UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-K
_____________________
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 28, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ______________
Commission
file number 001-34166
SunPower
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3008969
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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3939
North First Street, San Jose, California 95134
(Address
of principal executive offices and zip code)
(408)
240-5500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Common Stock. $0.001 par value
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Nasdaq
Global Select Market
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Class
B Common Stock. $0.001 par value
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Nasdaq
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
_____________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
Accelerated Filer x
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on June 29, 2008 was $2.6 billion. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the Nasdaq Global Market on June 27, 2008. For purposes of determining this
amount only, the registrant has defined affiliates as including the executive
officers and directors of registrant on June 27, 2008.
The total
number of outstanding shares of the registrant’s class A common stock as of
February 13, 2009 was 43,971,526.
The total
number of outstanding shares of the registrant’s class B common stock as of
February 13, 2009 was 42,033,287.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of
the registrant’s definitive proxy statement for the registrant’s 2009 annual
meeting of stockholders are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this Annual Report on Form 10-K.
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Trademarks
The
following terms are our trademarks and may be used in this report: SunPower®,
PowerGuard®, SunTile®, PowerTracker®, and PowerLight®. All other trademarks
appearing in this report are the property of their holders.
Cautionary
Statement Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “continue” and similar expressions to identify
forward-looking statements. Forward-looking statements in this Annual Report on
Form 10-K include, but are not limited to, our plans and expectations regarding
our ability to obtain financing, future financial results, operating results,
business strategies, projected costs, products, competitive positions,
management’s plans and objectives for future operations, and industry trends.
These forward-looking statements are based on information available to us as of
the date of this Annual Report on Form 10-K and current expectations, forecasts
and assumptions and involve a number of risks and uncertainties that could cause
actual results to differ materially from those anticipated by these
forward-looking statements. Such risks and uncertainties include a variety of
factors, some of which are beyond our control. Please see “Item 1A: Risk
Factors” and our other filings with the Securities and Exchange Commission for
additional information on risks and uncertainties that could cause actual
results to differ. These forward-looking statements should not be relied upon as
representing our views as of any subsequent date, and we are under no obligation
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 Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K. Our fiscal year ends on
the Sunday closest to the end of the applicable calendar year. All references to
fiscal periods apply to our fiscal quarters or year which ends on the Sunday
closest to the calendar month end.
ITEM 1:
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 business segment, or Components
Segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our Systems Segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other suppliers.
For more information about financial condition and results of operations of each
segment, please see “Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item
8: Financial Statements and Supplementary Data.”
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.
In fiscal 2008, 2007 and 2006, components revenue represented approximately 43%,
40% and 100%, respectively, of total revenue.
As
discussed more fully below, 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 a third-party subcontractor in
China.
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
Systems Segment is comprised primarily of the PowerLight (now known as SP
Systems) business we acquired in January 2007. 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. In fiscal 2008 and 2007, systems revenue
represented approximately 57% and 60%, respectively, of total
revenue.
We have
solar power system projects completed or in the process of being completed in
various countries including Germany, Italy, Portugal, South Korea, Spain and the
United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. 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 and South Korea, 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. Examples include
an agreement with Florida Power & Light Company, or FPL, to design and
build two solar photovoltaic power plants totaling 35 megawatts in Florida, and
another with Pacific Gas and Electric Company, or PG&E, to design and build
a 250 megawatt solar power plant in California.
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.
Our
Products and Services
Products
Sold Through Our Components Segment
Our solar
power products include solar cells and solar panels manufactured using
proprietary processes, and our technologies are based on more than 15 years
of research and development. We also sell a line of SunPower branded inverters
manufactured by third-parties.
