INDEX
TO FORM 10-Q
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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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28
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Item
3.
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39
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Item
4.
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41
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41
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Item
1.
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41
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Item
1A.
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41
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Item
6.
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43
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44
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45
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PART I. FINANCIAL INFORMATION
Condensed
Consolidated Balance Sheets
(In
thousands, except share data)
(unaudited)
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March 29,
2009
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December 28,
2008(1)
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Cash
and cash equivalents
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Restricted
cash and cash equivalents, 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 and cash equivalents, 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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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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Long-term
deferred tax liability
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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, 150,000,000 shares of class B common stock
authorized; 42,033,287 shares of class B common stock issued and
outstanding; $0.001 par value, 217,500,000 shares of class A common stock
authorized; 44,274,852 and 44,055,644 shares of class A common stock
issued; 43,999,060 and 43,849,566 shares of class A common stock
outstanding, at March 29, 2009 and December 28, 2008,
respectively
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Additional
paid-in capital
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Accumulated
other comprehensive loss
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)
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Less:
shares of class A common stock held in treasury, at cost; 275,792 and
206,078 shares at March 29, 2009 and December 28, 2008,
respectively
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Total
stockholders’ equity
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Total
liabilities and stockholders’ equity
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(1)
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As
adjusted due to the implementation of FSP APB 14-1 (see Note
1).
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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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March 29,
2009
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March 30,
2008(1)
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Cost
of components revenue
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Sales,
general and administrative
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)
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Other
income (expense), net
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)
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Income
(loss) before income taxes and equity in earnings of unconsolidated
investees
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)
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Income
tax provision (benefit)
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)
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Income
(loss) before equity in earnings of unconsolidated
investees
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)
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Equity
in earnings of unconsolidated investees, net of
taxes
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)
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Net
income (loss) per share of class A and class B common
stock:
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)
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)
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(1)
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As
adjusted due to the implementation of FSP APB 14-1 and FSP EITF 03-6-1
(see Note 1).
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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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Three Months Ended
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March 29,
2009
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March 30,
2008(1)
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Cash
flows from operating activities:
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)
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Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
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Amortization
of intangible assets
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Impairment
of long-lived assets
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Non-cash
interest expense
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Amortization
of debt issuance costs
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Equity
in earnings of unconsolidated investees
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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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)
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Changes
in operating assets and liabilities, net of effect of
acquisition:
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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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Billings
in excess of costs and estimated earnings
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Net
cash used in operating activities
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Cash
flows from investing activities:
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Increase
in restricted cash and cash equivalents
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Purchase
of property, plant and equipment
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Purchase
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 acquisition, net of cash acquired
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Cash
paid for investments in joint ventures and other non-public
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 issuance of long-term debt
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Proceeds
from exercise 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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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
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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Non-cash
interest expense capitalized and added to the cost of qualified
assets
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Change
in goodwill relating to adjustments to acquired net
assets
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(1)
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As
adjusted due to the implementation of FSP APB 14-1 (see Note
1).
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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”)
designs, manufactures and markets high-performance solar electric power
technologies. The Company’s solar cells and solar panels are manufactured using
proprietary processes, and our technologies are based on more than 15 years of
research and development. 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, including the Company’s global dealer
network.
The
Company was a majority-owned subsidiary of Cypress Semiconductor Corporation
(“Cypress”) through September 29, 2008. 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
of Cypress common stock as of September 17, 2008. 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.
Recently
Adopted Accounting Pronouncements
Convertible
Debt
On
December 29, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Staff Position (“FSP”) Accounting Principles Board (“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 requires
recognition of both the liability and equity components of convertible debt
instruments with cash settlement features. The debt component is required to be
recognized at the fair value of a similar instrument that does not have an
associated equity component. The equity component is recognized as the
difference between the proceeds from the issuance of the convertible debt and
the fair value of the liability, after adjusting for the deferred tax impact.
FSP APB 14-1 also requires an accretion of the resulting debt discount over the
expected life of the convertible debt. FSP APB 14-1 is required to be applied
retrospectively to prior periods, and accordingly, financial statements for
prior periods have been adjusted to reflect its adoption.
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures, or the 1.25% debentures. In the fourth
quarter of fiscal 2008, the Company received notices for the conversion
of approximately $1.4 million of the 1.25% debentures. In July 2007, the
Company issued $225.0 million in principal amount of its 0.75% senior
convertible debentures, or the 0.75% debentures. The 1.25% debentures
and the 0.75% debentures contain partial cash settlement features and are
therefore subject to FSP APB 14-1. As of December 28, 2008, the carrying
value of the equity component was $61.8 million and the principal amount of the
outstanding debentures, the unamortized discount and the net carrying value was
$423.6 million, $66.4 million and $357.2 million, respectively (see Note 10). On
a cumulative basis from the respective issuance dates of the 1.25% debentures
and the 0.75% debentures through December 28, 2008, the Company has
retrospectively recognized $22.6 million in non-cash interest expense related to
the adoption of FSP APB 14-1 excluding the related tax effects.
As a
result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed
Consolidated Balance Sheet as of December 28, 2008 has been adjusted as
follows:
(In thousands)
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As Adjusted
in this
Quarterly Report
on Form 10-Q
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As Previously Reported in
Annual Report
on Form 10-K
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Prepaid
expenses and other current assets
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98,254
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Property,
plant and equipment, net
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629,247
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76,751
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2,097,526
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357,173
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Deferred
tax liability, net of current portion
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8,141
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988,352
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Additional
paid-in capital
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1,065,745
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77,611
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Total
stockholders’ equity
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1,109,174
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As a
result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed
Consolidated Statement of Operations for the three months ended March 30,
2008 has been adjusted as follows:
(In
thousands)
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As Adjusted
in this
Quarterly Report
on Form 10-Q
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As Previously Reported in
Quarterly Report
on Form 10-Q
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$ |
143,264 |
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$ |
143,213 |
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Cost
of components revenue
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77,242 |
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77,168 |
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14,695 |
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14,820 |
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(6,297 |
) |
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(1,464
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) |
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715 |
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(257
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Income
before income taxes and equity in earnings of unconsolidated
investees
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13,260 |
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17,246 |
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1,805 |
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5,033 |
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Income
before equity in earnings of unconsolidated
investees
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11,455 |
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12,213 |
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11,999 |
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12,757 |
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As a
result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed
Consolidated Statement of Cash Flows for the three months ended March 30,
2008 has been adjusted as follows:
(In thousands)
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As Adjusted
in this
Quarterly Report
on Form 10-Q
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As Previously Reported in
Quarterly Report
on Form 10-Q
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Cash
flows from operating activities:
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$ |
11,999 |
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$ |
12,757 |
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10,139 |
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10,102 |
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Non-cash
interest expense
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4,384 |
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— |
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Amortization
of debt issuance costs
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537 |
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972 |
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Deferred
income taxes and other tax liabilities
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(455 |
) |
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2,773 |
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Net
cash used in operating activities
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(69,361 |
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(69,361
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Earnings
Per Share
On
December 29, 2008, the Company adopted FSP Emerging Issues Task Force Issue
(“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which clarifies
that all outstanding unvested share-based payment awards that contain rights to
nonforteitable dividends participate in undistributed earnings with common
shareholders. In fiscal 2007, the Company granted restricted stock awards with
the same dividend rights as its other stockholders, therefore, unvested
restricted stock awards are considered participating securities and the
two-class method of computing basic and diluted earnings per share must be
applied (see Note 14). The new guidance was applied retroactively to the
Company’s historical results of operations, and as a result, the Company’s
Condensed Consolidated Statement of Operations for the three months ended
March 30, 2008 has been adjusted as follows:
(In thousands, except per share
data)
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As Adjusted
in this
Quarterly Report
on Form 10-Q
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As Previously Reported in
Quarterly Report
on Form 10-Q
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Net
income per share of class A and class B common
stock:
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Disclosures
about Derivative Instruments and Hedging Activities
On
December 29, 2008, the Company adopted Statement of Financial Accounting
Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment of SFAS No. 133” (“SFAS No. 161”), which
had no financial impact on the Company’s condensed consolidated financial
statements and only required additional financial statement disclosures as set
forth in Note 12. 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 “Accounting for Derivative Instruments and
Hedging Activities” (“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.
Fair
Value of Nonfinancial Assets and Nonfinancial Liabilities
In
February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP SFAS No. 157-2”), which delayed the effective date
of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for all
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until the beginning of the first quarter of fiscal
2009. Therefore, in the first quarter of fiscal 2009, the Company adopted SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities. The adoption of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are
not measured and recorded at fair value on a recurring basis did not have a
significant impact on the Company’s condensed consolidated financial
statements.
Recent
Accounting Pronouncements Not Yet Adopted
In
April 2009, the FASB issued three Staff Positions: (i) FSP SFAS No.
157-4, “Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP SFAS No. 157-4”), (ii) SFAS No. 115-2 and SFAS
No. 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (“FSP SFAS No. 115-2 and FSP SFAS No. 124-2”), and (iii) SFAS
No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP SFAS No. 107 and APB 28-1”), which will be effective for
interim and annual periods ending after June 15, 2009. FSP SFAS No. 157-4
provides guidance on how to determine the fair value of assets and liabilities
under SFAS No. 157 in the current economic environment and reemphasizes that the
objective of a fair value measurement remains an exit price. If the Company were
to conclude that there has been a significant decrease in the volume and level
of activity of the asset or liability in relation to normal market activities,
quoted market values may not be representative of fair value and the Company may
conclude that a change in valuation technique or the use of multiple valuation
techniques may be appropriate. FSP SFAS No. 115-2 and FSP SFAS No. 124-2 modify
the requirements for recognizing other-than-temporarily impaired debt securities
and revise the existing impairment model for such securities by modifying the
current intent and ability indicator in determining whether a debt security is
other-than-temporarily impaired. FSP SFAS No. 107 and APB 28-1 enhance the
disclosure of instruments under the scope of SFAS No. 157 for both interim and
annual periods. The Company is currently evaluating the potential impact, if
any, of the adoption of these Staff Positions on its financial position, results
of operations and disclosures.
In
April 2009, the FASB issued FSP SFAS No. 141(R)-1 which amends the
provisions in SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS No. 141(R)”), for the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising
from contingencies in business combinations. FSP SFAS No.
141(R)-1 eliminates the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement criteria in
SFAS No. 141(R) and instead carries forward most of the provisions in
SFAS No. 141, "Business Combinations" ("SFAS No. 141"), for acquired
contingencies. FSP SFAS No. 141(R)-1 is effective for contingent assets and
contingent liabilities acquired in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company expects FSP SFAS No.
141(R)-1 will have an impact in its condensed consolidated financial
statements, but the nature and magnitude of the specific effects will depend
upon the nature, term and size of the acquired contingencies.
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. Fiscal year 2009 consists of 53 weeks while fiscal year 2008
consists of 52 weeks. The first quarter of fiscal 2009 ended on March 29, 2009
and the first quarter of fiscal 2008 ended on March 30, 2008.
Basis
of Presentation
The
accompanying condensed consolidated interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) regarding interim financial reporting and include the
accounts of the Company and all of its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. The year-end Condensed
Consolidated Balance Sheet data was derived from audited financial statements
adjusted for the retrospective application of FSP APB 14-1 discussed above.
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 28, 2008.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("United States" or "U.S.")
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 percentage-of-completion 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, goodwill, intangible assets and
other long-term assets, asset impairments, valuation of auction rate securities,
investments in joint ventures, certain accrued liabilities including accrued
warranty reserves, valuation of debt without the conversion feature, and income
taxes and tax valuation allowances. Actual results could materially differ from
those estimates.
In the
opinion of management, the accompanying condensed consolidated interim 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 March 29, 2009 and its results of
operations for the three months ended March 29, 2009 and March 30, 2008 and its
cash flows for the three months ended March 29, 2009 and March 30, 2008. These
condensed consolidated interim financial statements are not necessarily
indicative of the results to be expected for the entire year.
Note
2. INVENTORIES
(1)
|
In
addition to polysilicon and other raw materials for solar cell
manufacturing, raw materials include solar panels purchased from
third-party vendors and installation materials for systems
projects.
|
(2)
|
The
balance of finished goods increased by $0.2 million for the change in
amortization of capitalized non-cash interest expense capitalized in
inventory as a result of the Company’s adoption of FSP APB 14-1 (see Note
1).
|
Note
3. PROPERTY, PLANT AND
EQUIPMENT
(In thousands)
|
|
March 29,
2009
|
|
|
December 28,
2008(1)
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Property,
plant and equipment, net increased $16.6 million for non-cash interest
expense associated with the 1.25% debentures and 0.75% debentures that was
capitalized and added to the cost of qualified assets as a result of the
Company’s adoption of FSP APB 14-1 (see Note
1).
|
Certain
manufacturing equipment associated with solar cell manufacturing lines located
at our second facility in the Philippines are collateralized in favor of a
customer by way of a chattel mortgage, a first ranking mortgage and a security
interest in the property. The Company provided security for advance payments
received from a customer in fiscal 2008 totaling $40.0 million in the form of
collateralized manufacturing equipment with a net book value of $41.2 million
and $43.1 million as of March 29, 2009 and December 28, 2008,
respectively.
The
Company evaluates its long-lived assets, including property, plant and equipment
and intangible assets with finite lives (see Note 4), for impairment whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Factors
considered important that could result in an impairment review include
significant underperformance relative to expected historical or projected future
operating results, significant changes in the manner of use of acquired assets
and significant negative industry or economic trends.
