whereby we could be required buy-back a customer’s system at
fair value on specified future
dates.
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Such
financing arrangements and post-sale obligations involve complex accounting
analyses and judgments regarding the timing of revenue and expense recognition
and in certain situations these factors may require us to defer revenue
recognition until projects are completed, which could adversely affect revenue
and profits in a particular period.
In
addition, under our power purchase business model, we often execute power
purchase agreements directly with the end-user customer purchasing solar
electricity, with the expectation that we will later assign the power purchase
agreement to a financier. Under such arrangements, the financier separately
contracts with SunPower to build and acquire the solar system, and then sells
the electricity to the end-user customer under the assigned power purchase
agreement. When executing power purchase agreements with the end-user
customers, SunPower seeks to mitigate the risk that a financier will not be
available for the project by allowing termination of the power purchase
agreement in such event without penalty. However, SunPower may not always
be successful in negotiating for penalty-free termination rights for failure to
secure financing, and certain end-user customers have required substantial
financial penalties in exchange for such rights.
Due to
the recent tightening of credit markets and concerns regarding the availability
of credit, our customers may be delayed in obtaining, or may not be able to
obtain, necessary financing for their purchases of solar power systems. If we
are unable to arrange adequate financing or if our post-sale customer
obligations are more costly than expected, our revenue and financial results
could be materially adversely affected.
Our
systems segment acts as the general contractor for our customers in connection
with the installations of our solar power systems and is subject to risks
associated with construction, cost overruns, delays and other contingencies tied
to performance bonds and letters of credit, which could have a material adverse
effect on our business and results of operations.
Our
systems segment acts as the general contractor for our customers in connection
with the installation of our solar power systems. All essential costs are
estimated at the time of entering into the sales contract for a particular
project, and these are reflected in the overall price that we charge our
customers for the project. These cost estimates are preliminary and may or may
not be covered by contracts between us or the other project developers,
subcontractors, suppliers and other parties to the project. In addition, we
require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or defective or
late execution occur, we may not achieve our expected margins or cover our
costs. Also, some systems customers require performance bonds issued by a
bonding agency or letters of credit issued by financial institutions. Due to the
general performance risk inherent in construction activities, it has become
increasingly difficult recently to secure suitable bonding agencies willing to
provide performance bonding, and obtaining letters of credit requires adequate
collateral because we have not obtained a credit rating. In the event we are
unable to obtain bonding or sufficient letters of credit, we will be unable to
bid on, or enter into, sales contracts requiring such bonding.
In
addition, some of our larger systems customers require that we pay substantial
liquidated damages for each day or other period its solar installation is not
completed beyond an agreed target date, up to and including the return of the
entire project sale price. This is particularly true in Europe, where long-term,
fixed feed-in tariffs available to investors are typically set during a
prescribed period of project completion, but the fixed amount declines over time
for projects completed in subsequent periods. We face material financial
penalties in the event we fail to meet the completion deadlines, including but
not limited a full refund of the contract price paid by the customers. In
certain cases we do not control all of the events which could give rise to these
penalties, such as reliance on the local utility to timely complete electrical
substation construction.
In
addition, investors often require that the solar power system generate specified
levels of electricity in order to maintain their investment returns, allocating
substantial risk and financial penalties to us if those levels are not achieved,
up to and including the return of the entire project sale price. Furthermore,
our customers often require protections in the form of conditional payments,
payment retentions or holdbacks, and similar arrangements that condition its
future payments on performance. Delays in solar panel or other supply shipments,
other construction delays, unexpected performance problems in electricity
generation or other events could cause us to fail to meet these performance
criteria, resulting in unanticipated and severe revenue and earnings losses and
financial penalties. Construction delays are often caused by inclement weather,
failure to timely receive necessary approvals and permits, or delays in
obtaining necessary solar panels, inverters or other materials. All such risks
could have a material adverse effect on our business and results of
operations.
A
limited number of components customers are expected to continue to comprise a
significant portion of our revenues and any decrease in revenue from these
customers could have a significant adverse effect on us.
Even
though our customer base is expected to increase and our revenue streams to
diversify, a substantial portion of our net revenues could continue to depend on
sales to a limited number of customers and the loss of sales to these customers
would have a significant negative impact on our business. Our agreements with
these customers may be cancelled if we fail to meet certain product
specifications or materially breach the agreement or in the event of bankruptcy,
and our customers may seek to renegotiate the terms of current agreements or
renewals. Most of the solar panels we sell to the European market in our
components business are sold to small numbers of German customers, and this may
continue into the foreseeable future.
Our
operating results will be subject to fluctuations and are inherently
unpredictable; if we fail to meet the expectations of securities analysts or
investors, our stock price may decline significantly.
We have
incurred net losses from inception through 2005 and for the quarter ended
July 1, 2007. On September 28, 2008, we had accumulated earnings of
approximately $39.9 million. To maintain our profitability, we will need to
generate and sustain higher revenue while maintaining reasonable cost and
expense levels. We do not know if our revenue will grow, or if it will grow
sufficiently to outpace our expenses, which we expect to increase as we expand
our manufacturing capacity. We may not be able to sustain or increase
profitability on a quarterly or an annual basis. Our quarterly revenue and
operating results will be difficult to predict and have in the past fluctuated
from quarter to quarter. It is possible that our operating results in some
quarters will be below market expectations. In particular, our systems segment
is difficult to forecast and is susceptible to large fluctuations in financial
results. The amount, timing and mix of sales of our systems segment, often for a
single medium or large-scale project, may cause large fluctuations in our
revenue and other financial results. Further, our revenue mix of high margin
material sales versus lower margin projects in the systems business segment can
fluctuate dramatically quarter to quarter, which may adversely affect our
revenue and financial results in any given period. Finally, our ability to
meet project completion schedules for an individual project and the
corresponding revenue impact under the percentage-of-completion method of
recognizing revenue, may similarly cause large fluctuations in our revenue and
other financial results. This may cause us to miss analysts’ guidance or any
future guidance announced by us.
In
addition, our quarterly operating results will also be affected by a number of
other factors, including:
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the
average selling price of our solar cells, solar panels and solar power
systems;
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the
availability and pricing of raw materials, particularly
polysilicon;
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foreign
currency fluctuations, particularly in the Euro, Philippine peso, South
Korean won or Australian dollar;
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the
availability, pricing and timeliness of delivery of raw materials and
components, particularly solar panels and balance of systems components,
including steel, necessary for our solar power systems to
function;
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the
rate and cost at which we are able to expand our manufacturing and product
assembly capacity to meet customer demand, including costs and timing of
adding personnel;
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construction
cost overruns, including those associated with the introduction of new
products;
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the
impact of seasonal variations in demand and/or revenue recognition linked
to construction cycles and weather
conditions;
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timing,
availability and changes in government incentive
programs;
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unplanned
additional expenses such as manufacturing failures, defects or
downtime;
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acquisition
and investment related costs;
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unpredictable
volume and timing of customer orders, some of which are not fixed by
contract but vary on a purchase order
basis;
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the
loss of one or more key customers or the significant reduction or
postponement of orders from these
customers;
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geopolitical
turmoil within any of the countries in which we operate or sell
products;
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the
effect of currency hedging
activities;
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our
ability to establish and expand customer
relationships;
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changes
in our manufacturing costs;
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changes
in the relative sales mix of our systems, solar cells and solar
panels;
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the
availability, pricing and timeliness of delivery of other products, such
as inverters and other balance of systems materials necessary for our
solar power products to function;
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our
ability to successfully develop, introduce and sell new or enhanced solar
power products in a timely manner, and the amount and timing of related
research and development costs;
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the
timing of new product or technology announcements or introductions by our
competitors and other developments in the competitive
environment;
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the
willingness of competing solar cell and panel suppliers to continue
product sales to our systems
segment;
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increases
or decreases in electric rates due to changes in fossil fuel prices or
other factors; and
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We base
our planned operating expenses in part on our expectations of future revenue,
and a significant portion of our expenses will be fixed in the short-term. If
revenue for a particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that quarter, which
would harm our operating results for that quarter. This may cause us to miss
analysts’ guidance or any guidance announced by us. If we fail to meet or exceed
analyst or investor expectations or our own future guidance, even by a small
amount, our stock price could decline, perhaps substantially.
Our
solar cell production lines are currently located in our manufacturing
facilities in the Philippines, and if we experience interruptions in the
operation of these production lines or are unable to add additional production
lines, it would likely result in lower revenue and earnings than
anticipated.
We
currently have ten solar cell manufacturing lines in production which are
located at our manufacturing facilities in the Philippines. If our current or
future production lines were to experience any problems or downtime, we would be
unable to meet our production targets and our business would suffer. If any
piece of equipment were to break down or experience downtime, it could cause our
production lines to go down. We have started operations in our second solar cell
manufacturing facility nearby our existing facility in the Philippines. This
expansion has required and will continue to require significant management
attention, a significant investment of capital and substantial engineering
expenditures and is subject to significant risks including:
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we
may experience cost overruns, delays, equipment problems and other
operating difficulties;
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we
may experience difficulties expanding our processes to larger production
capacity;
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our
custom-built equipment may take longer and cost more to engineer than
planned and may never operate as designed;
and
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we
are incorporating first-time equipment designs and technology
improvements, which we expect to lower unit capital and operating costs,
but this new technology may not be
successful.
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If we
experience any of these or similar difficulties, we may be unable to complete
the addition of new production lines on schedule in order to expand our
manufacturing facilities and our manufacturing capacity could be substantially
constrained. If this were to occur, our per-unit manufacturing costs would
increase, we would be unable to increase sales or gross margins as planned and
our earnings would likely be materially impaired.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and
upon the achievement of contractual milestones and any delay or cancellation of
a project could adversely affect our business.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and, as
a result, the revenue from this segment is driven by the performance of our
contractual obligations, which is generally driven by the timelines of
installation of our solar power systems at customer sites. The
percentage-of-completion method of accounting for revenue recognition is
inherently subjective because it relies on management estimates of total project
cost as a basis for recognizing revenue and profit. Accordingly, revenue
and profit we have recognized under the percentage-of-completion method are
potentially subject to adjustments in subsequent periods based on refinements in
estimated costs of project completion that could materially impact our future
revenue and profit.
In
connection with our acquisition of SP Systems, we do not recognize revenue from
intercompany sales by our components segment to our systems segment. Instead,
the sale of our solar panels used for construction projects are included in
system segment revenues. This could result in unpredictability of revenue and,
in the near term, a revenue decrease. As with any project-related business,
there is the potential for delays within any particular customer project.
Variation of project timelines and estimates may impact our ability to recognize
revenue in a particular period. Moreover, incurring penalties involving the
return of the contract price to the customer for failure to timely install one
project could negatively impact our ability to continue to recognize revenue on
a “percentage-of-completion” basis generally for other projects. In addition,
certain customer contracts may include payment milestones due at specified
points during a project. Because our systems segment usually must invest
substantial time and incur significant expense in advance of achieving
milestones and the receipt of payment, failure to achieve such milestones could
adversely affect our business and results of operations.
We
established a captive solar panel assembly facility, and, if this panel
manufacturing facility is unable to produce high quality solar panels at
commercially reasonable costs, our revenue growth and gross margin could be
adversely affected.
We
currently run five solar panel assembly lines in the Philippines with 150
megawatts of production capacity. This factory commenced commercial production
during the fourth quarter of 2006. Much of the manufacturing equipment and
technology in this factory is new and ramping to achieve their full rated
capacity. In the event that this factory is unable to ramp production with
commercially reasonable yields and competitive production costs, our anticipated
revenue growth and gross margin will be adversely affected.
Expansion
of our manufacturing capacity has and will continue to increase our fixed costs,
which increase may have a negative impact on our financial condition if demand
for our products decreases.
We have
recently expanded, and plan to continue to expand, our manufacturing facilities.
For example, on May 19, 2008, we announced plans to construct our third solar
cell manufacturing facility based in Malaysia. We plan to begin production
as soon as the first quarter of 2010 on the first line of the solar cell
manufacturing facility, which is expected to have an aggregate manufacturing
capacity of more than 1 gigawatt per year when completed. As we build additional
manufacturing lines or facilities, our fixed costs will increase. If the demand
for our solar power products or our production output decreases, we may not be
able to spread a significant amount of our fixed costs over the production
volume, thereby increasing our per unit fixed cost, which would have a negative
impact on our financial condition and results of operations.
We
depend on a third-party subcontractor in China to assemble a significant
portion of our solar cells into solar panels and any failure to obtain
sufficient assembly and test capacity could significantly delay our ability to
ship our solar panels and damage our customer relationships.
Historically,
we have relied on Jiawei, a third-party subcontractor in China, to assemble
a significant portion of our solar cells into solar panels and perform
panel testing and to manage packaging, warehousing and shipping of our solar
panels. We do not have a long-term agreement with Jiawei and we typically obtain
its services based on short-term purchase orders that are generally aligned with
timing specified by our customers’ purchase orders and our sales forecasts. If
the operations of Jiawei were disrupted or its financial stability impaired, or
if it should choose not to devote capacity to our solar panels in a timely
manner, our business would suffer as we may be unable to produce finished solar
panels on a timely basis. In addition, we supply inventory to Jiawei and we bear
the risk of loss, theft or damage to our inventory while it is held in its
facilities.
As a
result of outsourcing a significant portion of this final step in our
production, we face several significant risks, including:
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limited
assembly and testing capacity and potentially higher
prices;
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limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
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delays
resulting from an inability to move production to an alternate
provider.
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The
ability of our subcontractor to perform assembly and test is limited by its
available capacity. We do not have a guaranteed level of production capacity
with our subcontractor, and our production needs for solar panels may differ
from our forecasts provided to Jiawei. Other customers of Jiawei that are larger
and better financed than we are, or that have long-term agreements in place, may
induce Jiawei to reallocate capacity to them. Any reallocation could impair our
ability to secure the supply of solar panels that we need for our customers. In
addition, interruptions to the panel manufacturing processes caused by a natural
or man-made disaster could result in partial or complete disruption in supply
until we are able to shift manufacturing to another facility. It may not be
possible to obtain sufficient capacity or comparable production costs at another
facility. Migrating our design methodology to a new third-party subcontractor or
to a captive panel assembly facility could involve increased costs, resources
and development time. Utilizing additional third-party subcontractors could
expose us to further risk of losing control over our intellectual property and
the quality of our solar panels. Any reduction in the supply of solar panels
could impair our revenue by significantly delaying our ability to ship products
and potentially damage our relationships with existing customers.