Solar
Cells
Solar
cells are semiconductor
devices that directly convert sunlight into direct current electricity. Our
A-300 solar cell is a silicon solar cell with a specified power value of 3.1
watts and a conversion efficiency averaging between 20% and 21.5%. Our A-330
solar cell delivers 3.3 watts with a conversion efficiency of up to
22.7%. The A-330 solar cell started shipping in 2007. Our solar cells are
designed without highly reflective metal contact grids or current collection
ribbons on the front of the solar cells. This feature enables our solar cells to
be assembled into solar panels that exhibit a more uniform appearance than
conventional solar panels.
Solar
Panels
Solar
panels are solar cells electrically connected together and encapsulated in a
weatherproof package. We believe solar panels made with our solar cells are the
highest efficiency solar panels available for the mass market. Because our solar
cells are more efficient relative to conventional solar cells, when our solar
cells are assembled into panels, the assembly cost per watt is less because more
power can be incorporated into a given size package. Higher solar panel
efficiency allows installers to mount a solar power system with more power
within a given roof or site area and can reduce per watt installation
costs.
Products Sold
Through Our Systems Segment
Our solar
electric power system technology integrates solar cells and solar panels to
convert sunlight to electricity. Our systems are principally designed to be used
in large-scale utility, commercial, public sector and production home
applications.
PowerGuard®
Roof System
Our
PowerGuard® Roof System is a roof-mounted solar panel mounting system that
delivers reliable, clean electricity while insulating and protecting the roof.
PowerGuard® is a proprietary, pre-engineered solar power roofing tile system.
Each PowerGuard® tile consists of a solar laminate, lightweight cement substrate
and styrofoam base. Designed for quick and easy installation, PowerGuard® tiles
fit together with interlocking tongue-and-groove side surfaces. In addition to
generating electricity, PowerGuard® roof systems also insulate and protect the
roof membrane from ultraviolet rays and thermal degradation. This saves both
heating and cooling energy expenses and extends the roof life. The PowerGuard®
roof system has been tested and certified by Underwriters Laboratories Inc., or
UL, and has received a UL Class B fire rating which we believe facilitates
obtaining building permits and inspector approvals.
Our
PowerGuard® system resists wind uplift without compromising the rooftop’s
structural integrity. In comparison, conventional solar power systems typically
penetrate the roof. Systems that require drilling many holes into rooftops to
install and secure solar panels may compromise the integrity of the roof and
reduce its life span. To avoid drilling holes, certain other conventional
systems add weight for stability against wind and weather, which may exceed
weight limits for some commercial buildings’ roofs.
PowerGuard®
tiles typically weigh approximately four pounds per square foot, which is
supported by most commercial rooftops. Our technology integrates this
lightweight construction with a patented pressure equalizing design that has
been tested to withstand winds of up to 140 miles per hour. PowerGuard® roof
systems have been installed in a broad range of climates, including California,
Illinois, Hawaii, Massachusetts, Nevada, New Jersey, New York, Canada and
Switzerland and on a wide variety of building types, from rural single story
warehouses to urban high rise structures.
SunPower® T-10 Commercial Solar Roof
Tiles
SunPower®
T-10 commercial solar roof tiles are pre-engineered solar panels that tilt at a
10-degree angle. Depending on geographical location and local climate
conditions, this can allow for the generation of up to 10% more annual energy
output than traditional flat roof-mounted systems. These non-penetrating panels
interlock for secure, rapid installation on rooftops without compromising the
structural integrity of the roof.
Similar
to our PowerGuard® product, the SunPower® T-10 commercial roof tile is
lightweight, weighing less than four pounds per square foot, and is installed
without penetrating the roof surface. Sloped side and rear wind deflectors
improve wind performance, allowing T-10 arrays to withstand winds up to 120
miles per hour.
Whereas
PowerGuard® performance is optimized in constrained rooftop environments where
it contributes to maximum power density, commercial roof tile performance is
optimized for larger roofs with less space constraints as well as underutilized
tracks of land, such as ground reservoirs.