Ongoing
weak global credit market conditions have had a negative impact on the Company’s
earnings during the first quarter of fiscal 2009. In addition, the Company
expects that the current credit market conditions will continue through at least
the first half of fiscal 2009, reducing demand for its solar power products in
the near term, which could harm future earnings. From time to time, the Company
may temporarily remove certain long-lived assets from service based on
projections of reduced capacity needs. The Company believes the current adverse
change in its business climate resulting in lower forecasted revenue for fiscal
2009 is temporary in nature and does not indicate that the fair values of its
long-lived assets have fallen below their carrying values as of March 29,
2009.
Note
4. GOODWILL AND INTANGIBLE
ASSETS
Goodwill
The
following table presents the changes in the carrying amount of goodwill under
the Company's reportable business segments:
(In thousands)
|
|
Systems
|
|
|
Components
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company records a translation adjustment for the revaluation of its Euro
functional currency and Australian dollar functional currency subsidiaries’
goodwill and intangible assets into U.S. dollar. As of March 29, 2009, the
translation adjustment decreased the balance of goodwill by $0.5
million.
In
accordance with SFAS No. 142, “Accounting for Goodwill and Other Intangible
Assets” (“SFAS No. 142”), goodwill is 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 fiscal quarter of each year. Impairment of goodwill is tested at the
Company’s reporting unit level which is at the segment level by comparing each
segment’s carrying amount, including goodwill, to the fair value of that
segment. To determine fair value, the Company’s process has historically
utilized a market multiples comparative approach. In performing its analysis,
the Company has utilized information with assumptions and projections it
considers reasonable and supportable. If the carrying amount of the reporting
unit exceeds its implied fair value, goodwill is considered impaired and a
second step is performed to measure the amount of impairment loss, if any. Based
on its last impairment test as of September 28, 2008, the Company determined
there was no impairment.
Under
SFAS No. 142, goodwill of a reporting unit shall be tested for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. Ongoing weak global credit market conditions have had a negative impact
on the Company’s earnings and the profitability of its reporting units during
the first quarter of fiscal 2009. The Company expects that the current credit
market conditions will continue through at least the first half of fiscal 2009,
negatively affecting its ability to finance systems projects. Management
evaluated all the facts and circumstances, including the duration and severity
of the decline in its revenue and market capitalization and the reasons for it,
to assess whether an impairment indicator exists that would require impairment
testing of its reporting units. Management has concluded that no impairment
indicator exists as of March 29, 2009, because the decline in revenue is
temporary in nature and management does not believe that there is a significant
adverse change in the long-term business climate.
Intangible
Assets
The
following tables present details of the Company's acquired identifiable
intangible assets:
(In thousands)
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and purchased technology
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
Customer
relationships and other
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and purchased technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of
the Company’s acquired identifiable intangible assets are subject to
amortization. Amortization expense for intangible assets totaled $4.1 million
and $4.3 million for the three months ended March 29, 2009 and March 30, 2008,
respectively. As of March 29, 2009, the estimated future amortization expense
related to intangible assets is as follows (in thousands):
2009
(remaining nine months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
5. INVESTMENTS
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.
Assets
Measured at Fair Value on a Recurring Basis
The
following tables present information about the Company’s available-for-sale
securities accounted for under SFAS No. 115, “Accounting for Investment in
Certain Debt and Equity Securities” (“SFAS No. 115”), that are measured at fair
value on a recurring basis and indicate 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. Information about the Company’s
foreign currency derivatives measured at fair value on a recurring basis is
disclosed in Note 12 below. 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.
|
|
March 29, 2009
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2008
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.3 million and $7.2 million as of
March 29, 2009 and December 28, 2008, respectively, and auction rate securities
totaling $19.0 million and $23.6 million as of March 29, 2009 and December 28,
2008, respectively.
Money
Market Funds
Investments
in money market funds utilizing Level 3 inputs 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 per
share for the Reserve Funds fell below $1.00 because the funds had investments
in Lehman Brothers Holdings, Inc. (“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 and also announced that the funds would be
closed and distributed to holders. The Company has estimated its loss on the
Reserve Funds to be approximately $2.2 million based upon information publicly
disclosed by the Reserve Funds relative to its holdings and remaining
obligations. The Company recorded impairment charges of $1.2 million and $1.0
million during the first quarter of fiscal 2009 and the second half of fiscal
2008, respectively, in “Other, net” in its Condensed Consolidated Statements of
Operations, thereby establishing a new cost basis for each fund. The Company’s
other 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.
Auction
Rate Securities
Auction
rate securities in which the Company invested 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 7 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 held by the Company have failed to clear at auctions in
subsequent periods. For failed auctions, the Company continues to earn interest
on these investments at the contractual rate. Prior to last year, 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 held are classified as
“Long-term investments” in 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 the balance sheet dates. 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:
|
·
|
continued
receipt of contractual interest which provides a premium spread for failed
auctions; and
|
|
·
|
discount
rates ranging from 4.5% to 6.3%, which incorporates a spread for both
credit and liquidity risk.
|
Based on
these assumptions, the Company estimated that the auction rate securities with a
stated par value of $21.1 million at March 29, 2009 would be valued at
approximately 90% of their stated par value, or $19.0 million, representing a
decline in value of approximately $2.1 million. At December 28, 2008, the
Company estimated that auction rate securities with a stated par value of $26.1
million would be valued at approximately 91% of their stated par value, or $23.6
million, representing a decline in value of approximately $2.5 million. Due to
the length of time that has passed since the auctions failed and the ongoing
uncertainties regarding future access to liquidity, the Company has determined
the impairment is other-than-temporary and recorded impairment losses of $0.1
million and $2.5 million in the first quarter of fiscal 2009 and fourth quarter
of fiscal 2008, respectively, in “Other, net” in its Condensed Consolidated
Statements of Operations. The following table provides a summary of changes in
fair value of the Company’s available-for-sale securities utilizing Level 3
inputs for the three months ended March 29, 2009:
(In thousands)
|
|
Money Market
Funds
|
|
|
Auction Rate Securities
|
|
Balance
at December 28, 2008
|
|
|
|
|
|
|
|
|
Sales
and distributions (1)
|
|
|
|
|
|
|
|
|
Impairment
loss recorded in “Other, net”
|
|
|
|
|
|
|
|
|
Balance
at March 29, 2009 (2)
|
|
|
|
|
|
|
|
|
(1)
|
The
Company sold an auction rate security with a carrying value of $4.5
million for $4.6 million to a third-party outside of the auction
process and received distributions of $3.7 million from the Reserve
Funds.
|
(2)
|
On
April 17, 2009, the Company received distributions of $1.1 million from
the Reserve Funds.
|
The
following table provides a summary of changes in fair value of the Company’s
available-for-sale securities which utilized Level 3 inputs for the three
months ended March 30, 2008:
(In thousands)
|
|
Auction Rate Securities
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
Transfers
from Level 2 to Level 3
|
|
|
|
|
|
|
|
|
|
Unrealized
loss included in other comprehensive income
|
|
|
|
|
Balance
at March 30, 2008
|
|
|
|
|
The
classification of available-for-sale securities is as follows:
(In thousands)
|
|
March 29,
2009
|
|
|
December 28,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
restricted cash and cash equivalents(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
restricted cash and cash equivalents(1, 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company provided security in the form of cash collateralized bank standby
letters of credit for advance payments received from
customers.
|
(2)
|
In
January 2009 and December 2008, the Company borrowed Malaysian Ringgit
185.0 million and 190.0 million, respectively, or approximately $51.2
million and $52.7 million, respectively, from the Malaysian Government
under its facility agreement to finance the construction of its planned
third solar cell manufacturing facility in
Malaysia.
|
Note
6. ADVANCES TO
SUPPLIERS
The
Company has entered into agreements with various polysilicon, ingot, wafer,
solar cell and solar panel 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 first quarter of fiscal 2009, the Company paid advances totaling $5.6
million in accordance with the terms of existing supply agreements. As of March
29, 2009 and December 28, 2008, advances to suppliers totaled $154.5 million and
$162.6 million, respectively, the current portion of which is $39.6 million and
$43.2 million, respectively.
The
Company’s future prepayment obligations related to these agreements as of March
29, 2009 are as follows (in thousands):
2009
(remaining nine months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
7. RESTRUCTURING
COSTS
The
Company records restructuring costs in accordance with SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities”
(“SFAS No. 146”). In response to deteriorating economic conditions, the Company
reduced its global workforce of regular employees by approximately 60
positions in the first quarter of fiscal 2009 in order to reduce its annual
operating expenses. The restructuring actions included charges of $1.2 million
for other severance, benefits and related costs.
A summary
of total restructuring activity for the three months ended March 29, 2009 is as
follows:
(in thousands)
|
|
Workforce
Reduction
|
|
Balance
as of December 28, 2008
|
|
$ |
— |
|
Restructuring
charges
|
|
|
1,185 |
|
Cash
payments
|
|
|
(1,029
|
) |
Balance
as of March 29, 2009
|
|
$ |
156 |
|
Restructuring
accruals totaled $0.2 million as of March 29, 2009 and are recorded in
“Accrued liabilities” in the Condensed Consolidated Balance Sheet and represent
estimated future cash outlays primarily related to severance expected to be paid
within the second quarter of fiscal 2009.
A summary
of the charges in the Condensed Consolidated Statement of Operations resulting
from workforce reductions is as follows:
|
|
Three
Months Ended
|
|
(in thousands)
|
|
March 29, 2009
|
|
Cost
of systems revenue
|
|
$ |
179 |
|
Cost
of components revenue
|
|
|
28 |
|
Research
and development
|
|
|
77 |
|
Sales,
general and administrative
|
|
|
901 |
|
Total
restructuring charges
|
|
$ |
1,185 |
|
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. 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. 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 March 29, 2009 are as follows (in
thousands):
2009
(remaining nine months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 disclosed 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).
As of
March 29, 2009, total obligations related to non-cancelable purchase orders
totaled approximately $115.6 million and long-term supply agreements totaled
approximately $3,992.2 million. Future purchase obligations under non-cancelable
purchase orders and long-term supply agreements as of March 29, 2009 are as
follows (in thousands):
2009
(remaining nine months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
future purchase commitments of $4,107.8 million as of March 29, 2009 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 March 29, 2009 would be reduced by $614.9 million to
$3,492.9 million had the Company’s obligations under such tolling agreements
been disclosed using net cash outflows.
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 10 years. In addition, it passes through to customers
long-term warranties from the original equipment manufacturers (“OEMs”) of
certain system components. Warranties of 25 years from solar panels suppliers
are standard, while inverters typically carry a 2-, 5- or 10-year warranty. The
Company generally warrants at the time of sale or guarantees systems installed
for a period of 1, 2, 5 or 10 years. The Company maintains warranty reserves to
cover potential liability 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 various factors including, historical warranty
claims, results of accelerated testing, field monitoring and vendor reliability
estimates, and data on industry average for similar products. Historically,
warranty costs have been within management’s expectations.
Provisions
for warranty reserves charged to cost of revenue were $3.7 million and $4.9
million during the three months ended March 29, 2009 and March 30, 2008,
respectively. Activity within accrued warranty for the three months ended March
29, 2009 and March 30, 2008 is summarized as follows:
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Balance
at the beginning of the period
|
|
|
|
|
|
|
|
|
Accruals
for warranties issued during the period
|
|
|
|
|
|
|
|
|
Settlements
made during the period
|
|
|
|
|
|
|
|
|
Balance
at the end of the period
|
|
|
|
|
|
|
|
|
The
accrued warranty balance at March 29, 2009 and December 28, 2008 includes $3.9
million and $4.2 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.
Uncertain
Tax Positions
Total
liabilities associated with uncertain tax positions under FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, and Related Implementation
Issues” (“FIN 48”), were $12.8 million as of both March 29, 2009 and December
28, 2008 and are included in "Other long-term liabilities" in the Company’s
Condensed Consolidated Balance Sheets 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.
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,
the outcome of these matters is not determinable and negative outcomes may
adversely affect its financial position, liquidity or results of
operations.
Note
9. JOINT
VENTURES
Woongjin
Energy Co., Ltd (“Woongjin Energy”)
The
Company and Woongjin Holdings Co., Ltd. (“Woongjin”), a provider of
environmental products located in Korea, formed Woongjin Energy in fiscal 2006,
a joint venture to manufacture monocrystalline silicon ingots. The Company and
Woongjin have funded the joint venture through capital investments. In
January 2008, the Company invested an additional $5.4 million in the joint
venture. Until Woongjin Energy engages in an IPO, Woongjin Energy will refrain
from declaring or making any distributions, including dividends, unless its
debt-to-equity ratio immediately following such distribution would not be
greater than 200%. The Company supplies polysilicon, services and technical
support required for silicon ingot manufacturing to the joint venture, and the
Company procures the manufactured silicon ingots from the joint venture under a
five-year agreement. For the three months ended March 29, 2009 and March 30,
2008, the Company paid $32.3 million and $5.8 million, respectively, to Woongjin
Energy for manufacturing silicon ingots. As of March 29, 2009 and December
28, 2008, $29.9 million and $22.5 million, respectively, remained due and
payable to Woongjin Energy.
As of
March 29, 2009 and December 28, 2008, the Company had a $25.3 million and $24.0
million, respectively, investment in the joint venture in its Condensed
Consolidated Balance Sheets which consisted of a 40% equity investment. The
Company periodically evaluates the qualitative and quantitative attributes of
its relationship with Woongjin Energy to determine whether the Company is the
primary beneficiary of the joint venture and needs to consolidate Woongjin
Energy’s results into the Company’s financial statements in accordance with FSP
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FSP
FIN 46(R)”). The Company has concluded it is not the primary beneficiary of the
joint venture because Woongjin Energy supplies only a portion of the Company’s
future estimated total ingot requirement through 2012 and the existing supply
agreement is shorter than the estimated economic life of the joint venture. In
addition, the Company believes that Woongjin is the primary beneficiary of the
joint venture because Woongjin guarantees the initial $33.0 million loan for
Woongjin Energy and exercises significant control over Woongjin Energy’s board
of directors, management, and daily operations.