If
we do not achieve satisfactory yields or quality in manufacturing our solar
cells, our sales could decrease and our relationships with our customers and our
reputation may be harmed.
The
manufacture of solar cells is a highly complex process. Minor deviations in the
manufacturing process can cause substantial decreases in yield and in some
cases, cause production to be suspended or yield no output. We have from time to
time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
process technologies or equipment. For example, we recently acquired a building
to house our second solar cell manufacturing facility near our existing
facility. As we expand our manufacturing capacity and bring additional lines or
facilities into production, we may experience lower yields initially as is
typical with any new equipment or process. We also expect to experience lower
yields as we continue the initial migration of our manufacturing processes to
thinner wafers. If we do not achieve planned yields, our product costs could
increase, and product availability would decrease resulting in lower revenues
than expected.
Additionally,
products as complex as ours may contain undetected errors or defects, especially
when first introduced. For example, our solar cells and solar panels may contain
defects that are not detected until after they are shipped or are installed
because we cannot test for all possible scenarios. These defects could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and significantly affect
our customer relations and business reputation. If we deliver solar cells or
solar panels with errors or defects, including cells or panels of third-party
manufacturers, or if there is a perception that such solar cells or solar panels
contain errors or defects, our credibility and the market acceptance and sales
of our products could be harmed.
We
have implemented a new enterprise resource planning system, or ERP system, and
disruptions of the system could adversely affect our operations and financial
results.
We
prepared for the ERP system implementation for over a year and took appropriate
measures to ensure the successful and timely implementation including but not
limited to hiring qualified consultants and performing extensive testing.
However, implementations of this scope have inherent risks including potential
disruption of our internal control structure, substantial capital expenditures,
additional administration expenses, demands on management’s time and other risks
of delays or difficulties in transitioning to the new ERP system. The new
ERP system may not result in productivity improvements at a level that outweighs
the costs of implementation, or at all, if issues encountered during the
stabilization period results in decreased revenue or increased administration
expenses. This and any other information technology system disruptions or our
ability to mitigate existing and future disruptions, if not anticipated or
appropriately mitigated, could have an adverse effect on our operations,
financial results, as well as our ability to complete the evaluation of our
internal control over financial reporting and attestation activities pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002. See also “Changes in
Internal Control over Financial Reporting” within “Item 4: Controls and
Procedures.”
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our products and
services.
The
market for electricity generation products is heavily influenced by foreign,
U.S. federal, state and local government regulations and policies concerning the
electric utility industry, as well as policies promulgated by electric
utilities. These regulations and policies often relate to electricity pricing
and technical interconnection of customer-owned electricity generation. In the
U.S. and in a number of other countries, these regulations and policies are
being modified and may continue to be modified. Customer purchases of, or
further investment in the research and development of, alternative energy
sources, including solar power technology, could be deterred by these
regulations and policies, which could result in a significant reduction in the
potential demand for our solar power products. For example, without a regulatory
mandated exception for solar power systems, utility customers are often charged
interconnection or standby fees for putting distributed power generation on the
electric utility network. These fees could increase the cost to our customers of
using our solar power products and make them less desirable, thereby harming our
business, prospects, results of operations and financial condition.
We
anticipate that our solar power products and their installation will be subject
to oversight and regulation in accordance with national and local ordinances
relating to building codes, safety, environmental protection, utility
interconnection and metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply with the
varying standards. Any new government regulations or utility policies pertaining
to our solar power products may result in significant additional expenses to us
and our resellers and their customers and, as a result, could cause a
significant reduction in demand for our solar power products.
We
will continue to be dependent on a limited number of third-party suppliers for
key components for our solar systems products during the near-term, which could
prevent us from delivering our products to our customers within required
timeframes, which could result in installation delays, cancellations, liquidated
damages and loss of market share.
In
addition to our reliance on a small number of suppliers for our solar cells and
panels, we rely on third-party suppliers for key components for our solar power
systems, such as inverters that convert the direct current electricity generated
by solar panels into alternating current electricity usable by the customer. For
the nine months ended September 28, 2008, two suppliers accounted for most of
our inverter purchases for domestic projects, two suppliers accounted for most
of our inverter purchases for European projects and one supplier accounted for
all of the inverter purchases for our Asia projects. In addition, one vendor
supplies all of the foam required to manufacture our PowerGuard® roof
system.
If we
fail to develop or maintain our relationships with our limited suppliers, we may
be unable to manufacture our products or our products may be available only at a
higher cost or after a long delay, which could prevent us from delivering our
products to our customers within required timeframes and we may experience order
cancellation and loss of market share. To the extent the processes that our
suppliers use to manufacture components are proprietary, we may be unable to
obtain comparable components from alternative suppliers. The failure of a
supplier to supply components in a timely manner, or to supply components that
meet our quality, quantity and cost requirements, could impair our ability to
manufacture our products or decrease their costs. If we cannot obtain substitute
materials on a timely basis or on acceptable terms, we could be prevented from
delivering our products to our customers within required timeframes, which could
result in installation delays, cancellations, liquidated damages and loss of
market share, any of which could have a material adverse effect on our business
and results of operations.
We
obtain capital equipment used in our manufacturing process from sole suppliers
and if this equipment is damaged or otherwise unavailable, our ability to
deliver products on time will suffer, which in turn could result in order
cancellations and loss of revenue.
Some of
the capital equipment used in the manufacture of our solar power products and in
our wafer-slicing operations have been developed and made specifically for us,
is not readily available from multiple vendors and would be difficult to repair
or replace if it were to become damaged or stop working. In addition, we
currently obtain the equipment for many of our manufacturing processes from sole
suppliers and we obtain our wafer-slicing equipment from one supplier. If any of
these suppliers were to experience financial difficulties or go out of business,
or if there were any damage to or a breakdown of our manufacturing or
wafer-slicing equipment at a time when we are manufacturing commercial
quantities of our products, our business would suffer. In addition, a supplier’s
failure to supply this equipment in a timely manner, with adequate quality and
on terms acceptable to us, could delay our capacity expansion of our
manufacturing facility and otherwise disrupt our production schedule or increase
our costs of production.
Acquisitions
of other companies or investments in joint ventures with other companies could
adversely affect our operating results, dilute our stockholders’ equity, or
cause us to incur additional debt or assume contingent liabilities.
To
increase our business and maintain our competitive position, we may acquire
other companies or engage in joint ventures in the future. Acquisitions and
joint ventures involve a number of risks that could harm our business and result
in the acquired business or joint venture not performing as expected,
including:
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insufficient
experience with technologies and markets in which the acquired business is
involved, which may be necessary to successfully operate and integrate the
business;
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problems
integrating the acquired operations, personnel, technologies or products
with the existing business and
products;
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diversion
of management time and attention from the core business to the acquired
business or joint venture;
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potential
failure to retain key technical, management, sales and other personnel of
the acquired business or joint
venture;
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difficulties
in retaining relationships with suppliers and customers of the acquired
business, particularly where such customers or suppliers compete with
us;
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reliance
upon joint ventures which we do not
control;
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subsequent
impairment of the acquired assets, including intangible assets;
and
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assumption
of liabilities including, but not limited to, lawsuits, tax examinations,
warranty issues, etc.
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We may
decide that it is in our best interests to enter into acquisitions or joint
ventures that are dilutive to earnings per share or that negatively impact
margins as a whole. In addition, acquisitions or joint ventures could require
investment of significant financial resources and require us to obtain
additional equity financing, which may dilute our stockholders’ equity, or
require us to incur additional indebtedness.
To the
extent that we invest in upstream suppliers or downstream channel capabilities,
we may experience competition or channel conflict with certain of our existing
and potential suppliers and customers. Specifically, existing and potential
suppliers and customers may perceive that we are competing directly with them by
virtue of such investments and may decide to reduce or eliminate their supply
volume to us or order volume from us. In particular, any supply reductions from
our polysilicon, ingot or wafer suppliers could materially reduce manufacturing
volume.
For
example, as a result of our acquisition of SP Systems, we now directly compete
with some of our own suppliers of solar cells and panels. As a result, the
acquisition could cause one or more solar cell and panel suppliers to reduce or
terminate their business relationship with us. Since the acquisition closed, we
have discontinued our purchasing relationship with certain suppliers of panels.
Other reductions or terminations, which may be significant, could occur. Any
such reductions or terminations could adversely affect our ability to meet
customer demand for solar power systems, which would likely materially adversely
affect our results of operations and financial condition. We will use
commercially reasonable efforts to replace any lost solar cells or panels with
our own inventory to mitigate the impact on us. However, such replacements may
not be sufficient to fully address solar supply shortfalls, and in any event
could negatively impact our revenue and earnings as we forego selling such
inventory to third parties.
Similarly,
in 2007, we entered into a joint venture agreement to form a new company in the
Philippines named First Philec Solar Corporation, and, in 2006, we entered into
a joint venture agreement to form a new company in South Korea named Woongjin
Energy. First Philec Solar was formed to perform wafer-slicing operations
for us, and Woongjin Energy was formed to convert polysilicon that we provide
into silicon ingots that we will procure under a five-year agreement. First
Philec Solar began manufacturing in the second quarter of fiscal 2008, and
Woongjin Energy began manufacturing in the third quarter of fiscal
2007. Because these are not wholly owned subsidiaries, they have their own
respective employees and management teams, and we do not control their
operations. While we have long-term supply agreements with both First
Philec Solar and Woongjin Energy, we significantly depend on their performing
under the agreements. If they or our other third-party vendors increase
their prices or decrease or discontinue their shipments to us, as a result of
equipment malfunctions, competing purchasers or otherwise, and we are unable to
obtain substitute wafers and ingots from other vendors on acceptable terms, or
we are unable to increase our own wafer-slicing and develop our own
ingot-pulling operations on a timely basis, our sales may decrease, our costs
may increase or our business could otherwise be harmed.
Following
the spin-off of our shares by Cypress on September 29, 2008, our ability to
issue equity, including to acquire companies or assets, is subject to limits as
described in “Our agreements
with Cypress require us to indemnify
Cypress for certain tax liabilities. These
indemnification obligations and related contractual restrictions may limit our ability to obtain
additional financing, participate in future acquisitions or pursue other
business initiatives.” To the extent these limits prevent us from
pursuing acquisitions or investments that we would otherwise pursue, our growth
and strategy could be impaired.
We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices
Act and similar worldwide anti-bribery laws.
The U.S.
Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery laws in other
jurisdictions generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or
retaining business. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. We train our
key staff concerning FCPA issues, and we also inform many of our partners,
subcontractors, agents and others who work for us or on our behalf that they
must comply with FCPA requirements. We cannot assure you that our internal
controls and procedures always will protect us from the reckless or criminal
acts committed by our employees, subcontractors or agents. If we are found to be
liable for FCPA violations (either due to our own acts or our inadvertence, or
due to the acts or inadvertence of others), we could suffer from criminal or
civil penalties or other sanctions which could have a material adverse effect on
our business.
We
have significant international activities and customers, and plan to continue
these efforts, which subject us to additional business risks, including
logistical complexity and political instability.
For the
nine months ended September 28, 2008, a substantial portion of our sales were
made to customers outside of the United States. Historically, we have had
significant sales in Spain, Germany, Austria, Italy and South Korea. We
currently have ten solar cell production lines in operation, which are located
at our manufacturing facilities in the Philippines. In addition, a majority of
our assembly functions have historically been conducted by a third-party
subcontractor in China. Risks we face in conducting business internationally
include:
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multiple,
conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other
government approvals, permits and
licenses;
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difficulties
and costs in staffing and managing foreign operations as well as cultural
differences;
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difficulties
and costs in recruiting and retaining individuals skilled in international
business operations;
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increased
costs associated with maintaining international marketing
efforts;
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potentially
adverse tax consequences associated with our permanent establishment of
operations in more countries;
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inadequate
local infrastructure;
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financial
risks, such as longer sales and payment cycles and greater difficulty
collecting accounts receivable; and
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political
and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business
restrictions.
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We
particularly face risks associated with political and economic instability and
civil unrest in the Philippines. In addition, in the Asia/Pacific region
generally, we face risks associated with tensions between countries in that
region, such as political tensions between China and Taiwan, the ongoing
discussions with North Korea regarding its nuclear weapons program, potentially
reduced protection for intellectual property rights, government-fixed foreign
exchange rates, relatively uncertain legal systems and developing
telecommunications infrastructures. In addition, some countries in this region,
such as China, have adopted laws, regulations and policies which impose
additional restrictions on the ability of foreign companies to conduct business
in that country or otherwise place them at a competitive disadvantage in
relation to domestic companies.
In
addition, although base wages are lower in the Philippines than in the United
States, wages for our employees in the Philippines are increasing, which could
result in increased costs to employ our manufacturing engineers. As of September
28, 2008, approximately 84% of our employees were located in the Philippines. We
also are faced with competition in the Philippines for employees, and we expect
this competition to increase as additional manufacturing companies enter the
market and expand their operations. In particular, there may be limited
availability of qualified manufacturing engineers. We have benefited from an
excess of supply over demand for college graduates in the field of engineering
in the Philippines. If this favorable imbalance changes due to increased
competition, it could affect the availability or cost of qualified employees,
who are critical to our performance. This could increase our costs and turnover
rates.
Our
current tax holidays in the Philippines will expire within the next several
years.
We currently
benefit from income tax holiday incentives in the Philippines in accordance with
our subsidiary’s registration with the Philippine Economic Zone Authority, which
provide that we pay no income tax in the Philippines. Our current income tax
holidays expire between 2010 and 2011, and we intend to apply for extensions and
renewals upon expiration. However, these tax holidays may or may not be
extended. We believe that as our Philippine tax holidays expire, (a) gross
income attributable to activities covered by our Philippine Economic Zone
Authority registrations will be taxed at a 5% preferential rate, and
(b) our Philippine net income attributable to all other activities will be
taxed at the statutory Philippine corporate income tax rate of 32%. Fiscal 2007
was the first year for which profitable operations benefitted from the
Philippine tax ruling.
Our
systems segment sales cycles for projects can be longer than our components
segment sales cycle for our solar cells and panels and may require significant
upfront investment which may not ultimately result in signing of a sales
contract and could have a material adverse effect on our business and results of
operations.