SunTile®
Roof Integrated System for Residential Market
Our
SunTile® product is a highly efficient solar power shingle roofing system
utilizing our A-300 solar cell technology that is designed to integrate with
conventional residential roofing materials. SunTile® solar shingles are designed
to replace multiple types of roof panels, including the most common concrete
flat, low and high profile “S” tile and composition shingles. We believe that
SunTile® is less visible on a roof than conventional solar technology because
the solar panel is integrated directly into the roofing material instead of
mounted onto the roof. SunTile® has a UL-listed Class A fire rating, which
is the highest level of fire rating provided by UL. SunTile® is designed to be
incorporated by production home builders into the construction of their new
homes.
Ground Mounted SunPower® Tracker Systems
We offer
several types of ground-mounted solar power systems using our PowerTracker®
technology, now referred to as SunPower® Tracker. SunPower® Tracker is a
single-axis tracking system that automatically pivots solar panels to track the
sun’s movement throughout the day. We believe this tracking feature increases
the amount of sunlight that is captured and converted into energy by up to 30%
over flat or fixed-tilt systems depending on geographic location and local
climate conditions. A single motor and drive mechanism can control 10 to 20
rows, or more than 200 kilowatts of solar panels. The multi-row feature
represents a cost advantage for our customers over dual axis tracking systems,
as such systems require more motors, drives, land, and power to operate per
kilowatt of capacity. The SunPower® Tracker system can be assembled onsite, and
is easily scalable. We have installed ground-mounted systems integrating
SunPower® Tracker in a wide range of geographical markets including Arizona,
California, Hawaii, Nevada, New Jersey, Germany, Portugal, Spain and South
Korea.
Fixed Tilt and SunPower® Tracker Systems for Parking
Structures
We have
developed and patented several designs for solar power systems for parking
structures in multiple configurations. These dual use systems typically
incorporate solar panels into the roof of a carport or similar structure to
deliver onsite solar power while providing shade and protection. Aesthetically
pleasing, standardized and scalable, they are well suited for parking lots
adjacent to facilities. In addition, we have incorporated our SunPower® Tracker
technology into certain of our systems for elevated parking structures to
provide a differentiated product offering to our customers.
Other
System Offerings
We have
other products that leverage our core systems. For example, our metal roof
system is designed for sloped-metal roof buildings, which are used in some
winery and warehouse applications. This solar power system is designed for rapid
installation. We also offer other architectural products such as day lighting
with translucent solar panels.
Balance
of System Components
“Balance
of system components” are components of a solar power system other than the
solar panels, and include SunPower branded inverters, mounting structures,
charge controllers, grid interconnection equipment and other devices depending
upon the specific requirements of a particular system and project.
Client
Services Sold Through Our Systems Segment
We
provide our customers and partners with a variety of services, including system
design, energy efficiency, financial consulting and analysis, construction
management and maintenance and monitoring.
System
Design
We design
solar power systems taking into account the customer’s location, site conditions
and energy needs. During the preliminary design phase, we conduct a site audit
and building assessment for onsite generation feasibility and identify energy
efficiency savings opportunities. We model the performance of a proposed system
design taking into account variables such as local weather patterns, utility
rates and other relevant factors at the customer’s location. We also identify
necessary permits and design our systems to comply with applicable building
codes and other regulations.
Financial
Consulting and Analysis
We offer
financial consulting services to our customers and assist them in developing
funding strategies for solar power projects depending on a customer’s size, cash
flow and tax status. We have partnered with many financial companies and
organizations which provide project development financing and bonding for our
customers. To date, we have successfully arranged financing for clients ranging
from simple loans and tax-advantaged operating leases to long-term, multi-party
power purchase agreements.
Construction
Management
We offer
general contracting services and employ project managers to oversee all aspects
of system installation, including securing necessary permits and approvals.
Subcontractors, typically electricians and roofers, usually provide the
construction labor, tools and heavy equipment for solar system installation. We
have developed relationships with subcontractors in many target markets, and
require subcontractors to be licensed, carry appropriate insurance and adhere to
the local labor and payroll requirements. Our construction management services
include system testing, commissioning and management of utility network
interconnection.