The
Company accounts for its investment in Woongjin Energy under APB Opinion No. 18,
“The Equity Method of Accounting for Investments in Common Stock” (the “equity
method”), in
which the 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 $1.3 million and $0.5 million for the three months ended March 29, 2009
and March 30, 2008, respectively, is included in “Equity in earnings of
unconsolidated investees” in the Condensed Consolidated Statements of
Operations. The amount of equity earnings increased due to 1) increases in
production since Woongjin Energy began manufacturing in the third quarter of
fiscal 2007; and 2) the Company’s equity investment increased from 27.4% as of
March 30, 2008 to 40% as of March 29, 2009. Neither party has contractual
obligations to provide any additional funding to the joint venture. The
Company’s maximum exposure to loss as a result of its involvement with Woongjin
Energy is limited to its carrying value.
The
Company conducted other related-party transactions with Woongjin Energy during
fiscal 2008. The Company recognized $0.6 million in components revenue during
the three months ended March 30, 2008 related to the sale of solar panels to
Woongjin Energy. As of March 29, 2009 and December 28, 2008, zero and $0.8
million, respectively, remained due and receivable from Woongjin Energy related
to the sale of solar panels.
First
Philec Solar Corporation (“First Philec Solar”)
The
Company and First Philippine Electric Corporation (“First Philec”) formed First
Philec Solar in fiscal 2007, 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. In fiscal 2008, the Company invested
an additional $4.2 million in the joint venture. The Company supplies to the
joint venture silicon ingots and technology required for slicing 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. In the
three months ended March 29, 2009, the Company paid $6.8 million to First Philec
Solar for wafer slicing services of silicon ingots. As of March 29, 2009
and December 28, 2008, $2.1 million and $1.9 million, respectively, remained due
and payable to First Philec Solar.
As of
March 29, 2009 and December 28, 2008, the Company had a $4.9 million and $5.0
million, respectively, investment in the joint venture in its Condensed
Consolidated Balance Sheets which consisted of a 19% equity investment. The
Company periodically evaluates the qualitative and quantitative attributes of
its relationship with First Philec Solar to determine whether the Company is the
primary beneficiary of the joint venture and needs to consolidate First Philec
Solar’s results into the Company’s financial statements in accordance with FSP
FIN 46(R). The Company has concluded it is not the primary beneficiary of the
joint venture because the existing five-year agreement named above is considered
a short period compared against the estimated economic life of the joint
venture. In addition, the Company believes that First Philec is the primary
beneficiary of the joint venture because First Philec exercises significant
control over First Philec Solar’s board of directors, management, and daily
operations.
The
Company accounts for this investment using the equity method of accounting since
the Company is able to exercise significant influence over First Philec Solar
due to its board positions. The Company’s 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 the three months
ended March 29, 2009 are included in “Equity in earnings of unconsolidated
investees” in the Condensed Consolidated Statement of Operations. The Company’s
maximum exposure to loss as a result of its involvement with First Philec Solar
is limited to its carrying value.
Note
10. DEBT AND CREDIT
SOURCES
Line
of Credit
On July
13, 2007, the Company entered into a credit agreement with Wells Fargo Bank,
N.A. (“Wells Fargo”) and has entered into amendments to the credit agreement
from time to time. As of March 29, 2009, the credit agreement provides for a
$50.0 million uncollateralized revolving credit line, with a $50.0 million
uncollateralized letter of credit subfeature, and a separate $150.0 million
collateralized 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 uncollateralized letter of credit subfeature through March 27,
2010. Letters of credit issued under the subfeature reduce the Company’s
borrowing capacity under the revolving credit line. Additionally, the Company
may request that Wells Fargo issue up to $150.0 million in letters of credit
under the collateralized letter of credit facility through March 27, 2014. As
detailed in the agreement, the Company pays interest of LIBOR plus 1.25% on
outstanding borrowings under the uncollateralized revolving credit line, and a
fee of 2% and 0.2% to 0.3% depending on maturity for outstanding letters of
credit under the uncollateralized letter of credit subfeature and collateralized
letter of credit facility, respectively. At any time, the Company can prepay
outstanding loans. All borrowings under the uncollateralized revolving credit
line must be repaid by March 27, 2010, and all letters of credit issued under
the uncollateralized letter of credit subfeature expire on or before March 27,
2010 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
collateralized letter of credit facility expire no later than March 27,
2014.
In
connection with the credit agreement, the Company 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. SunPower North America,
LLC and SunPower Corporation, Systems (“SP Systems”), both wholly-owned
subsidiaries of the Company, also entered into an associated continuing guaranty
with Wells Fargo. In addition, SP Systems will pledge 60% of its equity interest
in SunPower Systems SA to Wells Fargo in the second quarter of fiscal 2009 to
collateralize up to $50.0 million of the Company’s obligations under the credit
agreement. 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. If the Company fails to comply with the
financial and other restrictive covenants contained in the credit agreement
resulting in an event of default, all debt could become immediately due and
payable. Financial and other restrictive covenants include, but are not limited
to, net income adjusted for purchase accounting not less than $1.00 in each
period of four consecutive quarters as of the recently completed fiscal quarter,
total liabilities divided by tangible net worth not exceeding two to one as of
the end of each fiscal quarter, and no declaration or payment of
dividends.
As of
March 29, 2009 and December 28, 2008, letters of credit totaling $49.7 million
and $29.9 million, respectively, were issued by Wells Fargo under the
uncollateralized letter of credit subfeature. In addition, letters of credit
totaling $74.5 million and $76.5 million were issued by Wells Fargo under the
collateralized letter of credit facility as of March 29, 2009 and December
28, 2008, respectively. As of March 29, 2009 and December 28, 2008, cash
available to be borrowed under the uncollateralized revolving credit line was
$0.3 million and $20.1 million, respectively, and includes letter of credit
capacities available to be issued by Wells Fargo under the uncollateralized
letter of credit subfeature. Letters of credit available under the
collateralized letter of credit facility at March 29, 2009 and December 28, 2008
totaled $75.5 million and $73.5 million, respectively.
Debt
Facility Agreement with the Malaysian Government
On
December 18, 2008, the Company entered into a facility agreement with the
Malaysian Government. In connection with the facility agreement, the Company
executed a debenture and deed of assignment in favor of the Malaysian
Government, granting a security interest in a deposit account and all assets of
SunPower Malaysia Manufacturing Sdn. Bhd., a wholly-owned subsidiary of the
Company, to secure its obligations under the facility agreement.
Under the
terms of the facility agreement, the Company may borrow up to Malaysian Ringgit
1.0 billion (approximately $276.9 million) to finance the construction of its
planned third solar cell manufacturing facility (“FAB3”) in Malaysia. The
loans within the facility agreement are divided into two tranches that may be
drawn through June 2010. Principal is to be repaid in six quarterly
payments starting in July 2015, and a non-weighted average interest rate of
approximately 4.4% per annum accrues and is payable starting in July 2015. The
Company has the ability to prepay outstanding loans and all borrowings must be
repaid by October 30, 2016. The terms of the facility agreement include certain
conditions to borrowings, representations and covenants, and events of default
customary for financing transactions of this type. As of March 29, 2009 and
December 28, 2008, the Company had borrowed Malaysian Ringgit 375.0 million
(approximately $103.9 million) and Malaysian Ringgit 190.0 million
(approximately $54.6 million), respectively, under the facility
agreement.
1.25%
and 0.75% Convertible Debenture Issuances
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures. Interest on the 1.25% debentures is
payable on February 15 and August 15 of each year, which commenced
August 15, 2007. The 1.25% debentures mature on February 15, 2027.
Holders may require the Company to repurchase all or a portion of their 1.25%
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 1.25% debentures on or after February 15, 2012. The
1.25% 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 the Company’s class A common stock. The initial
effective conversion price of the 1.25% debentures is approximately $56.75 per
share, which represented a premium of 27.5% over the closing price of
the Company's class A 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 0.75% debentures is payable on
February 1 and August 1 of each year, which commenced February 1,
2008. The 0.75% debentures mature on August 1, 2027. Holders may require the
Company to repurchase all or a portion of their 0.75% 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 0.75%
debentures on or after August 1, 2010. The 0.75% debentures will be classified
as short-term debt in the Company’s Condensed Consolidated Balance Sheet
beginning on August 1, 2009. The 0.75% 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, class A common
stock or a combination of cash and class A common stock, at the Company’s
election. The initial effective conversion price of the 0.75% debentures is
approximately $82.24 per share, which represented a premium of 27.5% over
the closing price of the Company's class A common stock on the date of
issuance. The applicable conversion rate will be subject to customary
adjustments in certain circumstances.
The 1.25%
debentures and 0.75% debentures are senior, unsecured obligations of the
Company, ranking equally with all existing and future senior unsecured
indebtedness of the Company. The 1.25% debentures and 0.75% 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 1.25%
debentures and 0.75% debentures do not contain any covenants or sinking fund
requirements.
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 1.25% 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 1.25% debentures. During the
fourth quarter in fiscal 2008, holders of the 1.25% debentures were able to
exercise their right to convert the debentures any day in that fiscal quarter.
As of December 28, 2008, the Company received notices for the conversion of
approximately $1.4 million of the 1.25% debentures which the Company settled for
approximately $1.2 million in cash and 1,000 shares of class A common
stock.
Because
the closing price of the Company’s class A common stock on at least 20 of the
last 30 trading days during the fiscal quarters ending March 29, 2009 and
December 28, 2008 did not equal or exceed $70.94, or 125% of the applicable
conversion price for its 1.25% debentures, and $102.80, or 125% of the
applicable conversion price governing its 0.75% debentures, holders of the
1.25% debentures and 0.75% debentures are unable to exercise their right to
convert the debentures, based on the market price conversion trigger, any day in
the first and second quarters of fiscal 2009. Accordingly, the Company
classified the convertible debt as long-term debt in its Condensed Consolidated
Balance Sheets as of March 29, 2009 and December 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 1.25%
debentures and 0.75% debentures are subject to the provisions of FSP APB 14-1,
adopted by the Company on December 29, 2008, since the debentures can be
settled in cash upon conversion. The
Company estimated that the effective interest rate for similar debt without the
conversion feature was 9.25% and 8.125% on the 1.25% debentures and 0.75%
debentures, respectively. The
principal amount of the outstanding debentures, the unamortized discount and the
net carrying value as of March 29, 2009 was $423.6 million, $59.8 million and
$363.8 million, respectively, and as of December 28, 2008 was $423.6 million,
$66.4 million and $357.2 million, respectively. The Company recognized $5.0
million and $4.4 million in non-cash interest expense in the three months ended
March 29, 2009 and March 30, 2008, respectively, related to the adoption of FSP
APB 14-1 (see Note 1). As of March 29, 2009, the remaining weighted average
period over which the unamortized discount will be recognized is as follows (in
thousands):
2009
(remaining nine months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the Company’s outstanding convertible
debt:
|
|
As of
|
|
|
|
March 29, 2009
|
|
|
December 28, 2008
|
|
(In thousands)
|
|
Face Value
|
|
|
Fair Value*
|
|
|
Face Value
|
|
|
Fair Value*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The
fair value of the convertible debt was determined based on quoted market
prices as reported by an independent pricing
source.
|
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 translation adjustments. The components of
comprehensive income were as follows:
|
|
Three Months Ended
|
|
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. In
connection with its global tax planning, the Company changed the flow of
transactions to European subsidiaries that have Euro functional currency,
resulting in greater exposure to changes in the value of the Euro beginning in
the second quarter of fiscal 2008. 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.
On
December 29, 2008, the Company adopted SFAS No. 161 which had no financial
impact on the Company’s condensed consolidated financial statements and only
required additional financial statement disclosures (see Note 1). The Company
has applied the requirements of SFAS No. 161 on a prospective basis.
Accordingly, disclosures related to interim periods prior to the date of
adoption have not been presented.
Under
SFAS No. 133, the Company is required to recognize derivative instruments as
either assets or liabilities at fair value in the Condensed Consolidated Balance
Sheets. The Company calculates the fair value of its option and 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
March 29, 2009 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)
|
|
Balance Sheet Location
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under SFAS No.
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under SFAS No.
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments under SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
|
|
|
|
|
Foreign
currency option contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the amount of unrealized loss recognized in
“Accumulated other comprehensive loss” (“OCI”) in “Stockholders’ equity” in the
Condensed Consolidated Balance Sheet:
|
|
Unrealized Loss Recognized in OCI (Effective
Portion)
|
|
Loss Reclassified from OCI to Cost of Revenue
(Effective Portion)
|
|
Loss Recognized in Other, Net on Derivatives
(Ineffective Portion and Amount Excluded from Effectiveness
Testing)
|
|
|
|
As
of
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
(In thousands)
|
|
March 29,
2009
|
|
March 29,
2009
|
|
March 29,
2009
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
(3,551
|
) |
$ |
(125
|
) |
$ |
(1,478
|
) |
Foreign
currency option contracts
|
|
|
— |
|
|
— |
|
|
(485
|
) |
|
|
$ |
(3,551 |
) |
$ |
(125 |
) |
$ |
(1,963 |
) |
The
following table summarizes the amount of loss recognized in “Other, net” in
the Condensed Consolidated Statement of Operations in the three months ended
March 29, 2009:
|
|
|
|
Derivatives
not designated as hedging instruments under SFAS No.
133
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
|
$ |
(1,838 |
) |
Foreign
Currency Exchange Risk
Cash
Flow Exposure
The
Company’s subsidiaries have had and will continue to have material future cash
flows, including revenues and expenses, that are denominated in currencies other
than their functional currencies. The Company’s cash flow exposure primarily
relates to trade accounts receivable and accounts payable. Changes in exchange
rates between the Company’s subsidiaries’ functional currencies and other
currencies in which they transact will cause fluctuations in cash flows
expectations and cash flows realized or settled. Accordingly, the Company enters
into option and forward contracts to hedge the value of a portion of these
forecasted cash flows.