Our
systems segment sales cycles, which measure the time between its first contact
with a customer and the signing of a sales contract for a particular project,
vary substantially and average approximately eight months. Sales cycles for our
systems segment are lengthy for a number of reasons, including:
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our
customers often delay purchasing decisions until their eligibility for an
installation rebate is confirmed, which generally takes several
months;
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the
long time required to secure adequate financing for system purchases on
terms acceptable to customers; and
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the
customer’s review and approval processes for system purchases are lengthy
and time consuming.
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As a
result of these long sales cycles, we must make significant upfront investments
of resources in advance of the signing of sales contracts and the receipt of any
revenues, most of which are not recognized for several additional months
following contract signing. Accordingly, we must focus our limited resources on
sales opportunities that we believe we can secure. Our inability to enter into
sales contracts with potential customers after we make such an investment could
have a material adverse effect on our business and results of
operations.
We
generally do not have long-term agreements with our customers and accordingly
could lose customers without warning.
In our
components segment, our solar cells and solar panel products are generally not
sold pursuant to long-term agreements with customers, but instead are sold on a
purchase order basis. In our systems segment, we typically contract to perform
large projects with no assurance of repeat business from the same customers in
the future. Although we believe that cancellations on our purchase orders to
date have been insignificant, our customers may cancel or reschedule purchase
orders with us on relatively short notice. Cancellations or rescheduling of
customer orders could result in the delay or loss of anticipated sales without
allowing us sufficient time to reduce, or delay the incurrence of, our
corresponding inventory and operating expenses. In addition, changes in
forecasts or the timing of orders from these or other customers expose us to the
risks of inventory shortages or excess inventory. This, in addition to the
completion and non-repetition of large systems projects, in turn could cause our
operating results to fluctuate.
Our
systems segment could be adversely affected by seasonal trends and construction
cycles.
Our
systems segment is subject to significant industry-specific seasonal
fluctuations. Its sales have historically reflected these seasonal trends with
the largest percentage of total revenues being realized during the last two
calendar quarters. Low seasonal demand normally results in reduced shipments and
revenues in the first two calendar quarters. There are various reasons for this
seasonality, mostly related to economic incentives and weather patterns. For
example, in European countries with feed-in tariffs, the construction of solar
power systems may be concentrated during the second half of the
calendar year, largely due to the annual reduction of the applicable minimum
feed-in tariff and the fact that the coldest winter months are January through
March. In the United States, customers will sometimes make purchasing decisions
towards the end of the year in order to take advantage of tax credits or for
other budgetary reasons.
In
addition, to the extent we are successful in implementing our strategy to enter
the new home development market, we expect the seasonality of our business and
financial results to become more pronounced as sales in this market are often
tied to construction market demands which tend to follow national trends in
construction, including declining sales during cold weather months.
The
new homebuilder residential market may increase our exposure to certain
risks.
Our
systems segment is active in the residential market by selling our systems to
large production homebuilders. As part of this strategy, we developed SunTile®,
a product that integrates a solar panel into a roof tile. The current credit
crisis and demand decline in the housing market in the United States is
adversely affecting sales of new homes and may have a negative impact on our
near term ability to generate material revenue and earnings in this
market.
The
residential construction market has also characteristics that may increase our
exposure to certain risks we currently face or expose us to new risks. These
risks include increased seasonality, sensitivity to interest rates and other
macroeconomic conditions, as well as enhanced legal exposure. In particular, new
home developments often result in class action litigation when one or more homes
within a development experiences construction problems. Unlike our systems
segment commercial business, where we typically act as the general contractor,
we will be generally acting as subcontractor to homebuilders overseeing the
development projects. In many instances subcontractors may be held liable for
work of the homebuilder or other subcontractors. In addition, homebuilders often
require onerous indemnification obligations that effectively allocate most of
the potential liability from homeowner or class action lawsuits to
subcontractors, including us. Insurance policies for residential work have
significant limitations on coverage that may render such policies inapplicable
to these lawsuits. If we are not successful in entering the new residential
construction market, or if as a result of the litigation and indemnification
risks associated with such market, we incur significant costs, our business and
results of operations could be materially adversely affected.
If
we fail to successfully develop and introduce new products and services or
increase the efficiency of our products, we will not be able to compete
effectively, and our ability to generate revenues will suffer; technological
changes in the solar power industry could render our solar power products
uncompetitive or obsolete, which could reduce our market share and cause our
sales to decline.
As we
introduce new or enhanced products or integrate new technology into our
products, we will face risks relating to such transitions including, among other
things, technical challenges, disruption in customers’ ordering patterns,
insufficient supplies of new products to meet customers’ demand, possible
product and technology defects arising from the integration of new technology
and a potentially different sales and support environment relating to any new
technology. Our failure to manage the transition to newer products or the
integration of newer technology into our products could adversely affect our
business’ operating results and financial results.
The solar
power market is characterized by continually changing technology requiring
improved features, such as increased efficiency and higher power output and
improved aesthetics. This will require us to continuously develop new solar
power products and enhancements for existing solar power products to keep pace
with evolving industry standards and changing customer requirements.
Technologies developed by our direct competitors, including thin film solar
panels, concentrating solar cells, solar thermal electric and other solar
technologies, may provide power at lower costs.
Our
failure to further refine our technology and develop and introduce new solar
power products could cause our products to become uncompetitive or obsolete,
which could reduce our market share and cause our sales to decline. We will need
to invest significant financial resources in research and development to
maintain our market position, keep pace with technological advances in the solar
power industry and effectively compete in the future.
Evaluating
our business and future prospects may be difficult due to our limited history in
producing and shipping solar cells and solar panels in commercial
volumes.
There is
limited historical information available about our company upon which investors
can base their evaluation of our business and prospects. Although we began to
develop and commercialize high-efficiency solar cell technology for use in solar
concentrators in 1988 and began shipping product from our pilot manufacturing
facility in 2003, we shipped our first commercial A-300 solar cells from our
Philippines manufacturing facility in late 2004. Relative to the entire solar
industry, we have shipped only a limited number of solar cells and solar panels
and have recognized limited revenue. Our future success will require us to
continue to scale our Philippines facilities significantly beyond their current
capacity and successfully build and deploy our new solar cell manufacturing
facility in Malaysia. In addition, our business model, technology and ability to
achieve satisfactory manufacturing yields at higher volumes are unproven at a
very large scale. As a result, investors should consider our business and
prospects in light of the risks, expenses and challenges that we will face as we
seek to develop and manufacture new products in a rapidly growing
market.
Our
reliance on government programs to partially fund our research and development
programs could impair our ability to commercialize our solar power products and
services and increase our research and development expenses.
We intend
to continue our policy of selectively pursuing contract research, product
development and market development programs funded by various agencies of the
federal and state governments to complement and enhance our own resources.
Funding from government grants is generally recorded as an offset to our
research and development expense. During the nine months ended September 28,
2008 and September 30, 2007, funding from government grants, agreements and
contracts offset approximately 25% and 10%, respectively, our total research and
development expense, excluding in-process research and development. In addition,
in the third quarter of 2007, we signed a Solar America Initiative agreement
with the U.S. Department of Energy in which we were awarded $8.5 million in the
first budgetary period. Total funding for the three-year effort is estimated to
be $24.7 million. Our cost share requirement under this program, including
lower-tier subcontract awards, is anticipated to be $27.9 million.
These
government agencies may not continue their commitment to programs relevant to
our development projects. Moreover, we may not be able to compete successfully
to obtain funding through these or other programs. A reduction or discontinuance
of these programs or of our participation in these programs would materially
increase our research and development expenses, which would adversely affect our
profitability and could impair our ability to develop our solar power products
and services. In addition, contracts involving government agencies may be
terminated or modified at the convenience of the agency. Many of our systems
segment government awards also contain royalty provisions that require it to pay
certain amounts based on specified formulas. Government awards are subject to
audit and governmental agencies may dispute our royalty calculations. Any such
dispute could result in fines, increased royalty payments, cancellation of the
agreement or other penalties, which could have material adverse effect on our
business and results of operations.
Our
systems segment government-sponsored research contracts require that we provide
regular written technical updates on a monthly, quarterly or annual basis, and,
at the conclusion of the research contract, a final report on the results of our
technical research. Because these reports are generally available to the public,
third parties may obtain some aspects of its sensitive confidential information.
Moreover, the failure to provide accurate or complete reports may provide the
government with rights to any intellectual property arising from the related
research. Funding from government awards also may limit when and how we can
deploy our products and services developed under those contracts. For example,
government awards may require that the manufacturing of products developed with
federal funding be substantially conducted in the United States. In addition,
technology and intellectual property that we develop with government funding
provides the government with “march-in” rights. March-in rights refer to the
right of the government or a government agency to require us to grant a license
to the developed technology or products to a responsible applicant or, if it
refuses, the government may grant the license itself. The government can
exercise its march-in rights if it determines that action is necessary because
we fail to achieve practical application of the technology or because action is
necessary to alleviate health or safety needs, to meet requirements of federal
regulations or to give the United States industry preference. In addition,
government awards may include a provision providing the government with a
nonexclusive, nontransferable, irrevocable, paid-up license to practice or have
practiced each subject invention developed under an award throughout the world
by or on behalf of the government. Additional rights to technical data may
be granted to the government in recognition of funding.
Because
the markets in which we compete are highly competitive, we may not be able to
compete successfully and we may lose or be unable to gain market
share.
Our
components solar products compete with a large number of competitors in the
solar power market, including BP Solar International Inc., Evergreen Solar,
Inc., First Solar, Inc., Kyocera Corporation, Mitsubishi Electric Corporation,
Motech Industries, Inc., Q-Cells AG, Sanyo Corporation, Sharp Corporation,
SolarWorld AG and Suntech Power Holdings Co., Ltd. In addition, universities,
research institutions and other companies such as First Solar have brought to
market alternative technologies such as thin films and concentrators, which
compete with our technology in certain applications. We expect to face increased
competition in the future. Further, many of our competitors are developing and
are currently producing products based on new solar power technologies that may
ultimately have costs similar to, or lower than, our projected
costs.
Our
systems solar power products and services also compete against other power
generation sources including conventional fossil fuels supplied by utilities,
other alternative energy sources such as wind, biomass, CSP and emerging
distributed generation technologies such as micro-turbines, sterling engines and
fuel cells. In the large-scale on-grid solar power systems market, we will face
direct competition from a number of companies that manufacture, distribute, or
install solar power systems. Many of these companies sell our products as well
as their own or those of other manufacturers. Our systems segment's primary
competitors in the United States include BP Solar International, Inc., a
subsidiary of BP p.l.c., Conergy Inc., DT Solar, EI Solutions, Inc., First
Solar, Inc., GE Energy, a subsidiary of General Electric Corporation, Schott
Solar, Inc., Solar Integrated Technologies, Inc., SPG Solar, Inc., Sun Edison
LLC, Sunlink Corporation, SunTechnics Installation & Services, Inc.,
Thompson Technology Industries, Inc. and WorldWater & Power
Corporation. Our systems segment primary competitors in Europe include BP Solar,
City Solar AG, Conergy (through its subsidiaries AET Alternitive Energie Technik
GmbH, SunTechnics Solartechnik GmbH and voltwerk AG), PV-Systemtechnik Gbr, SAG
Solarstrom AG, Solon AG and Taufer Solar GmbH. In addition, we will occasionally
compete with distributed generation equipment suppliers such as Caterpillar,
Inc. and Cummins, Inc. Other existing and potential competitors in the solar
power market include universities and research institutions. We also expect that
future competition will include new entrants to the solar power market offering
new technological solutions. As we enter new markets and pursue additional
applications for our systems products and services, we expect to face increased
competition, which may result in price reductions, reduced margins or loss of
market share.
Competition
is intense, and many of our competitors have significantly greater access to
financial, technical, manufacturing, marketing, management and other resources
than we do. Many also have greater name recognition, a more established
distribution network and a larger installed base of customers. In addition, many
of our competitors have well-established relationships with our current and
potential suppliers, resellers and their customers and have extensive knowledge
of our target markets. As a result, these competitors may be able to devote
greater resources to the research, development, promotion and sale of their
products and respond more quickly to evolving industry standards and changing
customer requirements than we will be able to. Consolidation or strategic
alliances among such competitors may strengthen these advantages and may provide
them greater access to customers or new technologies. We may also face
competition from some of our systems segment resellers, who may develop products
internally that compete with our systems product and service offerings, or who
may enter into strategic relationships with or acquire other existing solar
power system providers. To the extent that government funding for research and
development grants, customer tax rebates and other programs that promote the use
of solar and other renewable forms of energy are limited, we will compete for
such funds, both directly and indirectly, with other renewable energy providers
and their customers.
If we
cannot compete successfully in the solar power industry, our operating results
and financial condition will be adversely affected. Furthermore, we expect
competition in systems markets to increase, which could result in lower prices
or reduced demand for our systems services and have a material adverse effect on
our business and results of operations.
The
demand for products requiring significant initial capital expenditures such as
our solar power products and services are affected by general economic
conditions, such as increasing interest rates that may decrease the return on
investment for certain customers or investors in projects, which could decrease
demand for our systems products and services and which could have a material
adverse effect on our business and results of operations.
The
United States and international economies have recently experienced a period of
slow economic growth. A sustained economic recovery is uncertain. In particular,
terrorist acts and similar events, continued turmoil in the Middle East or war
in general could contribute to a slowdown of the market demand for products that
require significant initial capital expenditures, including demand for solar
cells and solar power systems and new residential and commercial buildings. If
the United States or global economy enters a recession or the economic recovery
is slow as a result of the recent economic, political and social turmoil, or if
there are further terrorist attacks in the United States or elsewhere, we may
experience decreases in the demand for our solar power products, which may harm
our operating results.
We have
benefited from historically low interest rates in recent years, as these rates
have made it more attractive for our customers to use debt financing to purchase
our solar power systems. Interest rates have fluctuated recently and may
eventually continue to rise, which will likely increase the cost of financing
these systems and may reduce an operating company’s profits and investors’
expected returns on investment. This risk is becoming more significant to our
systems segment, which is placing increasing reliance upon direct sales to
financial institutions which sell electricity to end customers under a power
purchase agreement. This sales model is highly sensitive to interest rate
fluctuations and the availability of liquidity, and would be adversely affected
by increases in interest rates or liquidity constraints. Rising interest rates
may also make certain alternative investments more attractive to investors, and
therefore lead to a decline in demand for our solar power systems, which could
have a material adverse effect on our business and results of
operations.