Maintenance
and Monitoring
We also
offer post-installation services in support of our solar power systems,
including:
Operations
and Maintenance: Our systems have a design life in excess of 25 years. We
typically provide our customers with a one-, two-, five- or ten-year parts and
workmanship system warranty, after which the customer may extend the period
covered by our warranty for an additional fee. We also pass through to customers
long-term warranties from the original equipment manufacturers, or OEMs, of
certain system components. Warranties of 20 years from solar panel suppliers are
standard, while inverters typically carry a two-, five- or ten-year warranty. We
offer our customers a comprehensive suite of solar power system maintenance
services ranging from preventive maintenance to rapid-response outage
restoration and inverter repair. Our Standard Service Agreement includes
continuous remote monitoring, system performance reports, and a 24/7 technical
support line. Our Plus Level Service Agreement includes all of the Standard
Service features plus on-site preventive and corrective maintenance using
regionally-located field service technicians.
Monitoring:
We have developed a proprietary set of advanced monitoring applications built
upon the leading electric utility real-time monitoring platform. The monitoring
service continuously scans the operational status and performance of the solar
system and automatically identifies system outages and performance deficiencies
to our 24/7 monitoring technicians. If the monitoring technicians cannot
identify the cause of the problem within a predetermined response time, the
issue is escalated to our performance engineers for further analysis and
diagnostics. If the performance engineers cannot resolve the problem within the
service response time, the issue is escalated to our field service team to
resolve the problem at our customer’s facility. Customers can access historical
or daily system performance data through our customer website (www.sunpowermonitor.com).
Some customers choose to install electronic kiosks for flat-panel displays to
track performance information at their facility. We believe these displays
enhance our brand and educate the public and prospective customers about solar
power.
In 2008
we released the SunPower Monitoring System designed primarily for residential
customers. This system enables residential customers to view their daily,
monthly and annual solar energy production remotely via a web interface as well
as in their home with a dedicated display.
Energy
Efficiency Consulting and Related Services Sold Through Our Systems
Segment
In
addition to our solar power systems, we provide related energy efficiency
services designed to increase the total return on investment through an
integrated, seamless solution. We provide custom solar power generation and
demand side management solutions to minimize facility energy use and demand,
improve building operation controls and increase the comfort level of building
occupants.
Corporate
History
We were
originally incorporated in California in April 1985 by Dr. Richard Swanson
to develop and commercialize high-efficiency solar cell technologies. Cypress
Semiconductor Corporation, or Cypress, made a significant investment in SunPower
in 2002. In November 2004, Cypress acquired 100% ownership of all
outstanding shares of our capital stock, excluding unexercised warrants and
options. In November 2005, we reincorporated in Delaware, created two
classes of common stock and held the initial public offering, or IPO, of class A
common stock. After completion of our IPO, Cypress held all the outstanding
shares of our class B common stock. On September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock, in the
form of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock. As a result, our class B common stock now trades publicly
and is listed on the Nasdaq Global Select Market, along with our class A common
stock.
Research
and Development
We engage
in extensive research and development efforts to improve solar cell efficiency,
enhance our Systems Segment products and reduce manufacturing cost and
complexity. Our research and development organization works closely with our
manufacturing facilities, our equipment suppliers and our customers to improve
our solar cell design and to lower cell, panel and system product manufacturing
and assembly costs. In addition, we have dedicated employees who work closely
with our current and potential suppliers of crystalline silicon, a key raw
material used in the manufacture of our solar cells, to develop specifications
that meet our standards and ensure the high quality we require, while at the
same time controlling costs.