In
accordance with SFAS No. 133, the Company accounts for its hedges of forecasted
foreign currency purchases as cash flow hedges. As of March 29, 2009, the
Company has outstanding cash flow hedge forward contracts and option contracts
with an aggregate notional value of $397.9 million and $76.3 million,
respectively. As of December 28, 2008, the Company had outstanding cash flow
hedge forward contracts and option contracts with an aggregate notional value of
$364.5 million and $147.5 million, respectively. The maturity dates of the
outstanding contracts as of March 29, 2009 range from April 2009 to December
2009. Changes in fair value of the effective portion of hedge contracts are
recorded in “Accumulated other comprehensive loss” in “Stockholders’ equity” in
the Condensed Consolidated Balance Sheets. Amounts deferred in accumulated other
comprehensive loss are reclassified to “Cost of revenue” in the Condensed
Consolidated Statements of Operations in the periods in which the hedged
exposure impacts earnings. The Company expects to reclassify $3.6 million
of net losses related to these option and forward contracts that are included in
accumulated other comprehensive loss at March 29, 2009 to “Cost of revenue” in
the following nine months as the Company realizes the cost effects of the
related forecasted foreign currency cost of revenue transactions. The amounts
ultimately recorded in the Condensed Consolidated Statements of Operations will
be contingent upon the actual exchange rates when the related forecasted foreign
currency cost of revenue transactions are realized, and therefore, unrealized
losses at March 29, 2009 could change.
Cash flow
hedges are tested for effectiveness each period on an average to average rate
basis using regression analysis. The change in the time value of the options as
well as the cost of forward points (the difference between forward and spot
rates at inception) on forward exchange contracts are excluded from the
Company’s assessment of hedge effectiveness. The premium paid or time value of
an option whose strike price is equal to or greater than the market price on the
date of purchase is recorded as an asset in the Condensed Consolidated Balance
Sheets. Thereafter, any change to this time value and the cost of forward points
is included in “Other, net” in the Condensed Consolidated Statements of
Operations. Amounts recorded in “Other, net” were losses of $2.0 million
and none during the three months ended March 29, 2009 and March 30, 2008,
respectively, due to loss in time value and cost of forward
points.
Transaction
Exposure
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. Changes in exchange rates between the Company’s subsidiaries’
functional currencies and the currencies in which these assets and liabilities
are denominated can create fluctuations in the Company’s reported consolidated
financial position, results of operations and cash flows. The Company enters
into forward contracts to hedge foreign currency denominated monetary assets and
liabilities against the short-term effects of currency exchange rate
fluctuations. The Company records its derivative contracts 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 March 29, 2009 and December 28, 2008,
the Company held forward contracts with an aggregate notional value of $248.9
million and $66.6 million, respectively, to hedge balance sheet exposure related
to transactions with third-parties. These forward contracts have maturities of
one month or less.
The
Company’s option and forward contracts do not contain any credit-risk-related
contingent features. The Company is exposed to credit losses in the event of
nonperformance by the counter-parties of its option and forward contracts. The
Company enters into derivative contracts with high-quality financial
institutions and limits the amount of credit exposure to any one counter-party.
In addition, the derivative contracts are limited to a time period of less than
one year and the Company continuously evaluates the credit standing of its
counter-party financial institutions.
Note
13. INCOME
TAXES
In the
three months ended March 29, 2009, the Company’s effective rate of income tax
benefit of 58.7% was primarily attributable to domestic and foreign income
losses in certain jurisdictions, nondeductible amortization of purchased
intangible assets and discrete stock option deductions. The Company’s tax
provision for the three months ended March 30, 2008 of 13.6% was primarily
attributable to domestic and foreign income taxes in certain jurisdictions where
the Company’s operations were profitable, net of the consumption of
non-stock net operating loss carryforwards. As a result of the Company’s
adoption of FSP APB 14-1, the tax provision during the first quarter of fiscal
2008 was retroactively adjusted from 28.3% to 13.6% (see Note 1). The Company’s
interim period tax provision is estimated based on the expected annual worldwide
tax rate and takes into account the tax effect of discrete items.
Note
14. NET INCOME (LOSS) PER
SHARE OF CLASS A AND CLASS B COMMON STOCK
Effective
December 29, 2008, the Company adopted FSP EITF 03-6-1, which requires it to use
the two-class method to calculate net income (loss) per share. Under the
two-class method, net income (loss) per share is computed by dividing earnings
allocated to common stockholders by the weighted-average number of common shares
outstanding for the period. In applying the two-class method, earnings are
allocated to both common stock and other participating securities based on their
respective weighted-average shares outstanding during the period. No allocation
is generally made to other participating securities in the case of a loss per
share. In accordance with the implementation provisions of FSP EITF 03-6-1,
prior period share data and net income (loss) per share has been retroactively
adjusted (see Note 1).
Basic
weighted-average shares is computed using the weighted-average of the combined
class A and class B common stock outstanding. Class A and class B common
stock are considered equivalent securities for purposes of the earnings per
share calculation because the holders of each class are legally entitled to
equal per share distributions whether through dividends or in liquidation. The
Company's outstanding unvested restricted stock awards are considered
participating securities as they may participate in dividends, if declared, even
though the awards are not vested. As participating securities, the unvested
restricted stock awards are allocated a proportionate share of net
income, but excluded from the basic weighted-average shares. Diluted
weighted-average shares is computed using the basic weighted-average common
stock 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 units and senior convertible debentures.
Holders
of the Company’s 1.25% debentures and 0.75% debentures may, under certain
circumstances at their option, convert the 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, “Convertible Bonds with Issuer Option to Settle for Cash upon
Conversion” (“EITF 90-19”), the 1.25% debentures and 0.75% debentures are
included in the calculation of diluted net income (loss) per share if their
inclusion is dilutive under the treasury stock method.
The
following is a summary of other outstanding anti-dilutive potential common
stock:
|
|
As of
|
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the calculation of basic and diluted net income (loss)
per share:
|
|
Three Months Ended
|
(In thousands, except per share
amounts)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Basic
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Less: Undistributed
earnings allocated to unvested restricted stock
awards(1)
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Less: Undistributed
earnings allocated to unvested restricted stock
awards(1)
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted-average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
$ |
|
|
|
$ |
|
|
(1) Losses
are not allocated to unvested restricted stock awards because such awards do not
contain an obligation to participate in losses.
Beginning
on September 15, 2008, the date on which Lehman Brothers International (Europe)
Limited (“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 1.25% 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 Credit Suisse
International (“CSI”) in connection with the 0.75% debentures. If Credit Suisse
Securities (USA) LLC (“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.
For the
three months ended March 29, 2009, the Company’s average stock price for the
period did not exceed the conversion price for the senior convertible
debentures. For the three months ended March 30, 2008, dilutive potential common
shares includes approximately 1.0 million shares for the impact of the 1.25%
debentures as the Company experienced a substantial increase in its common stock
price during the first quarter of fiscal 2008 as compared to the conversion
price pursuant to the terms of the 1.25% debentures. For the three months ended
March 30, 2008, the Company’s average stock price for the period did not exceed
the conversion price for the 0.75% debentures. Under the treasury stock method,
the Company’s 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. STOCK-BASED
COMPENSATION
The
following table summarizes the consolidated stock-based compensation expense by
line item in the Condensed Consolidated Statements of Operations:
|
|
Three Months Ended
|
|
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
Cost
of components revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
|
|
|
|
|
|
|
The
following table summarizes the consolidated stock-based compensation expense, by
type of awards:
|
|
Three Months Ended
|
|
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
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 its acquisition of PowerLight Corporation (now known as SP
Systems) on January 10, 2007, the Company issued 1.1 million shares of its
class A common stock and 0.5 million stock options to employees of SP Systems.
The class A common stock and stock options were valued at $60.4 million
and were subject to certain transfer restrictions and a repurchase option
held by the Company. The Company recognized the expense as the re-vesting
restrictions of these shares lapsed 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 Company’s stock option activities:
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Outstanding
as of December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 29, 2009
|
|
|
|
|
|
|
|
|
Exercisable
as of March 29, 2009
|
|
|
|
|
|
|
|
|
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 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restricted
stock awards and units vested include shares withheld on behalf of
employees to satisfy the minimum statutory tax withholding
requirements.
|
Note
16. SEGMENT AND GEOGRAPHICAL
INFORMATION
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 the
Systems Segment and Components Segment using information about their revenue and
gross margin. The following tables present revenue by geography and segment,
gross margin by segment and revenue by significant customer. Revenue is based on
the destination of the shipments.
|
|
Three Months Ended
|
|
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Revenue
by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Significant
Customers |
Business
Segment
|
|
|
|
|
|
|
Florida
Power & Light Company (“FPL”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* denotes
less than 10% during the period
Note
17. SUBSEQUENT
EVENTS
Acquisition
of Tilt Solar, LLC (“Tilt Solar”)
On April
14, 2009, the Company completed the acquisition of Tilt Solar, a California
limited liability company, pursuant to a Membership Interest Purchase Agreement,
dated as of April 14, 2009, by and among the selling stockholders and the
Company. The acquisition of Tilt Solar was not material to the Company’s
financial position or results of operations.
Term
Loan with the Union Bank, N.A. (“Union Bank”)
On April
17, 2009, the Company entered into a loan agreement with Union Bank under which
the Company borrowed $30.0 million for three years at an interest rate of LIBOR
plus 2%. The loan is to be repaid in eight equal quarterly installments
commencing June 30, 2010. Unless and until the Company has granted to Union Bank
a security interest in cash collateral not less than 105% of the outstanding
principal amount of the loan, the Company will maintain a depository account
with Union Bank holding a predetermined amount of funds. During the first year
of the loan, such account is required to hold at all times a balance equal to
the aggregate sum of $10.0 million plus interest due and payable during the
following 12 months, calculated monthly on a rolling basis. During the second
and third years of the loan, such account is required to hold at all times a
balance equal to the aggregate payments due and payable with respect to
principal and interest during the following 12 months, calculated monthly on a
rolling basis. In connection with the loan agreement, the Company entered into a
security agreement with Union Bank, which will grant a security interest in the
deposit account in favor of Union Bank on April 1, 2010 if, prior to then, all
of the Company’s 0.75% debentures have not been converted or exchanged in a
manner satisfactory to Union Bank. SunPower North America, LLC and SP Systems,
both wholly-owned subsidiaries of the Company, have each guaranteed up to $30.0
million of the Company’s obligations under the loan agreement. The agreements
include certain representations, covenants, and events of default customary for
financing transactions of this type.
Supply
Agreement with FPL Group Inc. ("FPL Group")
On April 21,
2009, SP Systems, a wholly-owned subsidiary of the Company, entered into a
Photovoltaic Equipment Master Supply Agreement with FPL Group, an affiliate of
FPL. The supply agreement sets forth the material terms and conditions pursuant
to which SP Systems may sell to FPL Group solar panels and photovoltaic tracking
and support structure equipment from 2010 through 2012 for use in solar projects
of FPL Group or its affiliates.
Pursuant to
the supply agreement, SP Systems guarantees delivery over such three
year period of up to 100 megawatts (“MWAC ”)
annually as a base commitment, and up to an additional 100 MWAC annually
to the extent FPL Group exercises options to acquire such additional
quantities. The parties may elect to satisfy SP Systems' quantity
commitments as part of its provision of engineering, procurement and
construction services in future FPL Group solar projects.
The
supply agreement provides FPL Group the right to reduce or terminate its
obligations with respect to the base commitment, which under certain, but not
all, circumstances will result in an early termination payment. In addition, FPL
Group’s purchase obligations are conditioned upon the State of Florida
promulgating laws and the State of Florida Public Service Commission
promulgating regulations, by no later than September 30, 2009 (or such later
date as agreed by FPL Group and SP Systems), that allow FPL Group’s utility
affiliate to build, own and operate, and receive cost recovery for, photovoltaic
solar electric generation facilities that would enable FPL Group to satisfy
the base commitment for each year. If such condition is not satisfied by the
purchase condition date, then FPL Group shall have the right to reduce or
eliminate the base commitment.
4.75%
Convertible Debenture Issuance
On April
28, 2009, the Company entered into an underwriting agreement (the “Debenture
Underwriting Agreement”) with Deutsche Bank Securities Inc. (“Deutsche Bank”)
and Credit Suisse, as representatives of several underwriters (collectively, the
“Debenture Underwriters”), providing for the offer and sale by the Company of
$200.0 million principal amount of 4.75% senior convertible debentures due 2014
(the “4.75% debentures”), with an option in favor of the Debenture Underwriters
for the purchase of up to an additional $30.0 million principal amount of the
4.75% debentures in certain circumstances, which option was exercised by the
Debenture Underwriters in full on April 29, 2009. The 4.75% debentures were
issued under an indenture, dated February 7, 2007 (the “Base Indenture”),
between the Company and Wells Fargo, as trustee (the “Trustee”), as supplemented
by a third supplemental indenture (the “Supplemental Indenture” and, together
with the Base Indenture, the “Indenture”), which was executed by the Company and
the Trustee on May 4, 2009. The Indenture provides, among other things, that the
4.75% debentures are senior unsecured obligations of the Company, ranking
equally with all existing and future senior unsecured indebtedness of the
Company. The 4.75% 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 4.75% debentures do not contain any covenants or sinking fund
requirements. Net proceeds received from the issuance of $230.0 million
principal amount of the 4.75% debentures, before payment of the cost of the
convertible debenture hedge transactions described below, were $225.0 million
which closed on May 4, 2009.