One
of our key products, the PowerTracker®, now referred to as SunPower® tracker,
was acquired through an assignment and acquisition of the patents associated
with the product from a third-party individual, and if we are unable to continue
to use this product, our business, prospects, operating results and financial
condition would be materially harmed.
In
September 2002, PowerLight entered into a Technology Assignment and Services
Agreement and other ancillary agreements, subsequently amended in December 2005,
with Jefferson Shingleton and MaxTracker Services, LLC, a New York limited
liability company controlled by Mr. Shingleton. These agreements form the
basis for its intellectual property rights in its PowerTracker products. Under
such agreements, as later amended, Mr. Shingleton assigned to PowerLight
all right, title and interest in his MaxTracker ™, MaxRack ™, MaxRack Ballast ™
and MaxClip ™ products and all related intellectual property rights.
Mr. Shingleton is obligated to provide consulting services to PowerLight
related to such technology until December 31, 2012 and is required to
assign to PowerLight any enhancements he makes to the technology while providing
such consulting services. Mr. Shingleton retains a first security interest
in the patents and patent applications assigned until the earlier of the
expiration of the patents, full payment by PowerLight to Mr. Shingleton of
all of the royalty obligations under the Technology Assignment and Services
Agreement, or the termination of the Technology Assignment and Services
Agreement. In the event of PowerLight’s’ default under the Technology Assignment
and Services Agreement, MaxTracker Services and Mr. Shingleton may
terminate the agreements and the related assignments and cause the intellectual
rights assigned to it to be returned to Mr. Shingleton or MaxTracker
Services, including patents related to SunPower tracker. In addition, upon such
termination, PowerLight must grant Mr. Shingleton a perpetual,
non-exclusive, royalty-free right and license to use, sell, and otherwise
exploit throughout the world any intellectual property MaxTracker Services or
Mr. Shingleton developed during the provision of consulting services to
PowerLight. Events of default by PowerLight which could enable
Mr. Shingleton or Max Tracker Services to terminate the agreements and the
related assignments and cause the intellectual rights assigned to it to be
returned to Mr. Shingleton or MaxTracker Services include the
following:
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if PowerLight
files a petition in bankruptcy or equivalent order or petition under the
laws of any jurisdiction;
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if
a petition in bankruptcy or equivalent order or petition under the laws of
any jurisdiction is filed against it which is not dismissed within 60 days
of such filing;
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if
PowerLight’s assets are assigned for the benefit of
creditors;
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if PowerLight
voluntarily or involuntarily
dissolves;
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if PowerLight
fails to pay any amount due under the agreements when due and does not
remedy such failure to pay within 10 days of written notice of such
failure to pay; or
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if PowerLight
defaults in the performance of any of its material obligations under the
agreements when required (other than payment of amounts due under the
agreements), and such failure is not remedied within 30 days of written
notice to it of such default from Mr. Shingleton or MaxTracker
Services. However, if such a default can reasonably be cured after the
30-day period, and PowerLight commences cure of such default within
30-day period and diligently prosecutes that cure to completion, such
default does not trigger a termination right unless and
until PowerLight ceases commercially reasonable efforts to cure such
default.
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If we are
unable to continue to use and sell SunPower tracker as a result of the
termination of the agreements and the related assignment or any other reason,
our business, prospects, operating results and financial condition would be
materially harmed.
We
are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.
From time
to time, we, our respective customers or third-parties with whom we work may
receive letters, including letters from various industry participants, alleging
infringement of their patents. Although we are not currently aware of any
parties pursuing or intending to pursue infringement claims against us, we
cannot assure investors that we will not be subject to such claims in the
future. Additionally, we are required by contract to indemnify some of our
customers and our third-party intellectual property providers for certain costs
and damages of patent infringement in circumstances where our products are a
factor creating the customer’s or these third-party providers’ infringement
liability. This practice may subject us to significant indemnification claims by
our customers and our third-party providers. We cannot assure investors that
indemnification claims will not be made or that these claims will not harm our
business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s
attention from our business and could have a material adverse effect on our
business, operating results or financial condition. If there is a successful
claim of infringement against us, our customers or our third-party intellectual
property providers, we may be required to pay substantial damages to the party
claiming infringement, stop selling products or using technology that contains
the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties
making infringement claims may also be able to bring an action before the
International Trade Commission that could result in an order stopping the
importation into the United States of our solar cells. Any of these judgments
could materially damage our business. We may have to develop non-infringing
technology, and our failure in doing so or in obtaining licenses to the
proprietary rights on a timely basis could have a material adverse effect on our
business.
We
have filed, and, may continue to file claims against other parties for
infringing our intellectual property that may be very costly and may not be
resolved in our favor.
To
protect our intellectual property rights and to maintain our competitive
advantage, we have, and may continue to, file suits against parties who we
believe infringe our intellectual property. Intellectual property litigation is
expensive and time consuming and could divert management’s attention from our
business and could have a material adverse effect on our business, operating
results or financial condition, and our enforcement efforts may not be
successful. Our participation in intellectual property enforcement actions may
negatively impact our financial results.
We
may not be able to prevent others from using the term SunPower or similar terms
in connection with their solar power products which could adversely affect the
market recognition of our name and our revenue.
“SunPower”
is our registered trademark in the United States and the European Community for
use with solar cells and solar panels. We are seeking similar registration of
the “SunPower” trademark in foreign countries but we may not be successful in
some of these jurisdictions. In the foreign jurisdictions where we are unable to
obtain this registration or have not tried, others may be able to sell their
products using trademarks compromising or incorporating “SunPower,” which could
lead to customer confusion. In addition, if there are jurisdictions where
another proprietor has already established trademark rights in marks containing
“SunPower,” we may face trademark disputes and may have to market our products
with other trademarks, which also could hurt our marketing efforts. We may
encounter trademark disputes with companies using marks which are confusingly
similar to the SunPower mark which if not resolved favorably could cause our
branding efforts to suffer. In addition, we may have difficulty in establishing
strong brand recognition with consumers if others use similar marks for similar
products.
We hold
registered trademarks for SunPower®, PowerLight®, PowerGuard®, PowerTracker®,
SunTile®, PowerTilt® and Smarter Solar® in certain countries. We have not
registered, and may not be able to register, these trademarks in other key
countries.
We
rely substantially upon trade secret laws and contractual restrictions to
protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenue could
suffer.
We seek
to protect our proprietary manufacturing processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
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people
may not be deterred from misappropriating our technologies despite the
existence of laws or contracts prohibiting
it;
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policing
unauthorized use of our intellectual property may be difficult, expensive
and time-consuming, and we may be unable to determine the extent of any
unauthorized use; and
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the
laws of other countries in which we market our solar cells, such as some
countries in the Asia/Pacific region, may offer little or no protection
for our proprietary technologies.
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Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our technologies without
paying us for doing so. Any inability to adequately protect our proprietary
rights could harm our ability to compete, to generate revenue and to grow our
business.
We
may not obtain sufficient patent protection on the technology embodied in the
solar cells or solar system components we currently manufacture and market,
which could harm our competitive position and increase our
expenses.
Although
we substantially rely on trade secret laws and contractual restrictions to
protect the technology in the solar cells and solar system components we
currently manufacture and market, our success and ability to compete in the
future may also depend to a significant degree upon obtaining patent protection
for our proprietary technology. We currently own multiple patents and patent
applications which cover aspects of the technology in the solar cells and
mounting systems that we currently manufacture and market. Material patents that
relate to our systems products and services primarily relate to our rooftop
mounting products and ground-mounted tracking products. We intend to continue to
seek patent protection for those aspects of our technology, designs, and
methodologies and processes that we believe provide significant competitive
advantages.
Our
patent applications may not result in issued patents, and even if they result in
issued patents, the patents may not have claims of the scope we seek. In
addition, any issued patents may be challenged, invalidated or declared
unenforceable. The term of any issued patents would be 20 years from their
filing date and if our applications are pending for a long time period, we may
have a correspondingly shorter term for any patent that may issue. Our present
and future patents may provide only limited protection for our technology and
may not be sufficient to provide competitive advantages to us. For example,
competitors could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous technologies on their
own or design around our patents. Also, patent protection in certain foreign
countries may not be available or may be limited in scope and any patents
obtained may not be as readily enforceable as in the United States, making it
difficult for us to effectively protect our intellectual property from misuse or
infringement by other companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may harm our
business. In addition, given the costs of obtaining patent protection, we may
choose not to protect certain innovations that later turn out to be
important.
If
our ability to effectively obtain patents is decreased due to changes in patent
laws or changes in the rules propagated by the US Patent and Trademark Office,
or if we need to re-file some of our patent applications due to newly discovered
prior art, the value of our patent portfolio and the revenue we derive from
products protected by the patents may significantly decrease.
Current
legislation is being considered which could make numerous changes to the patent
laws, including forcing patent litigation to be filed in the defendant’s home
venue, reducing damage awards for infringement, limiting enhanced damages, an
expanded post-grant opposition procedure, expanding rights for third parties to
submit prior art and changing to a first-to-file system. Additionally,
based on situations such as newly discovered prior art, we may need to seek
re-examination some of our patent applications. If our ability to
effectively obtain patents is decreased due to these or similar changes, or if
we need to re-file some of our patent applications due to newly discovered prior
art, the value of our patent portfolio and the revenue we derive from products
protected by the patents may significantly decrease.
Our
success depends on the continuing contributions of our key
personnel.
We rely
heavily on the services of our key executive officers and the loss of services
of any principal member of our management team could adversely impact our
operations. In addition, our technical personnel represent a significant asset
and serve as the source of our technological and product innovations. We believe
our future success will depend upon our ability to retain these key employees
and our ability to attract and retain other skilled managerial, engineering and
sales and marketing personnel. However, we cannot guarantee that any employee
will remain employed with us for any definite period of time since all of our
employees, including our key executive officers, serve at-will and may terminate
their employment at any time for any reason.
In July
2008, Emmanuel Hernandez communicated his intent to retire as Chief Financial
Officer. Mr. Hernandez was previously identified in our 2007 proxy
statement as one of our named executive officers. In October 2008, we announced
the appointment of Dennis V. Arriola, 47, as our next Chief Financial
Officer. Mr. Arriola is expected to assume the role of Senior Vice
President and Chief Financial Officer on November 10, 2008. In such role,
he will serve as our principal financial officer and principal accounting
officer. Emmanuel Hernandez, our current Chief Financial Officer, is
expected to assist in the transition through January 2009.
On
October 24, 2008, Daniel S. Shugar announced that he plans to take a personal
leave of absence for 9 to 12 months to pursue personal interests commencing in
March, 2009. Mr. Shugar currently serves as President of SP
Systems. He joined SP Systems (formerly known as PowerLight) in 1996 prior
to our acquisition of the subsidiary in January 2007.
We
may be harmed by liabilities arising out of our acquisition of SP Systems and
the indemnity the selling stockholders have agreed to provide may be
insufficient to compensate us for these damages.
On
January 10, 2007, we completed our acquisition of SP Systems, formerly
known as PowerLight Corporation. SP Systems’ former stockholders made
representations and warranties to us in the acquisition agreement, including
those relating to the accuracy of its financial statements, the absence of
litigation and environmental matters and the consents needed to transfer
permits, licenses and third-party contracts in connection with our acquisition
of SP Systems. To the extent that we are harmed by a breach of these
representations and warranties, SP Systems’ former stockholders have agreed to
indemnify us for monetary damages from an escrowed proceeds account. In most
cases we are required to absorb approximately the first $2.4 million before we
are entitled to indemnification.
As of
December 30, 2007, the escrow proceeds account was comprised of approximately
$23.7 million in cash and approximately 0.7 million shares of our class A common
stock, with a total aggregate value of $118.1 million. Following the first
anniversary of the closing date, we authorized the release of approximately
one-half of the original escrow amount, leaving approximately $12.9 million in
cash and approximately 0.4 million shares of our class A common stock, with a
total aggregate value of $38.6 million as of September 28, 2008. Our rights
to recover damages under several provisions of the acquisition agreement also
expired on the first anniversary of the closing date. As a result, we are
now entitled to recover only limited types of losses, and our recovery will be
limited to the amount available in the escrow fund at the time of a claim. The
amount available in the escrow fund will be progressively reduced to zero on
each anniversary of the closing date over a period of five years since the date
of acquisition. We may incur liabilities from this acquisition which are not
covered by the representations and warranties set forth in the agreement or
which are non-monetary in nature. Consequently, our acquisition of SP Systems
may expose us to liabilities for which we are not entitled to indemnification or
our indemnification rights are insufficient.
Charges
to earnings resulting from the application of the purchase method of accounting
to the acquisition may adversely affect the market value of our class A and
class B common stock.
In
accordance with Statement of Financial Accounting Standards, or SFAS, No. 141,
“Business Combinations”, or SFAS No. 141, we accounted for the acquisition using
the purchase method of accounting. Further, a portion of the purchase price paid
in the acquisition has been allocated to in-process research and development.
Under the purchase method of accounting, we allocated the total purchase price
to SP Systems’ net tangible assets and intangible assets based on their fair
values as of the date of completion of the acquisition and recorded the excess
of the purchase price over those fair values as goodwill. We will incur
amortization expense over the useful lives of amortizable intangible assets
acquired in connection with the acquisition. In addition, to the extent the
value of goodwill and long lived assets becomes impaired, we may be required to
incur material charges relating to the impairment of those assets. Further, we
may be impacted by nonrecurring charges related to reduced gross profit margins
from the requirement to adjust SP Systems’ inventory to fair value. Finally, we
will incur ongoing compensation charges associated with assumed options, equity
held by employees of SP Systems and subjected to equity restriction agreements,
and restricted stock granted to employees of our SP Systems business. We
estimate that these charges will be approximately $75.0 million in the
aggregate, a majority of which will be recognized in the first two years
beginning on January 10, 2007 and lesser amounts in the succeeding two years.
Any of the foregoing charges could have a material impact on our results of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, or SFAS No. 141(R), which replaces SFAS No. 141.
SFAS No. 141(R) will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS No. 141(R),
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008 and will be adopted for any purchase business
combinations consummated subsequent to December 28, 2008.
Our
headquarters and other facilities, as well as the facilities of certain of our
key subcontractors, are located in regions that are subject to earthquakes and
other natural disasters.