We have
government contracts that enable us to more rapidly develop new technologies and
pursue additional research opportunities while helping to offset our research
and development expense. In the third quarter of 2007, we signed a Solar America
Initiative research and development agreement with the U.S. Department of Energy
in which we were awarded $10.8 million in the first budgetary period. Total
funding for the three-year effort is estimated to be $24.9 million. Our cost
share requirement under this program, including lower-tier subcontract awards,
is anticipated to be $28.1 million. Payments received under these contracts
offset our research and development expense by approximately 25%, 21% and 8% in
fiscal 2008, 2007 and 2006, respectively. Our research and development
expenditures, net of payments received under these contracts, were approximately
$21.5 million, $13.6 million and $9.7 million for fiscal 2008, 2007 and 2006,
respectively.
For more
information about these grants, including the government’s limited rights to use
technology developed as a result of such grants, please see “Item 1A: Risk Factors”
including “–Our reliance on
government programs to partially fund our research and development programs
could impair our ability to commercialize our solar power products and
services.”
Manufacturing
The solar
cell value chain starts with high purity silicon called polysilicon. Polysilicon
is created by refining quartz or sand. Polysilicon is melted and grown into
crystalline ingots by companies specializing in ingot growth, such as our joint
venture located in South Korea named Woongjin Energy Co., Ltd, or Woongjin
Energy. The ingots are sliced and the wafers are processed into solar cells in
our own manufacturing facilities and in a joint venture named First Philec Solar
Corporation, or First Philec Solar, located in the Philippines, and by other
vendors. We also purchase wafers and polysilicon from third-party vendors on a
purchase order or contract basis.
We
manufacture our solar cells through our subsidiary, SunPower Philippines
Manufacturing Limited, in two facilities located near Manila in the Philippines.
Our first facility, or FAB1, has 215,000 square feet and began operations in the
fall of 2004. We currently operate four solar cell manufacturing lines, with a
total rated manufacturing capacity of 108 megawatts per year at this FAB1. In
August 2006, we purchased a 344,000 square foot building in the Philippines, or
FAB2. This building is approximately 20 miles from FAB1 and was constructed to
house up to twelve solar cell manufacturing lines. FAB2 began operations in the
summer of 2007 and we currently operate eight solar cell manufacturing lines,
with a total rated manufacturing capacity of 306 megawatts per year at this
FAB2. By the end of 2009, we plan to operate 16 solar cell manufacturing lines
in total with an aggregate manufacturing capacity of 574 megawatts per year. In
addition, 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.
We
manufacture our solar panels at our solar panel assembly facility located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate seven solar panel manufacturing
lines with a rated manufacturing capacity of 210 megawatts of solar panels per
year.
Over the
past 15 years, we have developed a core competency in processing thin silicon
wafers. This proprietary semiconductor processing expertise involves specialized
equipment and facilities that we believe allow us to process thin wafers while
minimizing breakage and accurately controlling the effect of metallic
contaminants and other non-desirable process conditions.
We source
the balance of system components based on quality, performance and cost
considerations using solar cells and solar panels supplied internally as well as
from other third-party suppliers. We generally assemble proprietary components,
such as cementitious coatings and certain adhesive applications, while we
purchase generally available components from third-party suppliers. Certain of
our products, such as our PowerGuard® and SunTile® products, are assembled at
our or a third-party contractor’s assembly plant prior to shipment to the
project location. Other products such as our SunPower® Tracker and SunPower®
T-10 commercial roof tiles are field assembled with components shipped directly
from suppliers. We currently have the capacity to produce up to an aggregate of
twenty megawatts of our PowerGuard® and SunTile® products per year, depending on
product mix, in our California assembly plant or third-party contractor’s
assembly plant.
Supplier
Relationships
Crystalline
silicon is the leading commercial material for solar cells and is used in
several forms, including single-crystalline, or monocrystalline silicon,
multicrystalline, or polycrystalline silicon, ribbon and sheet silicon and
thin-layer silicon. We believe our supplier relationships and various short- and
long-term contracts will afford us the volume of material required to meet our
planned output. For more information about risks related to our crystalline
silicon, please see “Item 1A:
Risk Factors” including “– Limited competition among suppliers
has required us in some instances to enter into long-term, firm commitment
supply agreements that could result in excess or insufficient inventory and
place us at a competitive disadvantage.”