Interest
is payable on the 4.75% debentures on April 15 and October 15 of each year,
beginning on October 15, 2009. The 4.75% debentures are initially convertible
into shares of the Company’s class A common stock at a conversion price equal to
$26.40 per $1,000 principal amount of 4.75% debentures, which represents a
premium of 20% over the price of the Company’s class A common stock in the
concurrent equity offering. The applicable conversion rate may adjust in certain
circumstances, including upon a fundamental change (defined in the Supplemental
Indenture). If not earlier converted, the 4.75% debentures mature on April 15,
2014. Holders may also require the Company to repurchase all or a portion of
their 4.75% debentures upon a fundamental change at a cash repurchase price
equal to 100% of the principal amount plus accrued and unpaid interest. In the
event of certain events of default (defined in the Indenture), such as the
Company’s failure to make certain payments or perform or observe certain
obligations thereunder, the Trustee or holders of a specified amount of
then-outstanding 4.75% debentures will have the right to declare all amounts
then outstanding due and payable.
Common
Stock Issuance
Also on
April 28, 2009, the Company entered into an underwriting agreement (the “Equity
Underwriting Agreement”) with Credit Suisse and Deutsche Bank, as
representatives of several underwriters (collectively, the “Equity
Underwriters”), providing for the offer and sale by the Company of 9.0 million
shares of its class A common stock at a price of $22.00 per share. The Company
also granted to the Equity Underwriters an option to purchase up to an
additional 1.35 million shares of its class A common stock in certain
circumstances, which such option was exercised by the Equity Underwriters in
full on April 29, 2009. The sale of 10.35 million shares of the Company’s class
A common stock pursuant to the Equity Underwriting Agreement closed on May 4,
2009 and generated net proceeds of $218.9 million.
Option
and Warrant Issuance
Concurrently
with entering into the Debenture Underwriting Agreement, the Company entered
into certain convertible debenture hedge transactions with respect to the
Company’s class A common stock (the “purchased options”), with affiliates of
certain of the Debenture Underwriters referred to above. The purchased options
cover, subject to antidilution adjustments substantially identical to those in
the 4.75% debentures, up to approximately 8.7 million shares of the Company’s
class A common stock. The purchased options are intended to reduce the potential
dilution upon conversion of the 4.75% debentures in the event that the market
price per share of the Company’s class A common stock, as measured under the
4.75% debentures, at the time of exercise is greater than the conversion price
of the 4.75% debentures. The purchased options will be settled on a net share
basis. Each convertible debenture hedge transaction is a separate transaction,
entered into by the Company with each option counter-party, and is not part of
the terms of the 4.75% debentures. The Company paid aggregate consideration of
$97.3 million for the purchased options upon the closing of the purchased option
transaction on May 4, 2009.
Separately
and concurrently with entering into the Debenture Underwriting Agreement, on
April 28, 2009 the Company also entered into certain warrant transactions
whereby the Company agreed to sell to affiliates of certain of the Debenture
Underwriters warrants (the “Warrants”) to acquire, subject to anti-dilution
adjustments, up to approximately 8.7 million shares of the Company’s class A
common stock. The Warrants will expire in 2014. If the market price per share of
the Company’s class A common stock, as measured under the Warrants, exceeds the
strike price of the Warrants, the Warrants will have a dilutive effect on the
Company’s earnings per share. Each warrant transaction is a separate
transaction, entered into by the Company with each option counter-party, and is
not part of the terms of the 4.75% debentures. Holders of the 4.75% debentures
will not have any rights with respect to the Warrants. The Warrants were sold
for aggregate cash consideration of approximately $71.0 million upon the closing
of the sale of the Warrants on May 4, 2009. The exercise price of the Warrants
is $38.50 per share of the Company’s class A common stock, subject to adjustment
for customary anti-dilution and other events.
The purchase
options and Warrants transactions described above create a call spread overlay
with respect to the 4.75% debentures. Assuming full performance by the
counter-parties, the transactions effectively increase the conversion premium of
the 4.75% debentures from 20% over the price of the Company’s class A common
stock in the concurrent equity offering to 75%, or $38.50. The net cost of the
purchase options and Warrants transactions for the call spread overlay was $26.3
million.
Item 2.
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. Forward-looking
statements are statements that do not represent historical facts and may be
based on underlying assumptions. We use words such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential” and “continue” to identify forward-looking
statements in this Quarterly Report on Form 10-Q including our plans and
expectations regarding future financial results, operating results, business
strategies, projected costs, products, competitive positions, management’s plans
and objectives for future operations, our ability to obtain financing and
industry trends. Such forward-looking statements are based on information
available to us as of the date of this Quarterly Report on Form 10-Q and involve
a number of risks and uncertainties, some beyond our control, that could cause
actual results to differ materially from those anticipated by these
forward-looking statements. Please see “PART II. OTHER INFORMATION, Item
1A: Risk Factors” and our other filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the year ended December
28, 2008, 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 to, 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 year which ends on the Sunday closest to the calendar month end.
Business
We are a
vertically integrated solar products and services company that designs,
manufactures and markets high-performance solar electric power technologies. Our
solar cells and solar panels are manufactured using proprietary processes, and
our technologies are based on more than 15 years of research and
development. Of all the solar cells available for the mass market, we believe
our solar cells have the highest conversion efficiency, a measurement of the
amount of sunlight converted by the solar cell into electricity. Our solar power
products are sold through our components and systems business
segments.
Business
Segments Overview
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:
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superior
performance, including the ability to generate up to 50% more power per
unit area;
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superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
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more
efficient use of silicon, a key raw material used in the manufacture of
solar cells.
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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 North America, Europe and Asia,
principally in regions where public policy has accelerated solar power
adoption.
We
manufacture our solar cells at our two facilities in the Philippines, and are
developing a third solar cell manufacturing facility in Malaysia. Almost all of
our solar cells are then combined into solar panels at our solar panel assembly
facility located in the Philippines. Our solar panels are also manufactured for
us by third-party subcontractors.
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:
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superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
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superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast roof installation technologies;
and
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superior
channel breadth and delivery capability including turnkey
systems.
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Our
customers include commercial and governmental entities, investors, utilities,
production home builders and home owners. 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 the
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 of America, or the United States or U.S. We sell distributed
rooftop and ground-mounted solar power systems as well as central-station power
plants. In the United States, 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 under a power purchase agreement with a
financing company which buys the system from us. In Europe, 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 twenty megawatts, and generate electricity for sale
under tariff to private and public utilities.
In 2008,
we began serving the utility market in the United States, as regulated utilities
began seeking cost-effective renewable energy to meet governmental renewable
portfolio standard requirements. We believe we are well positioned for long-term
success, despite difficult near-term conditions, with our substantial backlog
for utility scale pipeline. Examples include an agreement with Pacific Gas
and Electric Company, or PG&E, to build a 210 megawatt (MWAC) solar
power plant in California from 2010 to 2012, an agreement with FPL Group Inc.,
or FPL Group, to supply solar panels and photovoltaic tracking and support
structure equipment of 300 to 600 MWAC from 2010
to 2012, an agreement with Florida Power & Light Company, or FPL, to build
two solar photovoltaic power plants totaling 35 MWAC in
Florida from 2009 to 2010, an agreement with Xcel Energy Inc, or Xcel, to build
a 17 MWAC solar
power plant in Colorado in 2010, and another agreement with Exelon
Corporation, or Exelon, to build a 8 MWAC solar
power plant in Chicago in 2009. While we
have contracts for these projects, there are substantial additional events,
including obtaining financing and proper governmental permits, which must occur
in order for the projects to move forward.
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.
Restructuring
Costs
In
response to deteriorating economic conditions, we reduced our global workforce
of regular employees by approximately 60 positions in the first quarter of
fiscal 2009 in order to reduce our annual operating expenses. The restructuring
actions included charges of $1.2 million incurred in the first quarter of fiscal
2009 for other severance, benefits and related costs. Restructuring accruals
totaled $0.2 million as of March 29, 2009 and is recorded in “Accrued
liabilities” in the Condensed Consolidated Balance Sheets and represents
estimated future cash outlays primarily related to severance expected to be paid
within the second quarter of fiscal 2009. The restructuring, along with other
cost-reduction strategies, is expected to reduce the Company’s 2009 operating
budget by approximately $50 million. See Note 7 of Notes to our Condensed
Consolidated Financial Statements.
Accounting
Changes and Recent Accounting Pronouncements
For a
description of accounting changes and recent accounting pronouncements,
including the expected dates of adoption and estimated effects, if any, in our
Condensed Consolidated Financial Statements, see Note 1 of Notes to our
Condensed Consolidated Financial Statements.
Results
of Operations for the Three Months Ended March 29, 2009 and March 30,
2008
Revenue
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Three Months Ended
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(Dollars in thousands)
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March 29,
2009
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March 30,
2008
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Total
Revenue: During the three months ended March 29, 2009 and March 30,
2008, our total revenue was $213.8 million and $273.7 million, respectively, a
decrease of 22%. The decrease in our total revenue during the three months ended
March 29, 2009 compared to the same period in 2008 is attributable to prolonged
winter conditions in Europe, the difficult economic and credit environment
domestically, and delayed purchasing decisions by many of our customers. Revenue
earned in the three months ended March 30, 2008 resulted from ongoing
construction of several large-scale solar power plants in Spain and high demand
for our solar cells and solar panels. We had twelve and seven solar cell
manufacturing lines in our two facilities as of March 29, 2009 and March 30,
2008, respectively, with a total rated manufacturing capacity of 414 megawatts
and 214 megawatts, respectively, per year. During the three months ended March
29, 2009 and March 30, 2008, our two solar cell manufacturing facilities
produced 93.7 megawatts and 38.5 megawatts, respectively.
Sales
outside the United States represented approximately 39% and 79% of our total
revenue for the three months ended March 29, 2009 and March 30, 2008,
respectively, representing a shift in the geography of the construction of
system projects from Europe to the United States, particularly with the ongoing
construction of a 25 megawatt solar power plant for FPL in Desoto County,
Florida.
Concentrations: We
have three customers that each accounted for more than 10 percent of our total
revenue in one of the three months ended March 29, 2009 and March 30, 2008 as
follows:
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Three Months Ended
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March 29,
2009
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March 30,
2008
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* denotes
less than 10% during the period
We
generate revenue from two business segments, as follows:
Systems
Segment Revenue: Our systems revenue for the three months ended March 29,
2009 and March 30, 2008 was $106.1 million and $178.9 million, respectively,
which accounted for 50% and 65%, respectively, of our total revenue. During the
three months ended March 29, 2009, our systems revenue decreased 41% as compared
to revenue earned in the three months ended March 30, 2008, due to the difficult
economic conditions resulting in near-term challenges in financing system
projects. In the three months ended March 30, 2008, our Systems Segment
benefited from strong power plant scale demand in Europe, primarily in Spain,
before the expiration of a pre-existing feed-in tariff in September
2008.
FPL was a
significant customer to the Systems Segment during the three months ended March
29, 2009 due to the ongoing construction of a 25 megawatt solar power plant in
Desoto County, Florida. Sedwick Corporate, S.L. and Naturener
Group were significant customers to the Systems Segment during the three
months ended March 30, 2008 due to the ongoing construction of several
large-scale solar power plants in Spain. FPL, Sedwick Corporate, S.L. and
Naturener Group 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 months ended March 29,
2009 and March 30, 2008, approximately 36% and 46%, 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.
Our
systems revenue is largely dependent on the timing of revenue recognition on
large construction projects and, accordingly, will fluctuate from period to
period. 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, our
systems are often purchased by third-party investors as central-station solar
power plants, typically rated from one to twenty 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 the United States,
Europe and Asia. The balance of our systems revenue are generally derived from
sales to new home builders for residential applications and maintenance revenue
from servicing installed solar systems. We expect the current credit market
conditions to continue through at least the first half of fiscal 2009,
negatively affecting our ability to finance systems projects. We expect the
U.S. utility and power plant market demand for renewable energy to grow over 50%
annually over the next five years.
Components
Segment Revenue: Components revenue for the three months ended March
29, 2009 and March 30, 2008 was $107.7 million and $94.8 million, respectively,
or 50% and 35%, respectively, of our total revenue. During the three months
ended March 29, 2009, our components revenue increased 15% as compared to
revenue earned in the three months ended March 30, 2008, primarily due to
growing demand for our solar power products in Italy. However, components
revenue in the three months ended March 29, 2009 was lower than our internal
forecast due to a long winter season in Europe, primarily in Germany, and
challenging business conditions due to the uncertain economic environment and
tight credit conditions which negatively influenced overall demand and timing of
customers’ buying decisions. In the three months ended March 30, 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.
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 solar panels produced
and shipped, average selling prices, product mix, product demand and the
percentage of our construction projects sourced with SunPower solar panels sold
through our Systems Segment which reduces the inventory available to sell
through our Components Segment. As we ramped production beginning in the fourth
quarter of fiscal 2004, we have experienced quarter-over-quarter unit volume
increases in shipments of our solar power products, until the first quarter of
fiscal 2009, when unit volume of shipments for our solar power products
decreased due to the challenging business conditions described above. From
fiscal 2005 through 2008, we also experienced increases in blended average
selling prices for our solar power products primarily due to the strength of
end-market demand and favorable currency exchange rates. In the three months
ended March 29, 2009, blended average selling prices for our solar power
products decreased less than 10% from the fourth quarter in fiscal 2008 mainly
due to unfavorable currency exchange rates of Euro-denominated revenue as well
as the decrease in our average selling prices in transactions denominated in
Euro due to competing market drivers and unprecedented price pressure. Over the
next several years, we expect average selling prices for our solar power
products to decline as the market becomes more competitive, as financial
incentives for solar power decline as typically planned by local, state, and
national policy programs designed to accelerate solar power adoption, as certain
products mature and as manufacturers are able to lower their manufacturing costs
and pass on some of the savings to their customers.