Our
headquarters, including research and development operations, our manufacturing
facilities and the facilities of our subcontractor upon which we rely to
assemble and test our solar panels are located in countries that are subject to
earthquakes and other natural disasters. Our headquarters and research and
development operations are located in California, our manufacturing facilities
are located in the Philippines, and the facilities of our subcontractor for
assembly and test of solar panels are located in China. Since we do not have
redundant facilities, any earthquake, tsunami or other natural disaster in these
countries could materially disrupt our production capabilities and could result
in our experiencing a significant delay in delivery, or substantial shortage, of
our solar cells.
Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
We are
required to comply with all foreign, U.S. federal, state and local laws and
regulations regarding pollution control and protection of the environment. In
addition, under some statutes and regulations, a government agency, or other
parties, may seek recovery and response costs from operators of property where
releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for such release or otherwise at fault. We use,
generate and discharge toxic, volatile and otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations. In addition, if
more stringent laws and regulations are adopted in the future, the costs of
compliance with these new laws and regulations could be substantial. To date
such laws and regulations have not had a significant impact on our operations,
and we believe that we have all necessary permits to conduct their respective
operations as they are presently conducted. If we fail to comply with present or
future environmental laws and regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. Under our agreement
with Cypress, we will indemnify Cypress from any environmental liabilities
associated with our operations and facilities in San Jose, California and the
Philippines.
We
maintain self-insurance for certain indemnities we have made to our officers and
directors.
Our
certificate of incorporation, by-laws and indemnification agreements require us
to indemnify our officers and directors for certain liabilities that may arise
in the course of their service to us. We primarily self-insure with respect to
potential indemnifiable claims. Although we have insured our officers and
directors against certain potential third-party claims for which we are legally
or financially unable to indemnify them, we intend to primarily self-insure with
respect to potential third-party claims which give rise to direct liability to
such third-party or an indemnification duty on our part. We previously pooled
our resources with those of Cypress for self-insurance purposes. Following
the separation of our company from Cypress this is no longer possible and we are
subject to heightened self-insurance risk. If we were required to pay a
significant amount on account of these liabilities for which we self-insure, our
business, financial condition and results of operations could be seriously
harmed.
Changes
to financial accounting standards may affect our combined results of operations
and cause us to change our business practices.
We
prepare our financial statements to conform with U.S. GAAP. These accounting
principles are subject to interpretation by the American Institute of Certified
Public Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on our combined reported results and may affect our reporting
of transactions completed before a change is announced. Changes to those rules
or the questioning of current practices may adversely affect our reported
financial results or the way we conducts our business. For example, accounting
policies affecting many aspects of our business, including rules relating to
employee stock option grants and existing joint ventures, have recently been
revised, or new guidance relating to outstanding convertible debt are being
proposed.
The
Financial Accounting Standards Board, or the FASB, and other agencies have made
changes to U.S. GAAP that required U.S. companies, starting in the first quarter
of fiscal 2006, to record a charge to earnings for employee stock option grants
and other equity incentives. We may have significant and ongoing accounting
charges resulting from option grant and other equity awards that could reduce
our net income or increase our net loss. In addition, since we have historically
used equity-related compensation as a component of our total employee
compensation program, the accounting change could make the use of equity-related
compensation less attractive to us and therefore make it more difficult to
attract and retain employees. In December 2003, the FASB issued the FASB Staff
Position FASB Interpretation No. 46 “Consolidation of Variable Interest
Entities”, or FSP FIN 46(R). The accounting method under FSP FIN 46(R) may
impact our accounting for certain existing or future joint ventures or project
companies for which we retain an ownership interest. In the event that we are
deemed the primary beneficiary of a Variable Interest Entity (VIE) subject to
the accounting of FSP FIN 46(R), we may have to consolidate the assets,
liabilities and financial results of the joint venture. This could have an
adverse impact on our financial position, gross margin and operating
results.
With
respect to our existing debt securities, we are not required under U.S. GAAP as
presently in effect to record any interest or other expense in connection with
our obligation to deliver upon conversion a number of shares (or an equivalent
amount of cash) having a value in excess of the outstanding principal amount of
the debentures. We refer to this obligation as our “net share obligation”. The
accounting method for net share settled convertible securities such as ours is
currently under consideration by the FASB. In May 2008, the FASB issued
FASB Staff Position APB 14-1, which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our existing debt securities by
requiring us to separately account for the liability and equity components of
our existing debt securities in a manner that reflects interest expense equal to
our non-convertible debt borrowing rate. The new guidance is expected to cause
us to incur additional interest expense and potentially increase our cost of
capital equipment and future depreciation expense due to capitalized interest,
thereby reducing our operating results. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
In
addition, because the approximately 1.8 million shares of class A common stock
loaned to Credit Suisse International, an affiliate of Credit Suisse Securities
(USA) LLC, or Credit Suisse, in July 2007 must be returned to us prior to August
1, 2027, we believe that under U.S. GAAP as presently in effect, the borrowed
shares will not be considered outstanding for the purpose of computing and
reporting our earnings per share. However, on September 15, 2008, Lehman
Brothers Holdings Inc., or Lehman, filed a petition for protection under Chapter
11 of the U.S. bankruptcy code, and Lehman Brothers International (Europe)
Limited, or LBIE, commenced administration proceedings (analogous to bankruptcy)
in the United Kingdom. After reviewing the circumstances of the Lehman
bankruptcy and LBIE administration proceedings, we have determined that we will
record the loaned shares as issued and outstanding starting on September 15,
2008, the date on which LBIE commenced administration proceedings, for the
purpose of computing and reporting our basic and diluted weighted average shares
and earnings per share. This accounting method is also subject to change.
If Credit Suisse or its affiliates, including Credit Suisse International, were
to file bankruptcy or commence similar administrative, liquidating,
restructuring or other proceedings, we may have to consider approximately 1.8
million shares lent to Credit Suisse International as issued and outstanding for
purposes of calculating earnings per share which would further dilute our
results of operations. Any reduction in our earnings per share could cause our
stock price to decrease, possibly significantly.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our common
stock.
Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our
internal control over financial reporting and have our independent registered
public accounting firm annually attest to the effectiveness of our internal
control over financial reporting. We have in the past discovered, and may in the
future discover, areas of our internal controls that need improvement. We are
complying with Section 404 by strengthening, assessing and testing our
system of internal controls to provide the basis for our report. However, the
continuous process of strengthening our internal controls and complying with
Section 404 is expensive and time consuming, and requires significant
management attention. We cannot be certain that these measures will ensure that
we will maintain adequate control over our financial processes and reporting, or
that we or our independent registered public accounting firm will be able to
provide the attestation and opinion required under Section 404 in our
Annual Reports on Form 10-K. If we or our independent registered public
accounting firm discover a material weakness, the disclosure of that fact, even
if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative sanctions,
including the suspension or delisting of our common stock from The Nasdaq Global
Select Market and the inability of registered broker-dealers to make a market in
our common stock, which would further reduce our stock price.
The
development of a unified system of control over financial reporting may take a
significant amount of management’s time and attention and, if not completed in a
timely manner, could negatively impact us.
Prior to
our acquisition of SP Systems in January 2007, SP Systems was not required to
report on the effectiveness of its internal control over financial reporting
because it was not subject to the requirements of the Securities Exchange Act of
1934, as amended, or the Exchange Act. In August 2006, the audit committee
of SP Systems received a letter from that company’s independent auditors
identifying certain material weaknesses in that company’s internal control over
financial reporting relating to that company’s audits of its Consolidated
Financial Statements for 2005, 2004 and 2003. These material weaknesses included
problems with financial statement close processes and procedures, inadequate
accounting resources, unsatisfactory application of the percentage-of-completion
accounting method, inaccurate physical inventory counts, incorrect accounting
for complex capital transactions and inadequate disclosure of related party
transactions. In addition, SP Systems had to restate its 2004 and 2003 financial
statements to correct previously reported amounts primarily related to its
contract revenue, contract costs, accrued warranty, California state sales taxes
and inventory items. In July 2007, subsequent to our acquisition of SP
Systems, its independent auditors completed their audit of SP Systems’ 2006
financial statements. In connection with that audit, our audit committee
received a letter from the independent auditors of SP Systems identifying
significant deficiencies in SP Systems’ internal control over financial
reporting.
As we
would for any other significant deficiencies identified by our external auditors
from time to time, we have begun remediation efforts with respect to the
significant deficiencies identified by SP Systems’ independent auditors.
Although initiated, our plans to improve these internal controls and processes
are not complete. While we expect to complete this remediation process as
quickly as possible, doing so depends on several factors beyond our control,
including the hiring of additional qualified personnel and, as a result, we
cannot at this time estimate how long it will take to complete the steps
identified above. Our management will continue to evaluate the effectiveness of
the control environment in our systems segment as well our company overall and
will continue to develop and enhance internal controls. We cannot assure
investors that the measures we have taken to date or any future measures will
remediate the significant deficiencies reported by our independent auditors. Any
failure to develop or maintain effective controls, or any difficulties
encountered in their implementation or improvement, could harm our operating
results or cause us to fail to meet our reporting obligations and may result in
a restatement of our prior period financial statements. Ineffective internal
controls could also cause investors to lose confidence in our reported financial
information, which would likely have a negative effect on the trading price of
our securities.
Our
report on internal control over financial reporting in our annual reports on
Form 10-K for the fiscal years ended December 30, 2007 and
December 31, 2006 did not include an assessment of SP Systems’ internal
controls. We are required to include SP Systems, which now makes up our systems
segment, in management’s report on internal controls in our annual report on
Form 10-K for the fiscal year ending December 28, 2008. Unanticipated
factors may hinder the effectiveness over financial reporting or delay the
integration of our combined internal control systems post-acquisition. We cannot
be certain as to whether we will be able to establish an effective, unified
system of internal control over financial reporting in a timely manner, or at
all.
Our
credit agreement with Wells Fargo contains covenant restrictions that may limit
our ability to operate our business.
Our
Credit Agreement with Wells Fargo contains, and any of our other future debt
agreements may contain, covenant restrictions that limit our ability to operate
our business, including restrictions on our ability to:
• incur
additional debt or issue guarantees;
• create
liens;
• make
certain investments or acquisitions;
• enter
into transactions with our affiliates;
• sell
certain assets;
• redeem
capital stock or make other restricted payments;
• declare
or pay dividends or make other distributions to stockholders; and
• merge
or consolidate with any person.
In
addition, our credit agreement contains additional affirmative and negative
covenants that are more restrictive than those contained in the indenture
governing the debentures. Our ability to comply with these covenants is
dependent on our future performance, which will be subject to many factors, some
of which are beyond our control, including prevailing economic
conditions.
As a
result of these covenants, our ability to respond to changes in business and
economic conditions and to obtain additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might otherwise be beneficial to us. In addition, our failure to comply
with these covenants could result in a default under the debentures and our
other debt, which could permit the holders to accelerate such debt. If any of
our debt is accelerated, we may not have sufficient funds available to repay
such debt.
If
the recent credit market conditions continue or worsen, they could have a
material adverse impact on our investment portfolio.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
During the third quarter of fiscal 2008, the net asset value of the Reserve
Primary Fund and the Reserve International Liquidity Fund fell below $1.00
because the funds had investments in Lehman, which filed for bankruptcy on
September 15, 2008. As a result of this event, the Reserve Funds wrote down
their investments in Lehman to zero. Of $26.7 million invested in the Reserve
Funds on September 28, 2008, we have estimated the loss to be approximately $0.9
million based on an evaluation of the fair value of the securities held by the
Reserve Funds and the net asset value that was last published by the Reserve
Funds before the funds suspended redemptions. We recorded an impairment
charge of $0.9 million in “Other, net” in our Condensed Consolidated
Statements of Operations thereby establishing a new cost basis of $25.7 million
for the Reserve Funds.
On October
31, 2008, we received a distribution of $11.9 million from the Reserve Funds. We
expect that the remaining distribution of $13.8 million from the Reserve Funds
will occur over the remaining twelve months as the investments held in the funds
mature. While we expect to receive substantially all of our current holdings in
the Reserve Funds within the next twelve months, it is possible we may encounter
difficulties in receiving distributions given the current credit market
conditions. If market conditions were to deteriorate even further such that the
current fair value were not achievable, we could realize additional losses in
our holdings with the Reserve Funds and distributions could be
further delayed. There can be no assurance that our other investments,
particularly in this unfavorable market and economic environment, will not face
similar risks of loss.
Beginning
in February 2008, the auction rate securities market experienced a significant
increase in the number of failed auctions, resulting from a lack of liquidity,
which occurs when sell orders exceed buy orders, and does not necessarily
signify a default by the issuer. As of September 28, 2008, we held five auction
rate securities totaling $25.0 million. All auction rate securities invested in
at September 28, 2008 have failed to clear at auctions. These auction rate
securities are typically over-collateralized and secured by pools of
student loans originated under the Federal Family Education Loan Program, or
FFELP, and are guaranteed and insured by the U.S. Department of Education. In
addition, all auction rate securities held are rated by one or more of the
Nationally Recognized Statistical Rating Organizations, or NRSRO, as triple-A.
For failed auctions, we continue to earn interest on these investments at the
maximum contractual rate as the issuer is obligated under contractual terms to
pay penalty rates should auctions fail. In the event we need to access these
funds, we will not be able to do so until a future auction is successful, the
issuer redeems the securities, a buyer is found outside of the auction process
or the securities mature. If these auction rate securities are unable to
successfully clear at future auctions or issuers do not redeem the securities,
we may be required to adjust the carrying value of the securities and record an
impairment charge. If we determine that the fair value of these auction rate
securities is temporarily impaired, we would record a temporary impairment
within Condensed Consolidated Statements of Comprehensive Income, a component of
stockholders' equity. If it is determined that the fair value of these auction
rate securities is other-than-temporarily impaired, we would record a loss in
our Condensed Consolidated Statements of Operations, which could materially
adversely impact our results of operations and financial condition.
Risks
Related to Our Debentures and Class A and Class B Common Stock
Conversion
of our outstanding debentures will dilute the ownership interest of existing
stockholders, including holders who had previously converted their
debentures.
To the
extent we issue class A common stock upon conversion of debentures, the
conversion of some or all of such debentures will dilute the ownership interests
of existing stockholders, including holders who had previously converted their
debentures. Any sales in the public market of the class A and class B
common stock issuable upon such conversion could adversely affect prevailing
market prices of our class A and class B common stock. In addition, the
existence of our outstanding debentures may encourage short selling of our
common stock by market participants who expect that the conversion of the
debentures could depress the prices of our class A and class B common
stock.