With
respect to suppliers for our Components Segment, we purchase polysilicon,
silicon ingots, inverters, solar panels and a balance of system components on
both a contracted and a purchase order basis. We have contracted with some of
our suppliers for multi-year supply agreements. Under such agreements, we have
annual minimum purchase obligations and in certain cases prepayment
obligations.
With
respect to suppliers for our Systems Segment, we are able to utilize solar
panels from various manufacturers depending on power, performance and cost
requirements for our construction projects. We historically partnered, and
intend to continue to partner, with solar cell and panel manufacturers that
offer the most advanced solar panel technologies and the highest quality
products.
Customers
Components
Customers
We
currently sell our solar power products to installers and resellers, including
our global dealer network. We sell our products in North America, Europe, Asia
and Australia, principally in regions where government incentives have
accelerated solar power adoption. We currently work with a number of customers
who have specific expertise and capabilities in a given market segment or
geographic region. As we expand our manufacturing capacity, we anticipate
developing additional customer relationships in other markets and geographic
regions to continue to decrease our customer concentration and
dependence.
We have four
components customers that each accounted for more than 10 percent of our total
revenue in fiscal 2006, and less than 10 percent of our total revenue in both
fiscal 2008 and 2007 as follows:
|
Year Ended
|
||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||
|
Significant
components customers:
|
||||||
|
Conergy
AG
|
*
|
*
|
25%
|
|||
|
Solon
AG
|
*
|
*
|
24%
|
|||
|
PowerLight**
|
n.a.
|
n.a.
|
16%
|
|||
|
General
Electric Company***
|
*
|
*
|
10%
|
|||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
International
sales comprise the majority of components revenue and represented approximately
67%, 64% and 68% of components revenue in fiscal 2008, 2007 and 2006,
respectively. We anticipate that a significant amount of our total revenue will
continue to be generated by sales to customers outside the United States. A
significant portion of our sales are denominated in Euros and we have entered
into foreign currency forward exchange and option contracts to protect against
an unfavorable U.S. dollar versus the Euro exchange rate. For more information
about risks related to currency fluctuations, please see “Item 1A: Risk Factors”
including “– We have significant international
activities and customers, and plan to continue these efforts, which subject us
to additional business risks, including logistical complexity and political
instability.” A table providing total revenue by geography for the
last three fiscal years is found in Note 17 to Consolidated Financial Statements
in "Item 8: Financial
Statements and Supplementary Data."
Systems
Customers
Our
systems customers include commercial and governmental entities, investors,
utilities, production home builders and home owners. We work with construction,
system integration and financing companies to deliver our solar power systems to
the end-users of electricity. In the United States, we often work with financing
companies that purchase solar power systems from us, and then sell solar
electricity generated from these systems under power purchase agreements to
end-users. Under power purchase agreements, the end-users typically pay the
financing companies over an extended period of time based on energy they consume
from the solar power systems, rather than paying for the full capital cost of
purchasing the solar power systems. Worldwide, more than 500 SunPower solar
power systems are commissioned or in construction, rated in the aggregate at
more than 400 megawatts of peak capacity. In addition, our new homes division
and our dealer network have deployed thousands of SunPower rooftop solar systems
to residential customers. We have solar power system projects completed or in
the process of being completed in various countries, including Germany, Italy,
Portugal, South Korea, Spain and the United States.