Cost
of Revenue
Details
to cost of revenue by segment:
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Three Months Ended
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Systems
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Components
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Consolidated
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(Dollars in thousands)
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March 29,
2009
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March 30,
2008
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March 29,
2009
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March 30,
2008
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March 29,
2009
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March 30,
2008
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Amortization
of intangible assets
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Impairment
of long-lived assets
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Non-cash
interest expense
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Factory
pre-operating costs
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Materials
and 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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Total
Cost of Revenue: During the three months ended March 29, 2009 and
March 30, 2008, our total cost of revenue was $166.0 million and $220.5 million,
respectively, which represents a decrease of 25%. The decrease in total cost of
revenue corresponds with the decrease of 22% in total revenue during the three
months ended March 29, 2009 compared to the same period in 2008. As a percentage
of total revenue, our total cost of revenue decreased to 78% in the three months
ended March 29, 2009 compared to 81% in the three months ended March 30, 2008.
This decrease in total cost of revenue as a percentage of total revenue is
reflective of (i) decreased costs of polysilicon beginning in the second quarter
of fiscal 2008; (ii) improved manufacturing economies of scale associated with
markedly higher production volume; (iii) reduced expenses associated with the
amortization of intangible assets and stock-based compensation; and (iv)
one-time asset impairment charges of $5.5 million in the first quarter of fiscal
2008 relating to the wind down of our imaging detector product line and for
the write-down of certain solar product manufacturing equipment which
became obsolete due to new processes (the costs associated with the $3.3 million
write-down of certain solar product manufacturing equipment was recovered from
the vendor in the third quarter of fiscal 2008). This decrease in total cost of
revenue as a percentage of total revenue was partially offset by restructuring
charges of $0.2 million in the first quarter of fiscal 2009 and higher
amortization of capitalized non-cash interest expense associated with the
adoption of Financial Accounting Standards Board, or FASB, Staff Position, or
FSP, Accounting Principles Board, or APB, 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement),” or FSP APB 14-1 (See Note 1 and 3 of Notes to our
Condensed Consolidated Financial Statements).
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 97% and 38% of its
solar panel installations with SunPower solar panels in the three months ended
March 29, 2009 and March 30, 2008, respectively. 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.
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 margin each
quarter is affected by a number of factors, including the types of projects in
process, the gross margins estimated for those projects in progress and the
actual system group department overhead costs. Historically, revenue 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 EPC 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 solar panel purchases with several
major solar panel manufacturers, some with liquidated damages and/or take-or-pay
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 margin. Our Systems
Segment's gross margin may also be impacted by provisions for inventory
reserves. We are seeking to improve gross margin 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 margin based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenue in line with expectations, and other
competitive pressures on gross margin.
Systems
Segment Gross Margin: Gross margin was $17.7 million and $35.6 million for
the three months ended March 29, 2009 and March 30, 2008, respectively, or
17% and 20%, respectively, of systems revenue. Gross margin decreased due to
lower average selling prices for our solar power systems and system group
department overhead costs incurred that are fixed in nature when systems revenue
decreased 41% in the three months ended March 29, 2009 as compared to the same
period in 2008.
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’s gross margin each quarter is affected by a
number of factors, including average selling prices for our solar power
products, our product mix, our actual manufacturing costs and the utilization
rate of our solar cell manufacturing facilities.
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 margin. Our gross margin may also be impacted by fluctuations
in manufacturing yield rates and certain adjustments for inventory reserves. We
expect our gross margin 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 margin based on manufacturing efficiencies,
however, could be partially or completely offset by increased raw material costs
or decreased revenue due to lower average selling prices.
Components
Segment Gross Margin: Gross margin was $30.0 million and $17.6 million for
the three months ended March 29, 2009 and March 30, 2008, respectively, or 28%
and 19%, respectively, of components revenue. Gross margin increased due to
higher average solar cell conversion efficiency and better silicon utilization,
continued reduction in silicon costs and higher volume, partially offset by
lower average selling prices for our solar power products.
Other
Cost of Revenue Factors: Other factors contributing to cost of
revenue include amortization of intangible assets, stock-based
compensation, depreciation, provisions for estimated warranty, salaries,
personnel-related costs, freight, royalties, facilities expenses and
manufacturing supplies associated with contracting revenue and solar cell
fabrication as well as factory pre-operating costs associated with our
second solar cell manufacturing facility, or FAB2, and our 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. From fiscal 2005 through 2008, demand for
our solar power products was robust and our production output increased allowing
us to spread a significant amount of our fixed costs over relatively high
production volume, thereby reducing our per unit fixed cost. During the first
quarter of fiscal 2009, we responded to the oversupply of solar power products
in the market by temporarily reducing manufacturing output to better match the
current demand environment.
We currently
operate 12 solar cell manufacturing lines in our two solar cell manufacturing
facilities, with a total rated manufacturing capacity of 414 megawatts per year.
By the end of 2009, we plan to operate 16 solar cell manufacturing lines with an
aggregate manufacturing capacity of 574 megawatts per year. We plan to begin
production in 2010 on the first line of our planned third solar cell
manufacturing facility, or FAB3, which will be constructed in Malaysia.
FAB3 will be constructed in two phases, with an aggregate manufacturing capacity
of more than 500 megawatts per year after the completion of the first phase, and
an expected aggregate manufacturing capacity of more than 1 gigawatt per year
when the second phase is completed. In addition, we operate both internal and
outsourced solar panel manufacturing operations in order to meet volume
requirements. 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 margin. This decline may continue until a line’s
manufacturing output reaches its rated practical capacity.
Research
and Development
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
During
the three months ended March 29, 2009 and March 30, 2008, our research and
development expense was $8.0 million and $4.6 million, respectively, which
represents an increase of 72%. 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 spending during the
three months ended March 29, 2009 compared to the same period in fiscal 2008
resulted primarily from: (i) increases in salaries, benefits and stock-based
compensation costs as a result of increased headcount; and (ii) costs related to
the improvement of our current generation solar cell manufacturing technology,
development of our third generation of solar cells, development of next
generation solar panels, development of next generation trackers and rooftop
systems, and development of systems performance monitoring products. These
increases were partially offset by grants and 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. These awards are typically structured such that only direct costs,
research and development overhead, procurement overhead and general and
administrative expenses that satisfy government accounting regulations are
reimbursed. In addition, our government awards from state agencies will usually
require us to pay to the granting governmental agency certain royalties based on
sales of products developed with grant funding or economic benefit derived from
incremental improvements funded. Royalties paid to governmental agencies will be
charged to the cost of goods sold. Our funding from government contracts offset
our research and development expense by approximately $1.8 million and $1.7
million in the three months ended March 29, 2009 and March 30, 2008,
respectively.
As a
percentage of total revenue, research and development expense totaled 4%
and 2% in the three months ended March 29, 2009 and March 30, 2008,
respectively, because we invested more in research and development during the
three months ended March 29, 2009 when our revenue was lower as compared to
revenue earned in the same period of 2008. We will continue to invest in
research and development to produce leading technology that will deliver a
competitively priced class of energy to our customers.
Sales,
General and Administrative
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Sales,
general and administrative
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
During
the three months ended March 29, 2009 and March 30, 2008, our sales, general and
administrative expense, or SG&A expense, was $42.3 million and $33.9
million, respectively, which represents an increase of 25%. SG&A 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 SG&A expense during the three months ended March 29, 2009
compared to the same period of fiscal 2008 resulted primarily from higher
spending in all areas of sales, marketing, finance and information technology to
support the growth of our business, particularly (i) sales and marketing
spending to expand our dealer network with nearly 500 dealers worldwide; (ii)
outside professional fees for legal and accounting services; (iii) increased
headcount and payroll related expenses; and (iv) restructuring charges of $0.9
million. During the three months ended March 29, 2009 and March 30, 2008,
stock-based compensation included in our SG&A expense was approximately $7.2
million and $10.0 million, respectively.
As a
percentage of revenue, SG&A expense increased to 20% in the three
months ended March 29, 2009 from 12% in the three months ended March 30, 2008,
because certain expenses increased during the three months ended March 29,
2009 when our revenue was lower as compared to revenue earned in the same period
of 2008. We have implemented a new cost-reduction strategy to
manage operating costs in the future more effectively, and as a
result, we have identified and reduced more than $50 million from our 2009
operating budget.
Other
Income (Expense), Net
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
Interest
income represents interest income earned on our cash, cash equivalents,
restricted cash, restricted cash equivalents, available-for-sale securities and
a note receivable. The decrease in interest income of 71% in the three
months ended March 29, 2009 as compared to the same period in fiscal 2008
resulted from lower cash holdings related to capital expenditures for our
manufacturing capacity expansion.
Interest
expense during the three months ended March 29, 2009 relates to borrowings under
our senior convertible debentures, the facility agreement with the Malaysian
Government and customer advance payments. Interest expense during the three
months ended March 30, 2008 relates to borrowings under our senior convertible
debentures and customer advance payments. Non-cash interest expense related to
the adoption of FSP APB 14-1 was $4.5 million and $4.3 million in the three
months ended March 29, 2009 and March 30, 2008, respectively (See Note 1
and 10 of Notes to our Condensed Consolidated Financial Statements). The
decrease in interest expense of 3% in the three months ended March 29, 2009 as
compared to the same period in fiscal 2008 is due to higher capitalized interest
of $2.5 million in the three months ended March 29, 2009 as compared to $1.5
million in the same period of 2008, partially offset by interest on borrowings
totaling Malaysian Ringgit 375.0 million (approximately $103.9 million)
under the facility agreement with the Malaysian Government. Our debt was used to
fund our capital expenditures for our manufacturing capacity
expansion.
The
following table summarizes the components of other, net:
|
|
Three Months Ended
|
|
(In
thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Gain
(loss) on derivatives and foreign exchange
|
|
|
|
|
|
|
|
|
Impairment
of investments
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net expenses during the three months ended March 29, 2009 consists primarily of
losses totaling $2.0 million from expensing the time value of option contracts
and forward points on forward exchange contracts, losses totaling $3.8
million on derivatives and foreign exchange largely due to the volatility in the
current markets and impairment charges for certain money market
funds and auction rate securities. Other, net income during the three
months ended March 30, 2008 consists primarily of gains on derivatives and
foreign exchange. See Note 5 and 12 of Notes to our Condensed
Consolidated Financial Statements.
Income
Taxes
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Income
tax provision (benefit)
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
In the
three months ended March 29, 2009, our effective rate of income tax benefit of
58.7% was primarily due to domestic and foreign income losses in certain
jurisdictions, nondeductible amortization of purchased intangible assets and
discrete stock option deductions. Our tax provision for the three months ended
March 30, 2008 of 13.6% was primarily attributable to domestic and foreign
income taxes in certain jurisdictions where our operations are profitable, net
of the consumption of non-stock net operating loss carryforwards. As a result of
our adoption of FSP APB 14-1, the tax provision during the first quarter of
fiscal 2008 was retroactively adjusted from 28.3% to 13.6%. 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. See Note 13 of Notes
to our Condensed Consolidated Financial Statements.
Deferred
tax assets and liabilities are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities. We have
recorded a valuation allowance to the extent our net deferred tax asset exceeded
our net deferred tax liability except for the items contained in other
comprehensive income. We have provided a valuation allowance on our deferred tax
assets in the U.S., consisting primarily of net operating loss carryforwards and
credits, because of the uncertainty of their realizability. We expect it is more
likely than not that we will not realize our net deferred tax assets as of March
29, 2009. 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.
Equity in earnings of unconsolidated
investees
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Equity
in earnings of unconsolidated investees, net of
taxes
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
In fiscal
2006, we formed Woongjin Energy Co., Ltd, or Woongjin Energy, a joint venture
located in South Korea, to manufacture monocrystalline silicon ingots. In
addition, in fiscal 2007, we formed First Philec Solar Corporation, or First
Philec Solar, a joint venture located in the Philippines, to provide wafer
slicing services of silicon ingots. We account for these investments under APB
Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock,” or the equity method, in which the equity investments are classified as
“Other long-term assets” in the Condensed Consolidated Balance Sheets and our
share of the investees’ earnings is included in “Equity in earnings of
unconsolidated investees” in the Condensed Consolidated Statements of
Operations.
During
the three months ended March 29, 2009 and March 30, 2008, our equity in earnings
of unconsolidated investees were gains of $1.2 million and $0.5 million,
respectively. Our share of Woongjin Energy’s income totaled $1.3 million in the
three months ended March 29, 2009 as compared to $0.5 million in the three
months ended March 30, 2008 due to 1) increases in production since Woongjin
Energy began manufacturing in the third quarter of fiscal 2007; and 2) our
equity investment increased from 27.4% as of March 30, 2008 to 40% as of March
29, 2009. First Philec Solar became operational in the second quarter of fiscal
2008 and our share of the joint venture’s loss totaled $0.1 million in the three
months ended March 29, 2009. See Note 9 of Notes to our Condensed Consolidated
Financial Statements.
Liquidity
and Capital Resources
Cash
Flows
A summary
of the sources and uses of cash and cash equivalents is as follows:
|
|
Three Months Ended
|
|
(In thousands)
|
|
March 29,
2009
|
|
|
March 30,
2008
|
|
Net
cash used in operating activities
|
|
|
|
)
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
)
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash
used in operating activities of $53.1 million in the three months ended March
29, 2009 was primarily the result of an increase in inventory of $95.9 million,
a decrease in accounts payable and other accrued liabilities of $27.2 million
due to the elimination or delay of costs from our internal expenditure plan
until the business climate and overall demand for our solar power products
improves, other changes in operating assets and liabilities of $3.7 million and
a net loss of $4.8 million, offset by non-cash charges totaling $38.8 million
for depreciation, amortization, impairment of investments, stock-based
compensation and non-cash interest expense, less non-cash income of $1.2 million
related to our equity share in earnings of joint ventures, and a decrease in
accounts receivable of $40.9 million.