As of the
first trading day of the fourth quarter in fiscal 2008, holders of the 1.25%
outstanding debentures, or February 2007 debentures, were able to exercise their
right to convert the debentures any day in that fiscal quarter because the
closing price of our class A common stock on at least 20 of the last 30 trading
days during the fiscal quarter ending September 28, 2008 has equaled or exceeded
$70.94, which represents more than 125% of the applicable conversion price for
our February 2007 debentures. Because the closing price of our class A common
stock on at least 20 of the last 30 trading days during the fiscal quarter
ending September 28, 2008 did not equal or exceed $102.80, or 125% of the
applicable conversion price governing the 0.75% outstanding debentures, or July
2007 debentures, holders of the July 2007 debentures are unable to exercise
their right to convert the debentures, based on the stock trading price trigger,
any day in the fourth fiscal quarter beginning on September 29, 2008. This test
is repeated each fiscal quarter, and prior to August 1, 2025, holders of our
outstanding debentures may only exercise their right to convert during a fiscal
quarter in which this test is met. After August 1, 2025, the debentures are
convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of October
31, 2008, we have received notices for the conversion of approximately $1.4
million of the February 2007 debentures which we have settled for approximately
$1.2 million in cash and 1,000 shares of class A common stock. The current
capital market conditions and credit environment could create incentives for
additional holders to convert their debentures that did not exist in prior
quarters. If the full $200.0 million in aggregate convertible debt was called
for conversion prior to December 28, 2008, we would likely not have sufficient
unrestricted cash and cash equivalents on hand to satisfy the conversion without
additional liquidity. If necessary, we may seek to restructure our
obligations under the convertible debt, or raise additional cash through sales
of investments, assets or common stock, or from borrowings. However, there can
be no assurance that we would be successful in these efforts in the current
market conditions.
In
addition, the holders of our February 2007 debentures and July 2007 debentures
would be able to exercise their right to convert the debentures during the five
consecutive business days immediately following any five consecutive trading
days in which the trading price of our senior convertible debentures is less
than 98% of the average of the closing sale price of a share of class A common
stock during the five consecutive trading days, multiplied by the applicable
conversion rate. On October 31, 2008, our February debentures and July 2007
debentures traded significantly below their historic trading prices, with our
February 2007 debentures trading slightly above their conversion value. We
believe the decline in trading prices is due primarily to the declining market
price of our class A common stock, the lack of liquidity in the current market,
a need for investors to raise capital by selling debentures, public concerns
regarding the availability of credit, and the end of our share lending
arrangement with Lehman Brothers International (Europe) Limited as a result of
LBIE’s administrative proceeding and the related Chapter 11 filing by Lehman
Brothers Holdings Inc. and certain of its affiliates. If the trading
prices of our debentures continue to decline, holders of the debentures may have
the right to convert the debentures in the future.
As of
September 28, 2008, we had cash and cash equivalents of $256.6 million, while
the aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Substantial
future sales or other dispositions of our class A or class B common stock
or other securities, or short selling activity, could cause our stock price to
fall and dilute earnings per share.
Sales of
our class A or class B common stock in the public market or sales of any of
our other securities, or the perception that such sales could occur, could cause
the market prices of our class A and class B common stock to decline. As of
September 28, 2008, we had approximately 43.8 million shares of
class A common stock outstanding, and Cypress owned the 42.0 million
outstanding shares of our class B common stock, representing approximately
50.1% of the total outstanding shares of our common stock. After the close of
trading on September 29, 2008, Cypress completed a spin-off of all of its shares
of our class B common stock, in the form of a pro rata dividend to the holders
of record as of September 17, 2008 of Cypress common stock. As a result, our
class B common stock now trades publicly and is listed on the Nasdaq Global
Select Market, along with our class A common stock.
Some of
the aggregate of approximately 4.7 million shares of class A common stock that
we lent to underwriters of our debenture offerings, including potentially the
approximately 2.9 million shares lent to LBIE, are being held by such
underwriters to facilitate later hedging arrangements of future purchases for
debentures in the after-market. These shares may be freely sold into the market
by the underwriters at any time, and such sales could depress our stock price.
In addition, any hedging activity facilitated by our debenture underwriters
would involve short sales or privately negotiated derivatives transactions.
These or other similar transactions could further negatively affect our stock
price.
In
addition, if we issue additional shares of class A or class B common stock or
other securities, our earnings per share would be further diluted.
Similarly, if Credit Suisse Securities (USA) LLC or its affiliates, including
Credit Suisse International to which we lent shares of our class A common stock
in connection with the issuance of our July 2007 debentures, were to file
bankruptcy or commence similar administrative, liquidating, restructuring or
other proceedings, we may have to consider approximately 1.8 million shares lent
to Credit Suisse International as issued and outstanding for purposes of
calculating earnings per share which would further dilute our results of
operations.
If
securities or industry analysts do not publish research or reports about us, our
business or our market, or if they change their recommendations regarding our
stock adversely, our securities prices and trading volumes could
decline.
The
trading markets for our class A and class B common stock and debentures are
influenced by the research and reports that industry or securities analysts
publish about us, our business or our market. If one or more of the analysts who
cover us change their recommendation regarding our stock adversely, our stock
and debenture prices would likely decline. If one or more of these analysts
cease coverage of our company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which in turn could cause our
securities prices or trading volumes to decline.
The
price of our class A common stock, and therefore of our outstanding
debentures, as well as our class B common stock may fluctuate significantly, and
a liquid trading market for our class A and class B common stock may not be
sustained.
Our
class A and class B common stock has a limited trading history in the
public markets, and during that period has experienced extreme price and volume
fluctuations. The trading price of our class A and class B common stock
could be subject to wide fluctuations due to the factors discussed in this risk
factors section. In addition, the stock market in general, and The Nasdaq Global
Select Market and the securities of technology companies and solar companies in
particular, have experienced severe price and volume fluctuations. These trading
prices and valuations, including our own market valuation and those of companies
in our industry generally, may not be sustainable. These broad market and
industry factors may decrease the market price of our class A and class B
common stock, regardless of our actual operating performance. Because the
debentures are convertible into our class A common stock, volatility or
depressed prices of our class A common stock could have a similar effect on
the trading price of these debentures. In addition, in the past, following
periods of volatility in the overall market and the market price of a company’s
securities, securities class action litigation has often been instituted against
these companies. This litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s attention and
resources.
The
difference in the voting rights and liquidity could result in different market
values for shares of our class A and our class B common
stock.
The
rights of class A and class B common stock are substantially similar,
except with respect to voting. The class B common stock is entitled to
eight votes per share and the class A common stock is entitled to one vote
per share. Following the tax-free spin-off of our shares by Cypress, our class B
common stock is freely tradable in the market. The difference in the voting
rights of our class A and class B common stock could reduce the value
of our class A common stock to the extent that any investor or potential
future purchaser of our common stock ascribes value to the right of our
class B common stock to eight votes per share. In addition, the lack of a
long trading history and lower trading volume of the class B common stock,
compared to the class A common stock, could result in lower trading prices for
the class B common stock.
Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions, and our board of directors entered into a rights agreement and
declared a rights dividend, that could delay or discourage takeover attempts
that stockholders may consider favorable.
Provisions
in our restated certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include the following:
• the
right of the board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors;
• the
prohibition of cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
• the
requirement for advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders’
meeting;
• the
ability of the board of directors to issue, without stockholder approval, up to
approximately 10.0 million shares of preferred stock with terms set by the board
of directors, which rights could be senior to those of common stock;
and
• our
board of directors following our spin-off from Cypress has been divided into
three classes of directors, with the classes to be as nearly equal in number as
possible;
• no
action can be taken by stockholders except at an annual or special meeting of
the stockholders called in accordance with our bylaws, and stockholders may not
act by written consent;
• stockholders
may not call special meetings of the stockholders;
• limitations
on the voting rights of our stockholders with more than 15% of our class B
common stock subject to receipt by Cypress of a supplemental ruling from
the IRS that the effectiveness of the restriction will not prevent the favorable
rulings received by Cypress with respect to certain tax issues arising under
Section 355 of the Code in connection with the spin-off from having full
force and effect; and
• our
board of directors is able to alter our bylaws without obtaining stockholder
approval.
In
addition, on August 12, 2008, we entered into a Rights Agreement with
Computershare Trust Company, N.A. and our board of directors declared an
accompanying rights dividend. The Rights Agreement became effective upon
completion of Cypress’ spin-off of our shares of class B common stock to the
holders of Cypress common stock. The Rights Agreement contains specific features
designed to the address the potential for an acquiror or significant investor to
take advantage of our capital structure and unfairly discriminate between
classes of our common stock. Specifically, the Rights Agreement is designed to
address the inequities that could result if an investor, by acquiring 20% or
more of the outstanding shares of class B common stock, were able to gain
significant voting influence over our company without making a correspondingly
significant economic investment. Our board of directors determined that the
rights dividend became payable to the holders of record of our common stock as
of the close of business on September 29, 2008. The rights dividend and Rights
Agreement, commonly referred to as a “poison pill,” could delay or discourage
takeover attempts that stockholders may consider favorable.
In
addition, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, or the DGCL. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting
stock, from merging or combining with us. These provisions in our restated
certificate of incorporation, bylaws and under Delaware law could discourage
potential takeover attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the
market price being lower than they would without these provisions.
Provisions
of our outstanding debentures could discourage an acquisition of us by a third
party.
Certain
provisions of our outstanding debentures could make it more difficult or more
expensive for a third party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of our outstanding
debentures will have the right, at their option, to require us to repurchase, at
a cash repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest on the debentures, all of their debentures or any portion of the
principal amount of such debentures in integral multiples of $1,000. We may also
be required to issue additional shares of our class A common stock upon
conversion of such debentures in the event of certain fundamental
changes.
We
currently have a significant amount of debt outstanding. Our substantial
indebtedness, along with our other contractual commitments, could adversely
affect our business, financial condition and results of operations, as well as
our ability to meet any of our payment obligations under the debentures and our
other debt.
We
currently have a significant amount of debt and debt service requirements. As of
September 28, 2008, after giving effect to our July 2007 offering of debentures,
we had $425.0 million of outstanding debt for borrowed money.
This
level of debt could have significant consequences on our future operations,
including:
• making
it more difficult for us to meet our payment and other obligations under the
debentures and our other outstanding debt;
• resulting
in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default
could result in all of our debt becoming immediately due and
payable;
• reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes;
• subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new
credit facility;
• limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and
the general economy; and
• placing
us at a competitive disadvantage compared to our competitors that have less debt
or are less leveraged.
Any of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the debentures and our other debt.
In
addition, we also have significant contractual commitments for the purchase of
polysilicon, some of which involve prepayments, and we may enter into
additional, similar agreements in the future. These commitments could have an
adverse effect on our liquidity and our ability to meet our payment obligations
under the debentures and our other debt.
Our
ability to meet our payment and other obligations under our debt instruments
depends on our ability to generate significant cash flow in the future. This, to
some extent, is subject to general economic, financial, competitive, legislative
and regulatory factors as well as other factors that are beyond our control. We
cannot assure investors that our business will generate cash flow from
operations, or that future borrowings will be available to us under our existing
or any future credit facilities or otherwise, in an amount sufficient to enable
us to meet our payment obligations under our outstanding debentures and our
other debt and to fund other liquidity needs. If we are not able to generate
sufficient cash flow to service our debt obligations, we may need to refinance
or restructure our debt, including our outstanding debentures, sell assets,
reduce or delay capital investments, or seek to raise additional capital. If we
are unable to implement one or more of these alternatives, we may not be able to
meet our payment obligations under the debentures and our other debt and other
obligations.
As of the
first trading day of the fourth quarter in fiscal 2008, holders of the February
2007 debentures were able to exercise their right to convert the debentures any
day in that fiscal quarter because the closing price of our class A common stock
on at least 20 of the last 30 trading days during the fiscal quarter ending
September 28, 2008 has equaled or exceeded $70.94, which represents more than
125% of the applicable conversion price for our February 2007 debentures.
Because the closing price of our class A common stock on at least 20 of the last
30 trading days during the fiscal quarter ending September 28, 2008 did not
equal or exceed $102.80, or 125% of the applicable conversion price governing
the July 2007 debentures, holders of the July 2007 debentures are unable to
exercise their right to convert the debentures, based on the stock trading price
trigger, any day in the fourth fiscal quarter beginning on September 29, 2008.
This test is repeated each fiscal quarter, and prior to August 1, 2025, holders
of our outstanding debentures may only exercise their right to convert during a
fiscal quarter in which this test is met. After August 1, 2025, the debentures
are convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of October
31, 2008, we have received notices for the conversion of approximately $1.4
million of the February 2007 debentures which we have settled for approximately
$1.2 million in cash and 1,000 shares of class A common stock. The current
capital market conditions and credit environment could create incentives for
additional holders to convert their debentures that did not exist in prior
quarters. If the full $200.0 million in aggregate convertible debt was called
for conversion prior to December 28, 2008, we would likely not have sufficient
unrestricted cash and cash equivalents on hand to satisfy the conversion without
additional liquidity. If necessary, we may seek to restructure our
obligations under the convertible debt, or raise additional cash through sales
of investments, assets or common stock, or from borrowings. However, there can
be no assurance that we would be successful in these efforts in the current
market conditions.
In
addition, the holders of our February 2007 debentures and July 2007 debentures
would be able to exercise their right to convert the debentures during the five
consecutive business days immediately following any five consecutive trading
days in which the trading price of our senior convertible debentures is less
than 98% of the average of the closing sale price of a share of class A common
stock during the five consecutive trading days, multiplied by the applicable
conversion rate. On October 31, 2008, our February debentures and July 2007
debentures traded significantly below their historic trading prices, with our
February 2007 debentures trading slightly above their conversion value. We
believe the decline in trading prices is due primarily to the declining market
price of our class A common stock, the lack of liquidity in the current market,
a need for investors to raise capital by selling debentures, public concerns
regarding the availability of credit, and the end of our share lending
arrangement with Lehman Brothers International (Europe) Limited as a result of
LBIE’s administrative proceeding and the related Chapter 11 filing by Lehman
Brothers Holdings Inc. and certain of its affiliates. If the trading
prices of our debentures continue to decline, holders of the debentures may have
the right to convert the debentures in the future.