We
have two systems customers that each accounted for more than 10 percent of
our total revenue in each of fiscal 2008 and 2007 as follows:
|
Year Ended
|
|||||
|
December
28,
2008
|
December
30,
2007
|
||||
|
Significant
systems customers:
|
|||||
|
Naturener
Group
|
18%
|
*
|
|||
|
Sedwick
Corporate, S.L.
|
11%
|
*
|
|||
|
SolarPack
|
*
|
18%
|
|||
|
MMA
Renewable Ventures
|
*
|
16%
|
|||
|
*
|
denotes
less than 10% during the period
|
Domestic
and international systems sales represented approximately 38% and 62%,
respectively, of our systems revenue in fiscal 2008 and 51% and 49%,
respectively, of our systems revenue in fiscal 2007. Installations in California
and Spain accounted for 34% and 54%, respectively, of our systems revenue for
fiscal 2008. Installations in California, Nevada and Spain accounted for 24%,
22% and 46%, respectively, of our systems revenue for fiscal 2007. In June and
July 2008, we energized several large-scale solar power plants in Spain rated at
over 40 megawatts in the aggregate. In December 2007, we completed the
construction of an approximately 14 megawatt solar power plant at Nellis Air
Force Base in Nevada that currently represents our largest installed solar power
project in North America.
Marketing
and Sales
We market
and sell solar electric power technologies worldwide both through a direct sales
force and resellers, including our global dealer network. We have direct sales
personnel or representatives in Australia, Germany, Italy, Korea, Singapore,
Spain, Switzerland and the United States. And during fiscal 2008, we tripled the
size of our dealer network by adding more than 350 dealers worldwide.
Approximately 69%, 85% and 73% of our total revenue for fiscal 2008, 2007 and
2006, respectively, were derived through our direct sales force and sales
affiliates, with the remainder from resellers. We provide warranty coverage on
systems we sell through our direct sales force, sales affiliates and resellers.
To the extent we sell through resellers, we may provide system design and
support services while the resellers are responsible for construction,
maintenance and service.
Our
marketing programs include conferences and technology seminars, sales training,
public relations and advertising. Our marketing group is also responsible for
driving many qualified leads to support our sales teams lead generation efforts,
assessing the productivity of our lead pipeline, and measuring
marketing-generated leads to closed sales. We support our customers through our
field application engineering and customer support organizations. We have
marketing staff in San Jose and Richmond, California, United States, as well as
in Geneva, Switzerland. Please see Note 17 of Notes to our Consolidated
Financial Statements for information regarding our revenue by geographic
region.
Backlog
Components
Segment: Our solar cell, solar panel and inverter sales within the
Components Segment are typically ordered by customers under standard purchase
orders with relatively short delivery lead-times, generally within one to three
months. We have entered into long-term supply agreements with certain customers
that contain minimum firm purchase commitments. However, specific products that
are to be delivered and the related delivery schedules under these long-term
contracts are generally subject to revision by our customers.
Systems
Segment: Our systems revenue is primarily comprised of engineering,
procurement and construction, or EPC, projects which are governed by customer
contracts that require us to deliver functioning solar power systems. EPC
projects are generally completed within 6 to 36 months from the date of the
contract signing. In addition, our Systems Segment also derives revenue from
sales of certain solar power products and services that are smaller in scope
than an EPC project. Our Systems Segment backlog represents the uncompleted
portion of contracted and financed projects. For example, we have more than one
gigawatt of contingent customer orders, including our contract with PG&E to
design and build a 250 megawatt solar power plant in California. However,
this contract is contingent and is not yet a financed project, therefore, it is
excluded from backlog as of December 28, 2008. Our contract with FPL to
design and build two solar photovoltaic power plants totaling 35 megawatts in
Florida is a financed project and is included in backlog as of December 28,
2008. Our EPC
projects and contracts in our new homes group are often cancelable by our
customers under certain situations. In addition, systems project revenue
and related costs are often subject to delays or scope modifications based on
change orders agreed to with our customers, or changes in the estimated
construction costs to be incurred in completing the project.