Net cash
used in operating activities of $69.4 million for the three months ended March
30, 2008 was primarily the result of decreases in billings in excess of costs
and estimated earnings of $43.7 million related to contractual timing of system
project billings, as well as increases in costs and estimated earnings in excess
of billings of $20.7 million, inventory of $39.5 million, accounts receivable of
$17.2 million and other changes in operating assets and liabilities totaling
$22.2 million. These items were partially offset by net income of $12.0 million,
plus non-cash charges totaling $39.4 million for depreciation, amortization,
impairment of long-lived assets, stock-based compensation and non-cash interest
expense, less non-cash income of $0.5 million for our equity share in earnings
of Woongjin Energy. In addition, these items were offset by increases in
accounts payable and other accrued liabilities of $23.0 million. The significant
increases in substantially all of our operating assets and liabilities resulted
from our substantial revenue increase in the three months ended March 30, 2008
compared to previous quarters which impacted net income and working
capital.
Investing
Activities
Net cash
used in investing activities during the three months ended March 29, 2009 was
$43.1 million, of which $52.1 million relates to capital expenditures primarily
associated with manufacturing capacity expansion in the Philippines and
Malaysia, $9.2 million relates to increases in restricted cash and cash
equivalents for the second drawdown under the facility agreement with the
Malaysian government, partially offset by $18.2 million in proceeds received
from the sales or maturities of available-for-sale securities.
Net cash
used in investing activities during the three months ended March 30, 2008 was
$92.3 million, of which $50.8 million relates to capital expenditures primarily
associated with manufacturing capacity expansion in the Philippines. Also during
the three months ended March 30, 2008, (i) restricted cash and cash equivalents
increased by $55.6 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 $13.5 million in cash for the acquisition of Solar
Solutions, a division of Combigas S.r.l., net of cash acquired; and (iii) we
invested an additional $5.6 million in joint ventures. Cash used in investing
activities was partially offset by $33.1 million in proceeds received from the
sales or maturities of available-for-sale securities, net of available-for-sale
securities purchased during the period.
Financing
Activities
Net cash
provided by financing activities during the three months ended March 29, 2009
reflects proceeds received of Malaysian Ringgit 185.0 million (approximately
$51.2 million) from the Malaysian Government under our facility agreement, $0.4
million from stock option exercises, partially offset by cash paid of $2.4
million for treasury stock purchases that were used to pay withholding taxes on
vested restricted stock. Net cash provided by financing activities during the
three months ended March 30, 2008 reflects $1.1 million from stock option
exercises and $4.4 million in excess tax benefits from stock-based award
activity, partially offset by cash paid of $3.3 million for treasury stock
purchases that were used to pay withholding taxes on vested restricted
stock.
Debt
and Credit Sources
Line
of Credit
We have a
credit agreement with Wells Fargo Bank, N.A., or Wells Fargo, providing for a
$50.0 million uncollateralized revolving credit line, with a $50.0 million
uncollateralized letter of credit subfeature, and a separate $150.0 million
collateralized letter of credit facility as of March 29, 2009. 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 uncollateralized letter of credit subfeature through
March 27, 2010. 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
collateralized letter of credit facility through March 27, 2014. As detailed in
the agreement, we pay interest of LIBOR plus 1.25% on outstanding borrowings
under the uncollateralized revolving credit line, and a fee of 2% and 0.2% to
0.3% depending on maturity for outstanding letters of credit under the
uncollateralized letter of credit subfeature and collateralized letter of credit
facility, respectively. At any time, we can prepay outstanding loans. All
borrowings under the uncollateralized revolving credit line must be repaid by
March 27, 2010, and all letters of credit issued under the uncollateralized
letter of credit subfeature expire on or before March 27, 2010 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 collateralized letter of
credit facility expire no later than March 27, 2014.
As of
March 29, 2009 and December 28, 2008, letters of credit totaling $49.7 million
and $29.9 million, respectively, were issued by Wells Fargo under the
uncollateralized letter of credit subfeature. In addition, letters of credit
totaling $74.5 million and $76.5 million were issued by Wells Fargo under the
collateralized letter of credit facility as of March 29, 2009 and December 28,
2008, respectively. As of March 29, 2009 and December 28, 2008, cash available
to be borrowed under the uncollateralized revolving credit line was
$0.3 million and $20.1 million, respectively, and includes letter of credit
capacities available to be issued by Wells Fargo under the uncollateralized
letter of credit subfeature. Letters of credit available under the
collateralized letter of credit facility as of March 29, 2009 and December 28,
2008 totaled $75.5 million and $73.5 million, respectively. See Note 10 of Notes
to our Condensed Consolidated Financial Statements.
Term
Loan
On April
17, 2009, we entered into a loan agreement with Union Bank, N.A., or Union Bank,
under which we borrowed $30.0 million for three years at an interest rate of
LIBOR plus 2%. The loan is to be repaid in eight equal quarterly installments
commencing June 30, 2010. See Note 17 of Notes to our Condensed Consolidated
Financial Statements.
Debt
Facility Agreement with the Malaysian Government
On
December 18, 2008, we entered into a facility agreement with the Malaysian
Government in which we may borrow up to Malaysian Ringgit 1.0 billion, or
approximately $276.9 million, to finance the construction of FAB3 in Malaysia.
The loans within the facility agreement are divided into two tranches that may
be drawn through June 2010. Principal is to be repaid in six quarterly payments
starting in July 2015, and a non-weighted average interest rate of approximately
4.4% per annum accrues and is payable starting in July 2015. We have the ability
to prepay outstanding loans and all borrowings must be repaid by October 30,
2016. As of March 29, 2009 and December 28, 2008, we borrowed Malaysian Ringgit
375.0 million, approximately $103.9 million, and Malaysian Ringgit 190.0
million, approximately $54.6 million, respectively, under the facility
agreement. See Note 10 of Notes to our Condensed Consolidated Financial
Statements.
1.25%,
0.75% and 4.75% Convertible Debenture Issuances
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures, or 1.25% debentures, and received net proceeds of $194.0
million. In the fourth quarter of fiscal 2008, we received notices for the
conversion of approximately $1.4 million of the 1.25% debentures. Interest on
the 1.25% debentures is payable on February 15 and August 15 of each year, which
commenced August 15, 2007. The 1.25% debentures mature on February 15, 2027.
Holders may require us to repurchase all or a portion of their 1.25% 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 1.25% debentures pursuant to these provisions will
be for cash at a price equal to 100% of the principal amount of the 1.25%
debentures to be repurchased plus accrued and unpaid interest. In addition, we
may redeem some or all of the 1.25% debentures on or after February 15, 2012 for
cash at a redemption price equal to 100% of the principal amount of the 1.25%
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 0.75% debentures, and received net proceeds of $220.1
million. Interest on the 0.75% debentures is payable on February 1 and August 1
of each year, which commenced February 1, 2008. The 0.75% debentures mature on
August 1, 2027. Holders may require us to repurchase all or a portion of their
0.75% 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. Therefore, the 0.75% debentures will be
classified as short-term debt in our Condensed Consolidated Balance Sheets
beginning on August 1, 2009. Any repurchase of the 0.75% debentures pursuant to
these provisions will be for cash at a price equal to 100% of the principal
amount of the 0.75% debentures to be repurchased plus accrued and unpaid
interest. In addition, we may redeem some or all of the 0.75% debentures on or
after August 1, 2010 for cash at a redemption price equal to 100% of the
principal amount of the 0.75% debentures to be redeemed plus accrued and unpaid
interest. See Note 10 of Notes to our Condensed Consolidated Financial
Statements.
On May 4,
2009, we issued $230.0 million in principal amount of our 4.75% senior
convertible debentures, or 4.75% debentures, and received net proceeds of $225.0
million, before payment of the cost of the convertible debenture hedge
transactions of $26.3 million. Interest on the 4.75% debentures is payable on
April 15 and October 15 of each year, beginning on October 15, 2009. The
4.75% debentures mature on April 15, 2014. The 4.75% debentures are
initially convertible into shares of our class A common stock at a conversion
price equal to $26.40 per $1,000 principal amount of 4.75% debentures, which
represents a premium of 20% over the price of our class A common stock in the
concurrent equity offering described below. See Note 17 of Notes to our
Condensed Consolidated Financial Statements.
Liquidity
As of
March 29, 2009, we had cash and cash equivalents of $149.1 million as compared
to $202.3 million as of December 28, 2008. Our cash balances are held in
numerous locations throughout the world, including substantial amounts held
outside of the U.S. Most of the amounts held outside of the U.S. could be
repatriated to the U.S. but, under current law, would be subject to U.S. federal
income taxes, less applicable foreign tax credits. We have accrued U.S. federal
taxes on the earnings of our foreign subsidiaries except when the earnings are
considered indefinitely reinvested outside of the U.S. Repatriation could result
in additional U.S. federal income tax payments in future years.
In
addition, we had short-term investments and long-term investments of $2.3
million and $19.0 million as of March 29, 2009, respectively, as compared to
$17.2 million and $23.6 million as of December 28, 2008, respectively. The
decrease in the balance of our cash and cash equivalents, short-term investments
and long-term investments as of March 29, 2009 compared to the balance as of
December 28, 2008 was due primarily to the liquidation of our investment
portfolio to fund our capital expenditures for our manufacturing capacity
expansion.
We
estimated that auction rate securities held with a stated par value of $21.1
million and $26.1 million at March 29, 2009 and December 28, 2008, respectively,
would be valued at approximately 90% and 91%, respectively, of their stated par
value, or $19.0 million and $23.6 million, respectively, representing a decline
in value of approximately $2.1 million and $2.5 million, respectively. Due to
the length of time that has passed since the auction rate securities failed to
clear at auctions and the ongoing uncertainties regarding future access to
liquidity, we have determined the impairment is other-than-temporary and
recorded impairment losses of $0.1 million and $2.5 million in the first quarter
of fiscal 2009 and fourth quarter of fiscal 2008, respectively, in “Other, net”
in our Condensed Consolidated Statements of Operations. If market conditions
were to deteriorate even further such that the current fair value were not
achievable, we could realize additional impairment losses related to our auction
rate securities. All our auction rate securities as of March 29, 2009 and
December 28, 2008 have failed to clear at auctions in subsequent periods.
Accordingly, auction rate securities at March 29, 2009 and December 28, 2008
totaling $19.0 million and $23.6 million, respectively, are classified as
“Long-term investments” in our Condensed Consolidated Balance Sheets, because
they are not expected to be used to fund current operations and consistent with
their stated contractual maturities between 20 to 30 years. On February 4, 2009,
we sold an auction rate security with a carrying value of $4.5 million as of
December 28, 2008 for $4.6 million to a third-party outside of the auction
process. See Note 5 of Notes to our Condensed Consolidated Financial
Statements.
Because
the closing price of our class A common stock on at least 20 of the last 30
trading days during the fiscal quarters ending March 29, 2009 and December 28,
2008 did not equal or exceed $70.94, or 125% of the applicable conversion price
for our 1.25% debentures, and $102.80, or 125% of the applicable conversion
price governing our 0.75% debentures, holders of the 1.25% debentures and
0.75% debentures are unable to exercise their right to convert the debentures,
based on the market price conversion trigger, any day in the first and second
quarters of fiscal 2009. Accordingly, the convertible debt is classified as
long-term debt in our Condensed Consolidated Balance Sheets as of March 29,
2009 and December 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. See Note
10 of Notes to our Condensed Consolidated Financial Statements.
In
addition, the holders of our 1.25% debentures and 0.75% 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. As
of March 29, 2009 and December 28, 2008, our 1.25% debentures and 0.75%
debentures traded significantly below their historic trading prices. 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.
On May 4,
2009, we received aggregate net proceeds of $417.6 million from the follow-on
public offering of 10.35 million shares of our class A common stock and the
issuance of $230.0 million in principal amount of our 4.75% debentures named
above, after deducting the underwriters’ discounts and commissions and estimated
offering expenses payable by us (including approximately $26.3 million paid as
the cost of convertible debenture hedge transactions entered into in connection
with the 4.75% debenture offering). See Note 17 of Notes to our Condensed
Consolidated Financial Statements.
We intend
to use the net proceeds from the follow-on public offering of 10.35 million
shares of our class A common stock and the issuance of the 4.75% debentures for
general corporate purposes, including working capital and capital expenditures
as well as for the purposes described below. From time to time, we will evaluate
potential acquisitions and strategic transactions of business, technologies, or
products, and may use a portion of the net proceeds for such acquisitions or
transactions. Currently, however, we do not have any agreements with
respect to any such material acquisitions or strategic
transactions.
We may use a portion of the net proceeds from the follow-on public
offering of 10.35 million shares of our class A common stock and the issuance of
the 4.75% debentures
to repurchase some of our
outstanding 1.25% debentures or 0.75% debentures. We expect that holders of our outstanding 1.25% debentures
or 0.75% debentures from
whom we may repurchase
such debentures (which holders may include one or more of the underwriters) may
have outstanding short
hedge positions in our
class A common stock relating to such debentures. Upon repurchase, we
expect that such holders
will unwind or offset those hedge positions by purchasing class A common stock
in secondary market transactions, including purchases in the open market, and/or
entering into various derivative transactions with respect to our class A common stock. These activities
could have the effect of increasing, or preventing a decline in, the market price of our class A common stock. The effect, if
any, of any of these transactions and activities on the market price of
our class A common stock
or the debentures will depend in part on market conditions and cannot be
ascertained at this time, but may be material.