As of
September 28, 2008, we had cash and cash equivalents of $256.6 million, while
the aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2: Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” See also
“Risk Factors - We expect to
continue to make significant capital expenditures, particularly in our manufacturing
facilities, and if adequate funds are not available or if the covenants in
our credit agreements impair our ability to raise capital when
needed, our ability to expand our manufacturing capacity and our
business will suffer.”
Our
outstanding debentures are effectively subordinated to any existing and future
secured indebtedness and structurally subordinated to existing and future
liabilities and other indebtedness of our subsidiaries.
Our
outstanding debentures are our general, unsecured obligations and rank equally
in right of payment with all of our existing and future unsubordinated,
unsecured indebtedness. All of our $425.0 million in outstanding principal
amount of debentures rate equally in right of payment. Our outstanding
debentures are effectively subordinated to our existing and any future secured
indebtedness we may have to the extent of the value of the assets securing such
indebtedness, and structurally subordinated to any existing and future
liabilities and other indebtedness of our subsidiaries. These liabilities may
include indebtedness, trade payables, guarantees, lease obligations and letter
of credit obligations. The debentures do not restrict us or our subsidiaries
from incurring indebtedness, including senior secured indebtedness in the
future, nor do they limit the amount of indebtedness we can issue that is equal
in right of payment.
The
terms of our outstanding debentures do not contain restrictive covenants and
provide only limited protection in the event of a change of
control.
The
indentures under which our outstanding debentures were issued do not contain
restrictive covenants that would protect holders from several kinds of
transactions that may adversely affect them. In particular, the indentures do
not contain covenants that will limit our ability to pay dividends or make
distributions on or redeem our capital stock or limit our ability to incur
additional indebtedness and, therefore, may not protect holders of our
debentures in the event of a highly leveraged transaction or other similar
transaction. The requirement that we offer to repurchase our outstanding
debentures upon a change of control is limited to the transactions specified in
the definitions of a “fundamental change” in the indentures. Similarly, the
circumstances under which we are required to adjust the conversion rate upon the
occurrence of a “non-stock change of control” are limited to circumstances where
a debenture is converted in connection with such a transaction as set forth in
the indentures.
Accordingly,
subject to restrictions contained in our other debt agreements, we could enter
into certain transactions, such as acquisitions, refinancings or
recapitalizations, that could affect our capital structure and the value of the
debentures and our class A common stock but would not constitute a
fundamental change under the debentures.
We
may be unable to repurchase the debentures for cash when required by the
holders, including following a fundamental change.
Holders
of our outstanding debentures have the right to require us to repurchase such
debentures on specified dates or upon the occurrence of a fundamental change
prior to maturity as described in the indentures governing such debentures. We
may not have sufficient funds to make the required repurchase in cash at such
time or the ability to arrange necessary financing on acceptable terms. In
addition, our ability to repurchase the debentures in cash may be limited by law
or the terms of other agreements relating to our debt outstanding at the time,
including our current credit facility which limits our ability to purchase the
debentures for cash in certain circumstances. If we fail to repurchase the
debentures in cash as required by the indenture governing the debentures, it
would constitute an event of default under each indenture governing our
outstanding debentures, which, in turn, would constitute an event of default
under our credit facility and the other indenture.
Some
significant restructuring transactions may not constitute a fundamental change,
in which case we would not be obligated to offer to repurchase our outstanding
debentures.
Upon the
occurrence of a fundamental change, holders of our debentures will have the
right to require us to repurchase their debentures. However, the fundamental
change provisions of our indentures will not afford protection to holders of
debentures in the event of certain transactions. For example, transactions such
as leveraged recapitalizations, refinancings, restructurings or acquisitions
initiated by us, as well as stock acquisitions by certain companies, would not
constitute a fundamental change requiring us to repurchase the debentures. In
the event of any such transaction, holders of debentures would not have the
right to require us to repurchase their debentures, even though each of these
transactions could increase the amount of our indebtedness, or otherwise
adversely affect our capital structure or any credit ratings, thereby adversely
affecting the holders of our debentures.
The
adjustment to the conversion rates of our outstanding debentures upon the
occurrence of certain types of fundamental changes may not adequately compensate
holders for the lost option time value of their debentures as a result of such
fundamental change.
If
certain types of fundamental changes occur prior to August 1, 2010 with
respect to our July 2007 debentures or prior to February 13, 2012 with respect
to our February 2007 debentures, we may adjust the conversion rate of the
debentures to increase the number of shares issuable upon conversion. The number
of additional shares to be added to the conversion rate will be determined based
on the date on which the fundamental change becomes effective and the price paid
per share of our class A common stock in the fundamental change as
described in the indentures for such debentures. Although this adjustment is
designed to compensate holders for the lost option value of their debentures as
a result of certain types of fundamental changes, the adjustment is only an
approximation of such lost value based upon assumptions made at the time when
their debentures were issued and may not adequately compensate them for such
loss. In addition, with respect to our July 2007 debentures, if the price paid
per share of our class A common stock in the fundamental change is less
than $64.50 or more than $155.00 (subject to adjustment), or if such
transaction occurs on or after August 1, 2010, there will be no such
adjustment. Moreover, in no event will the total number of shares issuable upon
conversion as a result of this adjustment exceed 15.5039 per $1,000
principal amount of the July 2007 debentures, subject to adjustment for stock
splits, combinations and the like. With respect to our February 2007 debentures,
if the price paid per share of our class A common stock in the fundamental
change is less than $44.51 or more than $135.00 (subject to adjustment), or if
such transaction occurs on or after February 15, 2012, there will be no such
adjustment. Moreover, in no event will the total number of shares issuable upon
conversion as a result of this adjustment exceed 22.4668 per $1,000 principal
amount of the February 2007 debentures, subject to adjustment for stock splits,
combinations and the like.
There
is currently no public market for our outstanding debentures, and an active
trading market may not develop for these debentures. The failure of a market to
develop for our debentures could adversely affect the liquidity and value of our
debentures.
We do not
intend to apply for listing of the debentures on any securities exchange or for
quotation of the debentures on any automated dealer quotation system. Although
we have been advised by the underwriters that the underwriters intend to make a
market in the debentures, none of the underwriters is obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market, if any, for the
debentures.
An active
market may not develop for any of our outstanding debentures, and there can be
no assurance as to the liquidity of any market that may develop for the
debentures. If active, liquid markets do not develop for our debentures, the
market price and liquidity of the affected debentures may be adversely affected.
Any of the debentures may trade at a discount from their initial offering
price.
The
liquidity of the trading market and future trading prices of our debentures will
depend on many factors, including, among other things, the market price of our
class A common stock, prevailing interest rates, our operating results,
financial performance and prospects, the market for similar securities and the
overall securities market, and may be adversely affected by unfavorable changes
in these factors. Historically, the market for convertible debt has been subject
to disruptions that have caused volatility in prices. It is possible that the
market for our debentures will be subject to disruptions which may have a
negative effect on the holders of these debentures, regardless of our operating
results, financial performance or prospects.
Upon
any conversion of our outstanding debentures, we will pay cash in lieu of
issuing shares of our class A common stock with respect to an amount up to
the principal amount of debentures converted. We retain the right to satisfy any
remaining conversion obligation, in whole or part, in additional shares of
class A common stock or, in the case of our July 2007 debentures, in cash,
based upon a predetermined formula. Therefore, upon conversion, holders of our
debentures may not receive any shares of our class A common stock, or may
receive fewer shares than the number into which their debentures would otherwise
be convertible.
Upon any
conversion of debentures, we will pay cash in lieu of issuing shares of our
common stock with respect to an amount up to the principal amount of debentures
converted. We retain the right to satisfy any remaining conversion obligation,
in whole or part, in additional shares of our class A common stock or, in
the case of our July 2007 debentures, in cash, with respect to the conversion
value in excess thereof, based on a daily conversion value (as defined herein)
calculated based on a proportionate basis for each day of the 20 trading day
conversion period. Accordingly, upon conversion of debentures, holders may not
receive any shares of our class A common stock. In addition, because of the
20 trading day calculation period, in certain cases, settlement will be delayed
until at least the 26th trading day following the related conversion date.
Moreover, upon conversion of debentures, holders may receive less proceeds than
expected because the price of our class A common stock may decrease (or not
appreciate as much as they may expect) between the conversion date and the day
the settlement amount of their debentures is determined. Further, as a result of
cash payments, our liquidity may be reduced upon conversion of the debentures.
In addition, in the event of our bankruptcy, insolvency or certain similar
proceedings during the conversion period, there is a risk that a bankruptcy
court may decide a holder’s claim to receive such cash and/or shares could be
subordinated to the claims of our creditors as a result of such holder’s claim
being treated as an equity claim in bankruptcy.
As of the
first trading day of the fourth quarter in fiscal 2008, holders of the February
2007 debentures were able to exercise their right to convert the debentures any
day in that fiscal quarter because the closing price of our class A common stock
on at least 20 of the last 30 trading days during the fiscal quarter ending
September 28, 2008 has equaled or exceeded $70.94, which represents more than
125% of the applicable conversion price for our February 2007 debentures.
Because the closing price of our class A common stock on at least 20 of the last
30 trading days during the fiscal quarter ending September 28, 2008 did not
equal or exceed $102.80, or 125% of the applicable conversion price governing
the July 2007 debentures, holders of the July 2007 debentures are unable to
exercise their right to convert the debentures, based on the stock trading price
trigger, any day in the fourth fiscal quarter beginning on September 29, 2008.
This test is repeated each fiscal quarter, and prior to August 1, 2025, holders
of our outstanding debentures may only exercise their right to convert during a
fiscal quarter in which the test was met. After August 1, 2025, the debentures
are convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of October
31, 2008, we have received notices for the conversion of approximately $1.4
million of the February 2007 debentures which we have settled for approximately
$1.2 million in cash and 1,000 shares of class A common stock. The current
capital market conditions and credit environment could create incentives for
additional holders to convert their debentures that did not exist in prior
quarters. If the full $200.0 million in aggregate convertible debt was called
for conversion prior to December 28, 2008, we would likely not have sufficient
unrestricted cash and cash equivalents on hand to satisfy the conversion without
additional liquidity. If necessary, we may seek to restructure our
obligations under the convertible debt, or raise additional cash through sales
of investments, assets or common stock, or from borrowings. However, there can
be no assurance that we would be successful in these efforts in the current
market conditions.
In
addition, the holders of our February 2007 debentures and July 2007 debentures
would be able to exercise their right to convert the debentures during the five
consecutive business days immediately following any five consecutive trading
days in which the trading price of our senior convertible debentures is less
than 98% of the average of the closing sale price of a share of class A common
stock during the five consecutive trading days, multiplied by the applicable
conversion rate. On October 31, 2008, our February debentures and July 2007
debentures traded significantly below their historic trading prices, with our
February 2007 debentures trading slightly above their conversion value. We
believe the decline in trading prices is due primarily to the declining market
price of our class A common stock, the lack of liquidity in the current market,
a need for investors to raise capital by selling debentures, public concerns
regarding the availability of credit, and the end of our share lending
arrangement with Lehman Brothers International (Europe) Limited as a result of
LBIE’s administrative proceeding and the related Chapter 11 filing by Lehman
Brothers Holdings Inc. and certain of its affiliates. If the trading
prices of our debentures continue to decline, holders of the debentures may have
the right to convert the debentures in the future.
As of
September 28, 2008, we had cash and cash equivalents of $256.6 million, while
the aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2: Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
The
conditional conversion features of our outstanding debentures could result in
holders receiving less than the value of the class A common stock into
which a debenture would otherwise be convertible.
At
certain times, the debentures are convertible into cash and, if applicable,
shares of our class A common stock only if specified conditions are met. If
these conditions are not met, holders will not be able to convert their
debentures at that time, and, upon a later conversion, holders may not be able
to receive the value of the class A common stock into which the debentures
would otherwise have been convertible had such conditions been met.
The
conversion rate of our outstanding debentures may not be adjusted for all
dilutive events that may adversely affect their trading prices or the
class A common stock issuable upon conversion of these
debentures.
The
conversion rates of our outstanding debentures are subject to adjustment upon
certain events, including the issuance of stock dividends on our class A
common stock, the issuance of rights or warrants, subdivisions, combinations,
distributions of capital stock, indebtedness or assets, cash dividends and
issuer tender or exchange offers. The conversion rates will not be adjusted for
certain other events, including, for example, upon the issuance of additional
shares of stock for cash, any of which may adversely affect the trading price of
our debentures or the class A common stock issuable upon conversion of the
debentures. Even if the conversion price is adjusted for a dilutive event, such
as a leveraged recapitalization, it may not fully compensate holders for their
economic loss.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock, but they will be subject to all changes made with
respect to our class A common stock.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions on our class A
common stock), but they will be subject to all changes affecting our
class A common stock. Holders will have rights with respect to our
class A common stock only if they convert their debentures, which they are
permitted to do only in limited circumstances. For example, in the event that an
amendment is proposed to our certificate of incorporation or bylaws requiring
stockholder approval and the record date for determining the stockholders of
record entitled to vote on the amendment occurs prior to delivery of our
class A common stock to holders, they will not be entitled to vote on the
amendment, although they will nevertheless be subject to any changes in the
powers, preferences or rights of our class A common stock.
Our
outstanding debentures may not be rated or may receive lower ratings than
anticipated.
We do not
intend to seek a rating on any of our outstanding debentures. However, if one or
more rating agencies rates these debentures and assigns them a rating lower than
the rating expected by investors, or reduces their ratings in the future, the
market price of the affected debentures and our class A common stock could
be reduced.
Risks
Related to Our Relationship with Cypress Semiconductor Corporation
Our
agreements with Cypress require us to indemnify Cypress for certain tax
liabilities. These indemnification obligations and related contractual
restrictions may limit our ability to obtain additional financing, participate
in future acquisitions or pursue other business initiatives.
We have
entered into a tax sharing agreement with Cypress, under which we and Cypress
agree to indemnify one another for certain taxes and similar obligations that
the other party could incur under certain circumstances. In general, we will be
responsible for taxes relating to our business. Furthermore, we may be held
jointly and severally liable for taxes determined on a consolidated basis for
the entire Cypress group for any particular taxable year that we are a member of
the group even though Cypress is required to indemnify us for its taxes pursuant
to the tax sharing agreement. As of June 2006, we ceased to be a member of
the Cypress consolidated group for federal income tax purposes and certain state
income tax purposes. As of September 29 2008, Cypress distributed the shares of
SunPower to its shareholders, so we are no longer eligible to file any state
combined returns. Thus, to the extent that we become entitled to utilize on our
separate tax returns portions of those credit or loss carryforwards existing as
of such date, we will distribute to Cypress the tax effect (estimated to be 40%
for federal and state income tax purposes) of the amount of such tax loss
carryforwards so utilized and the amount of any credit carryforwards so
utilized. We will distribute these amounts to Cypress in cash or in our shares,
at Cypress’s option. Accordingly, we will be subject to the obligations payable
to Cypress for any federal income tax credit or loss carryforwards utilized in
our federal tax returns. As of December 30, 2007, we had $44.0 million
of federal net operating loss carryforwards and approximately $73.5 million
of California net operating loss carryforwards, meaning that such potential
future payments to Cypress, which would be made over a period of several years,
would therefore aggregate to approximately $19.1 million. The majority of
these net operating loss carryforwards were created by employee stock
transactions. Because there is uncertainty as to the realizability of these
loss carryforwards, the portion created by employee stock transactions are not
reflected on our Condensed Consolidated Balance Sheets. If these losses were
reflected on the Condensed Consolidated Balance Sheets, to the extent the
deductions were not matched against previous stock-based compensation charges,
the loss carryforwards would be accounted for as an increase to deferred tax
assets and stockholders’ equity.
Subject
to certain caveats, Cypress has obtained a ruling from the Internal Revenue
Service, or IRS, to the effect that the distribution by Cypress of the our class
B common stock to Cypress stockholders qualified as a tax-free distribution
under Section 355 of the Internal Revenue Code (the “Code”). Despite such
ruling, the distribution may nonetheless be taxable to Cypress under
Section 355(e) of the Code if 50% or more of our voting power or economic
value is acquired as part of a plan or series of related transactions that
includes the distribution of our stock. The tax sharing agreement includes our
obligation to indemnify Cypress for any liability incurred as a result of
issuances or dispositions of our stock after the distribution, other than
liability attributable solely to certain dispositions of our stock by Cypress,
that cause Cypress’s distribution of shares of our stock to its stockholders to
be taxable to Cypress under Section 355(e) of the Code. Under current law,
following a distribution by Cypress and for up to two years thereafter (or
possibly longer if we are acting pursuant to a preexisting plan), our obligation
to indemnify Cypress will be triggered only if we issue stock or otherwise
participate in one or more transactions other than the distribution in which 50%
or more of our voting power or economic value is acquired in financing or
acquisition transactions that are part of a plan or series of related
transactions that includes the distribution. If such an indemnification
obligation is triggered, the extent of our liability to Cypress will generally
equal the product of (a) Cypress’s top marginal federal and state income
tax rate for the year of the distribution, and (b) the difference between
the fair market value of our class B common stock distributed to Cypress
stockholders and Cypress’s tax basis in such stock as determined on the date of
the distribution.
In connection with Cypress’ spin-off of
its shares of our class B common stock, on August 12, 2008, we and
Cypress entered into an Amendment No. 1 to the Tax Sharing Agreement
(the “Amended Tax Sharing Agreement”) to address certain transactions that may
affect the tax treatment of the spin-off and certain other matters.
Under the Amended Tax Sharing
Agreement, we are required to provide notice to Cypress of certain
transactions that could give rise to our indemnification obligation relating to
taxes resulting from the application of Section 355(e) of the Code or similar
provision of other applicable law to the spin-off as a result of one or more
acquisitions (within the meaning of Section 355(e)) of our stock after the
spin-off. An acquisition for these purposes includes any such acquisition
attributable to a conversion of any or all of our class B common stock to
class A common stock or any similar recapitalization transaction or series
of related transactions (a “Recapitalization”). We are not required to indemnify
Cypress for any taxes which would result solely from (A) issuances and
dispositions of our stock prior to the spin-off and (B) any acquisition of
our stock by Cypress after the spin-off.
Under the
Amended Tax Sharing Agreement, we also agreed that, for a period of
25 months following the spin-off, we will not (i) effect a
Recapitalization or (ii) enter into or facilitate any other transaction
resulting in an acquisition (within the meaning of Section 355(e) of the Code)
of our stock without first obtaining the written consent of Cypress; provided,
we are not required to obtain Cypress’s consent unless such transaction (either
alone or when taken together with one or more other transactions entered into or
facilitated by us consummated after August 4, 2008 and during the 25-month
period following the spin-off) would involve the acquisition for purposes of
Section 355(e) of the Code after August 4, 2008 of more than 25% of our
outstanding shares of common stock. In addition, the requirement to obtain
Cypress’s consent does not apply to (A) any acquisition of our stock that
will qualify under Treasury Regulation Section 1.355-7(d)(8) in
connection with the performance of services, (B) any acquisition of our
stock for which we furnish to Cypress prior to such acquisition an opinion of
counsel and supporting documentation, in form and substance reasonably
satisfactory to Cypress (a “Tax Opinion”), that such acquisition will qualify
under Treasury Regulation Section 1.355-7(d)(9), (C) an
acquisition of our stock (other than involving a public offering) for which we
furnish to Cypress prior to such acquisition a Tax Opinion to the effect that
such acquisition will qualify under the so-called “super safe harbor” contained
in Treasury Regulation Section 1.355-7(b)(2) or (D) the adoption
by us of a standard stockholder rights plan. We further agreed that we will not
(i) effect a Recapitalization during the 36 month period following the
spin-off without first obtaining a Tax Opinion to the effect that such
Recapitalization (either alone or when taken together with any other transaction
or transactions) will not cause the spin-off to become taxable under
Section 355(e), or (ii) seek any private ruling, including any
supplemental private ruling, from the IRS with regard to the spin-off, or any
transaction having any bearing on the tax treatment of the spin-off, without the
prior written consent of Cypress.
Cypress
made a complete distribution of its shares of our class B common stock on
September 29, 2008 when our total outstanding capital stock was
85.8 million shares. Unless we qualified for one of several safe
harbor exemptions available under the Treasury Regulations, in order to avoid
our indemnification obligation to Cypress, we could not, for up two years (or
possibly longer if we are acting pursuant to a preexisting plan) from the date
of Cypress’s distribution, issue 85.8 million or more shares of our
class A common stock, nor could we participate in one or more transactions
(excluding the distribution itself) in which 42 million or more shares of
our then-existing class A common stock were to be acquired in connection
with a plan or series of related transactions that includes the distribution. In
addition, these limits could be lower depending on certain actions that we or
Cypress might take before or after a distribution. If we were to participate in
such a transaction, assuming Cypress distributed 42 million shares, Cypress’s
top marginal income tax rate was 40% for federal and state income tax purposes,
the fair market value of our class B common stock was $80.00 per share and
Cypress’s tax basis in such stock was $5.00 per share on the date of their
distribution, then our liability under our indemnification obligation to Cypress
would be approximately $1.3 billion.
Our
ability to use our equity to obtain additional financing or to engage in
acquisition transactions for a period of time after the tax-free distribution of
our shares by Cypress will be restricted if we can only sell or issue a limited
amount of our stock before triggering our obligation to indemnify Cypress for
taxes it incurs under Section 355(e) of the Code.
Our
ability to operate our business effectively may suffer if we are unable to
cost-effectively establish our own administrative and other support functions in
order to operate as a stand-alone company after the termination or expiration of
our services agreements with Cypress.
As a
subsidiary of Cypress, we relied on administrative and other resources of
Cypress to operate our business. In connection with our initial public offering,
we entered into various service agreements to retain the ability for specified
periods to use these Cypress resources. After the close of trading on September
29, 2008, Cypress completed a spin-off of all of its shares of our class B
common stock, in the form of a pro rata dividend to the holders of record as of
September 17, 2008 of Cypress common stock, and, in connection with Cypress’
spin-off, we and Cypress agreed to terminate certain transition agreements and
implemented others. We will need to operate our own administrative and other
support systems or contract with third parties to replace Cypress’s systems.
These services may not be provided at the same level as when we were a wholly
owned subsidiary of Cypress, and we may not be able to obtain the same benefits
that we received prior to the separation. Any failure or significant
downtime in our own administrative systems or in Cypress’s administrative
systems during the transitional period could result in unexpected costs, impact
our results and/or prevent us from paying our suppliers or employees and
performing other administrative services on a timely basis.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES; USES OF
PROCEEDS FROM REGISTERED SECURITIES.
In
connection with our acquisition of SunPower Corporation Australia Party Limited,
on July 23, 2008, we issued 40,000 shares of class A common stock to the
then-current stockholders of the Australian business as partial consideration
for all the outstanding equity interests in the Australian
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
As
described in the Information Statement mailed to stockholders on or about
September 3, 2008, Cypress Semiconductor Corporation, the then-holder of a
majority of the voting power of our issued and outstanding voting securities,
approved by written consent dated September 3, 2008, the adoption of an amended
and restated certificate of incorporation. As of August 29, 2008, the record
date for determining stockholders entitled to vote on the adoption of the
amendment and restatement of our certificate of incorporation, we had 43,705,713
shares of class A common stock and 42,033,287 shares of class B common stock
issued and outstanding and entitled to vote. Cypress owned all the issued and
outstanding shares of our class B common stock, representing approximately 88.5%
of the combined voting power of our class A and class B common stock.
Accordingly, the written consent executed by Cypress was sufficient to approve
the adoption of the amended and restated certificate of incorporation and no
further stockholder action was required. The amendments to our certificate of
incorporation accomplished the following changes principally:
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(i)
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clarified
that, following the spin-off, the shares of our class B common stock
would remain outstanding as a separate class from our class A shares
and would be transferable by holders of class B common stock as a
separate class;
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(ii)
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eliminated
the ability of holders of shares of class B common stock to
voluntarily convert class B shares into shares of our class A
common stock following the spin-off;
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(iii)
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restricted
the voting power of a holder of more than 15% of our outstanding shares of
class B common stock with respect to the election or removal of
directors to 15% of the outstanding shares of class B common stock.
However, if such holder also owns in excess of 15% of our outstanding
shares of class A common stock, then the holder may exercise the
voting power of our class B common stock in excess of 15% to the
extent that such holder has an equivalent percentage of outstanding
class A common stock. For example, a holder of 20% of our outstanding
class B common stock, and none of our class A common stock,
would be limited to 15% of the voting power of our outstanding
class B common stock in the election or removal of directors. On the
other hand, if this person owned both 20% of our outstanding class B
common stock and 17% of our outstanding class A common stock, then the
person would be able to exercise 17% of the voting power of our
outstanding class B common stock in the election or removal of
directors. Any shares of class B common stock as to which voting
power is restricted as described above would automatically be voted in
proportion to the shares of class B common stock held by holders of
less than 15% of such stock; and
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(iv)
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facilitated
adoption of a stockholder rights plan by allowing for dividends payable in
rights to holders of class B common stock that, under certain
circumstances, entitle such holders to purchase shares of our class B
common stock or rights relating to the class B common stock and
permitting the issuance of shares of class B common stock upon
exercise of such rights. Our certificate incorporation previously allowed
for the issuance of class A common stock upon the exercise of similar
rights relating to our class A common
stock.
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The
effectiveness of the restriction on the voting power of a holder of more than
15% of our class B shares is subject to receipt by Cypress of a
supplemental ruling from the IRS that the effectiveness of the restriction will
not prevent the favorable rulings received by Cypress with respect to certain
tax issues arising under Section 355 of the Code in connection with the
spin-off from having full force and effect.
Exhibit
Number
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Description
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3.1
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Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 12, 2008).
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3.2
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Form
of By-laws of SunPower Corporation (incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 7,
2008).
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4.1
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Rights
Agreement, dated August 12, 2008, by and between SunPower Corporation and
Computershare Trust Company, N.A. (incorporated by reference to Exhibit
4.1 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 12, 2008).
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10.1†
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Turnkey
Engineering, Procurement and Construction Agreement, dated July 3, 2008,
by and between SunPower Corporation, Systems and Florida Power & Light
Company.
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10.2†
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Amendment
No. 1 to Ingot Supply Agreement, dated August 4, 2008, by and between
SunPower Corporation and Woongjin Energy Co., Ltd.
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10.3†
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Amendment
No. 2 to Polysilicon Supply Agreement, dated August 4, 2008, by and
between SunPower Philippines Manufacturing, Ltd. and Woognjin Energy Co.,
Ltd.
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10.4
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Fourth
Amendment to Lease, effective August 12, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
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10.5
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Amendment
No. 1 to Tax Sharing Agreement, dated August 12, 2008, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on August 12,
2008).
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10.6
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SunPower
Corporation Management Career Transition Plan.
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10.7
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Form
of Employment Agreement for Executive Officers, including Messrs. Werner,
Hernandez, Dinwoodie, Ledesma, Wenger, Shugar, Neese, Richards and
Swanson.
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10.8
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Form
of Indemnification Agreement for Directors and
Officers.
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31.1
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Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
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31.2
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Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
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32.1
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Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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A cross
(†) indicates that confidential treatment has been requested for portions of the
marked exhibits.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
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SUNPOWER CORPORATION
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Dated:
November 7, 2008
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By:
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/s/ EMMANUEL T. HERNANDEZ
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Emmanuel
T. Hernandez
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Chief
Financial Officer
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Exhibit
Number
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Description
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10.1†
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Turnkey
Engineering, Procurement and Construction Agreement, dated July 3, 2008,
by and between SunPower Corporation, Systems and Florida Power & Light
Company.
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10.2†
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Amendment
No. 1 to Ingot Supply Agreement, dated August 4, 2008, by and between
SunPower Corporation and Woongjin Energy Co., Ltd.
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|
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10.3†
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Amendment
No. 2 to Polysilicon Supply Agreement, dated August 4, 2008, by and
between SunPower Philippines Manufacturing, Ltd. and Woognjin Energy Co.,
Ltd.
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10.4
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Fourth
Amendment to Lease, effective August 12, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
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10.6
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SunPower
Corporation Management Career Transition Plan.
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|
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10.7
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Form
of Employment Agreement for Executive Officers, including Messrs. Werner,
Hernandez, Dinwoodie, Ledesma, Wenger, Shugar, Neese, Richards and
Swanson.
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10.8
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Form
of Indemnification Agreement for Directors and
Officers.
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31.1
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Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
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31.2
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Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
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32.1
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Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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A cross
(†) indicates that confidential treatment has been requested for portions of the
marked exhibits.