We
believe that our current cash and cash equivalents, cash generated from
operations, and funds available from the credit agreement with Wells Fargo,
facility agreement with the Malaysian Government, the term loan with the Union
Bank, and the issuance of the 4.75% debentures and 10.35 million shares of
our class A common stock 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. We
expect total capital expenditures in the range of $250 million to $300
million in 2009 as we continue to increase our solar cell and solar panel
manufacturing capacity in the Philippines and Malaysia. 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. However, after the tax-free distribution of our shares by
Cypress Semiconductor Corporation, or Cypress, on September 29, 2008, our
ability to sell additional equity securities to obtain additional financing is
limited before triggering our obligation to indemnify Cypress for taxes relating
to the distribution of our class B common stock. The sale of additional equity
securities or convertible debt securities would result in additional dilution to
our stockholders and may not be available on favorable terms or at all,
particularly in light of the current crises in the financial and credit markets.
Additional debt would result in increased expenses and would likely impose new
restrictive covenants like the covenants under the credit agreement with Wells
Fargo, the facility agreement with the Malaysian Government, the term loan with
the Union Bank, the 1.25% debentures, the 0.75% debentures and the 4.75%
debentures. 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 panels and materials in advance to support systems projects.
We intend to fund these activities with existing cash and cash equivalents,
cash generated from operations, borrowings under the term loan with the Union
Bank, the issuance of the 4.75% debentures and 10.35 million shares of our
class A common stock 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 March 29, 2009:
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Payments Due by Period
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(In thousands)
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Total
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2009
(remaining
9 months)
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2010 – 2011
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2012 – 2013
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Beyond
2013
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Customer
advances, including interest
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Convertible
debt, including interest
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Loan
from Malaysian Government
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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. Convertible debt
and interest on convertible debt relate to the aggregate of $423.6 million in
outstanding principal amount of our senior convertible debentures. For the
purpose of the table above, we assume that 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 $423.6 million with no premiums. Loan from the Malaysian
Government relates to amounts borrowed for the financing and operation of FAB3
to be constructed in Malaysia. 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 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 panels 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 twelve
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. See Note 8 of Notes to our Condensed
Consolidated Financial Statements.
As of
both March 29, 2009 and December 28, 2008, total liabilities associated with
uncertain tax positions under FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, and Related Implementation Issues,” or FIN 48, were
$12.8 million and are included in “Other long-term liabilities” in our Condensed
Consolidated Balance Sheets 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. See Note 8 of Notes to our Condensed Consolidated
Financial Statements.
On April
17, 2009, we entered into a loan agreement with the Union Bank, under which we
borrowed $30.0 million for three years at an interest rate of LIBOR plus 2%. In
addition, on May 4, 2009, we issued $230.0 million principal amount of our 4.75%
debentures. These contractual obligations occurred subsequent to the first
quarter of fiscal 2009, therefore, they have been excluded from the table above.
See Note 17 of Notes to our Condensed Consolidated Financial
Statements.
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Quantitative
and Qualitative Disclosure About Market
Risk
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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 35% and 67% of our
total revenue for the three months ended March 29, 2009 and March 30, 2008,
respectively. A 10% change in the Euro exchange rate would have impacted our
revenue by $7.5 million and $18.3 million for the three months ended March 29,
2009 and March 30, 2008, respectively. In connection with our global tax
planning, we 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 beginning in the second quarter of fiscal 2008. 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 March
29, 2009 to April 30, 2009, the exchange rate to convert one Euro to U.S.
dollars decreased from approximately $1.33 to $1.32. 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. When foreign
currencies appreciate against the U.S. dollar, inventories and expenses
denominated in foreign currencies become more expensive. Strengthening of the
Korean Won against the U.S. dollar could result in a foreign currency
translation loss by our joint venture, Woongjin Energy, which in turn negatively
impacts our equity in earnings of the unconsolidated investee. In addition,
strengthening of the Malaysian Ringgit against the U.S. dollar will increase our
liability under the facility agreement with the Malaysian Government. 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. We currently conduct hedging activities which involve the
use of option and forward contracts to address our exposure to changes in the
foreign exchange rate between the U.S. dollar and other currencies. As of March
29, 2009, we held option and forward contracts totaling $76.3 million and $397.9
million, respectively. As of December 28, 2008, we held option and forward
contracts totaling $147.5 million and $364.5 million, respectively. We
experienced losses on derivatives and foreign exchange, net of tax, of $5.8
million in the three months ended March 29, 2009 largely due to the volatility
in the current markets as compared to gains of $0.8 million in the three months
ended March 30, 2008. We cannot predict the impact of future exchange rate
fluctuations on our business and operating results. In the past, we have
experienced an adverse impact on our revenue and profitability as a result of
foreign currency fluctuations. We believe that we may have increased risk
associated with currency fluctuations in the future. See Note 12 of Notes to our
Condensed Consolidated Financial Statements.
We are
exposed to credit losses in the event of nonperformance by the counter-parties
of our foreign currency option contracts, foreign currency forward contracts and
convertible debenture hedge transactions, or the purchased options. We enter
into foreign currency derivative contracts and convertible debenture hedge
transactions with high-quality financial institutions and limit the amount of
credit exposure to any one counter-party. In addition, the foreign currency
derivative contracts are limited to a time period of less than one year, while
the purchased options will expire in 2014, and we continuously evaluate the
credit standing of our counter-party financial institutions. See Note 12 and
17 of Notes to our Condensed Consolidated Financial
Statements
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 a customer’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 more significant to our Systems Segment,
which engages in direct sales to financial institutions that 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, bank notes 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 loss 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
As of
March 29, 2009 and December 28, 2008, we had $2.2 million and $7.2 million,
respectively, invested in the Reserve Primary Fund and the Reserve International
Liquidity Fund, or collectively referred to as the Reserve Funds. The net asset
value per share for the Reserve Funds fell below $1.00 because the funds had
investments in Lehman Brothers Holdings, Inc., or 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 and also announced that the funds
would be closed and distributed to holders. We have estimated our loss on the
Reserve Funds to be approximately $2.2 million based upon information publicly
disclosed by the Reserve Funds relative to our holdings and remaining
obligations. We recorded an impairment charge of $1.2 million and $1.0 million
during the first quarter of fiscal 2009 and second half of fiscal 2008,
respectively, in “Other, net” in our Condensed Consolidated Statements of
Operations, thereby establishing a new cost basis for each fund.
On April
17, 2009, we received a distribution of $1.1 million from the Reserve Funds and
we expect that the remaining distribution of $1.1 million from the Reserve Funds
will occur over the remaining three months as the investments held in the funds
mature. While we expect to receive substantially all of the
current carrying value of our holdings in the Reserve Funds within the
next three 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. See Note 5 of Notes to our
Condensed Consolidated Financial Statements.
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 7 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 Statement of Financial Accounting Standards, or SFAS,
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” or
SFAS No. 115, and are recorded at fair value. We estimated that the auction rate
securities held with a stated par value of $21.1 million and $26.1 million as
of March 29, 2009 and December 28, 2008, respectively, would be valued at
approximately 90% and 91%, respectively, of their stated par value, or $19.0
million and $23.6 million, respectively, representing a decline in value of
approximately $2.1 million and $2.5 million, respectively. Due to the length of
time that has passed since the auctions failed and the ongoing uncertainties
regarding future access to liquidity, we have determined the impairment is
other-than-temporary and recorded impairment losses of $0.1 million and $2.5
million in the first quarter of fiscal 2009 and fourth quarter of fiscal 2008,
respectively, in “Other, net” in our Condensed Consolidated Statements of
Operations. If market conditions were to deteriorate even further such that the
current fair value were not achievable, we could realize additional impairment
losses related to our auction rate securities. All our auction rate securities
as of March 29, 2009 and December 28, 2008 have failed to clear at auctions in
subsequent periods. On February 4, 2009, we sold an auction rate security with a
carrying value of $4.5 million as of December 28, 2008 for $4.6 million to a
third-party outside of the auction process. See Note 5 of Notes to our Condensed
Consolidated Financial Statements.
Investments
in Non-Public Companies
Our
investments held in non-public companies expose us to equity price risk. As of
March 29, 2009 and December 28, 2008, non-publicly traded investments of $3.1
million are accounted for using the cost method and $30.3 million and $29.0
million, respectively, are accounted for using the equity method. 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 monitor these
non-publicly traded investments for impairment and record reductions in the
carrying values when necessary. Circumstances that indicate an
other-than-temporary decline include valuation ascribed to the issuing company
in subsequent financing rounds, decreases in quoted market price and declines in
operations of the issuer. During the fourth quarter of fiscal 2008, we recorded
an other-than-temporary impairment charge of $1.9 million in our Condensed
Consolidated Statement of Operations related to our non-publicly traded
investment accounted for using the cost method, due to the recent deterioration
of the credit market and economic environment. If the recent credit market
conditions continue or worsen, we may be required to record an additional
impairment charge, which could be material. There can be no assurance that our
cost and equity method investments will not face additional risks of loss. See
Note 9 of Notes to our Condensed Consolidated Financial Statements.
Convertible Debt
The fair
market value of our senior convertible debentures 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 debentures will generally increase as
interest rates fall and decrease as interest rates rise. In addition, the fair
market value of the 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 debentures but do
not impact our financial position, cash flows or results of operations due to
the fixed nature of the debt obligations. The estimated fair value of the 1.25%
debentures and 0.75% debentures was approximately $339.1 million and $310.7
million as of March 29, 2009 and December 28, 2008, respectively, based on
quoted market prices as reported by an independent pricing source. A 10%
increase in quoted market prices would increase the estimated fair value of the
debentures to approximately $373.0 million and $341.8 million as of March 29,
2009 and December 28, 2008, respectively, and a 10% decrease in the quoted
market prices would decrease the estimated fair value of the debentures to
$305.2 million and $279.7 million, respectively. See Note 10 of Notes to
our Condensed Consolidated Financial Statements.
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
(“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 is 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 changes in our internal control over financial reporting that
occurred during the three months ended March 29, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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.
In
addition to the other information set forth in this report, you should carefully
consider the risk factors discussed in “PART I. Item 1A: Risk Factors” in our
Annual Report on Form 10-K for the year ended December 28, 2008, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition or future results. We have updated these risk
factors to reflect changes during the first quarter of fiscal 2009 for the three
months ended March 29, 2009.
Our
operating results will be subject to fluctuations and are inherently
unpredictable.
In order
to return to profitability, we will need to generate and sustain higher revenue
while maintaining reasonable cost and expense levels. In the first quarter of
fiscal 2009 we experienced a loss. 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 become
profitable 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. 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 materials sales
versus lower margin projects in the Systems 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 any future guidance announced by us.
We base
our planned operating expenses in part on our expectations of future revenue,
and a significant portion of our expenses is 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 any guidance
announced by us.
Exhibit
Number
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Description
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10.1†*
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Long-Term
Supply Agreement, dated January 6, 2009, by and between SunPower
Corporation and Hemlock Semiconductor, LLC.
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10.2*
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Amendment
to Long-Term Supply Agreement, dated January 6, 2009, by and among
SunPower Corporation, Hemlock Semiconductor, LLC, and SunPower Philippines
Manufacturing Limited.
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10.3*
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Amended
and Restated SunPower Corporation Annual Key Employee Bonus
Plan.
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10.4*
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Amended
and Restated SunPower Corporation Key Employee Quarterly Key Initiative
Bonus Plan.
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10.5*
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Amendment
to Credit Agreement, dated February 25, 2009, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
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10.6*
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Amendment
to Second Amended and Restated SunPower Corporation 2005 Stock Incentive
Plan dated March 12, 2009.
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10.7*†
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Amended
and Restated Credit Agreement, dated March 20, 2009, by and between
SunPower Corporation and Wells Fargo Bank, National
Association.
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10.8*
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Continuing
Guaranty, dated March 20, 2009, by and between SunPower North America, LLC
and Wells Fargo Bank, National Association.
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10.9*†
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Amendment
Three to Turnkey Engineering, Procurement and Construction Agreement,
dated March 26, 2009, by and between SunPower Corporation, Systems and
Florida Power and Light Company.
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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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Exhibits
marked with an asterisk (*) are filed herewith.
Exhibits
marked with a cross (†) are subject to a request for confidential treatment
filed with the Securities and Exchange Commission.
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:
May 8, 2009
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By:
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/s/ DENNIS V.
ARRIOLA
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Dennis
V. Arriola
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Senior
Vice President and
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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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Long-Term
Supply Agreement, dated January 6, 2009, by and between SunPower
Corporation and Hemlock Semiconductor, LLC.
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10.2*
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Amendment
to Long-Term Supply Agreement, dated January 6, 2009, by and among
SunPower Corporation, Hemlock Semiconductor, LLC, and SunPower Philippines
Manufacturing Limited.
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10.3*
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Amended
and Restated SunPower Corporation Annual Key Employee Bonus
Plan.
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10.4*
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Amended
and Restated SunPower Corporation Key Employee Quarterly Key Initiative
Bonus Plan.
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10.5*
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Amendment
to Credit Agreement, dated February 25, 2009, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
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10.6*
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Amendment
to Second Amended and Restated SunPower Corporation 2005 Stock Incentive
Plan dated March 12, 2009.
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10.7*†
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Amended
and Restated Credit Agreement, dated March 20, 2009, by and between
SunPower Corporation and Wells Fargo Bank, National
Association.
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10.8*
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Continuing
Guaranty, dated March 20, 2009, by and between SunPower North America, LLC
and Wells Fargo Bank, National Association.
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10.9*†
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Amendment
Three to Turnkey Engineering, Procurement and Construction Agreement,
dated March 26, 2009, by and between SunPower Corporation, Systems and
Florida Power and Light Company.
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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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Exhibits
marked with an asterisk (*) are filed herewith.
Exhibits
marked with a cross (†) are subject to a request for confidential treatment
filed with the Securities and Exchange Commission.
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