Management
believes that backlog at any particular date is not necessarily a meaningful
indicator of future revenue for any particular period of time because our
backlog excludes contracts signed and completed in the same quarter and
contracts still subject to obtaining project financing. Backlog totaled
approximately $1,144 million and $778 million as of December 28, 2008 and
December 30, 2007, respectively. Approximately $450 million of our backlog at
December 28, 2008 is currently planned to be recognized as revenue during fiscal
2009.
Competition
The
market for solar electric power technologies is competitive and continually
evolving. We expect to face increased competition, which may result in price
reductions, reduced margins or loss of market share. Our solar power products
compete with a large number of competitors in the solar power market, including,
but not limited to, Evergreen Solar, Inc., First Solar, Inc., Q-Cells AG, Sanyo
Corporation, Sharp Corporation and Suntech Power Holdings Co., Ltd. We may also
face competition from some of our resellers, who may develop products internally
that compete with our product and service offerings, or who may enter into
strategic relationships with or acquire other existing solar power system
providers. To the extent that government funding for research and development
grants, customer tax rebates and other programs that promote the use of solar
and other renewable forms of energy are limited, we compete for such funds, both
directly and indirectly, with other renewable energy providers and
customers.
In
addition, universities, research institutions and other companies have brought
to market alternative technologies such as thin films and concentrators, which
compete with our technology in certain applications. Furthermore, the solar
power market in general competes with conventional fossil fuels supplied by
utilities and other sources of renewable energy such as wind, hydro,
biomass, concentrated solar power and emerging distributed generation
technologies such as micro-turbines, sterling engines and fuel cells. We believe
solar power has certain advantages when compared to these other power generating
technologies and offers a stable power price compared to utility network power,
which typically increases as fossil fuel prices increase. In addition, solar
power systems are deployed in many sizes and configurations and do not produce
air, water and noise emissions. Most other distributed generation technologies
create environmental impacts of some sort. The current high up-front cost of
solar relative to utility network power, however, is the primary market barrier
for on-grid applications.
In the
large-scale on-grid solar power systems market, we face direct competition from
a number of companies, including those that manufacture, distribute, or install
solar power systems as well as construction companies that have expanded into
the renewable sector. In addition, we will occasionally compete with distributed
generation equipment suppliers.
We
believe that the key competitive factors in the market for solar cells and solar
panels include:
|
|
•
|
levelized
cost of energy, or LCOE, an evaluation of the life-cycle energy costs and
life-cycle energy production;
|
|
|
•
|
power
efficiency and performance;
|
|
|
•
|
price;
|
|
|
•
|
aesthetic
appearance of solar cells and
panels;
|
|
|
•
|
strength
of distribution relationships; and
|
|
|
•
|
timeliness
of new product introductions.
|
The
principal elements of competition in the solar systems market include technical
expertise, experience, delivery capabilities, diversity of product offerings,
financing structures, marketing and sales, price, product performance, quality,
efficiency and reliability, and technical service and support. We believe that
we compete favorably with respect to each of these factors, although we may be
at a disadvantage in comparison to larger companies with broader product lines
and greater technical service and support capabilities and financial resources.
For more information about risks related to our competition, please see “Item 1A: Risk Factors”
including “– If we fail to successfully develop
and introduce new and enhanced products and services, we may not be able to
compete effectively, and our ability to generate revenues will
suffer.”
Intellectual
Property
We rely
on a combination of patent, copyright, trade secret, trademark and contractual
protections to establish and protect our proprietary rights. “SunPower” is our
registered trademark in countries throughout the world for use with solar cells,
solar panels and mounting systems. We also hold registered trademarks for
PowerLight®, PowerGuard®, PowerTracker® and SunTile® in certain countries. We
are seeking and will continue to seek registration of the “SunPower” trademark
and other trademarks in additional countries as we believe is appropriate. We
require our customers to enter into confidentiality and nondisclosure agreements
before we disclose any sensitive aspects of our solar cells, technology or
business plans, and we typically enter into proprietary information agreements
with employees and consultants.
Although
we apply for patents to protect our technology, our revenue is not dependent on
any particular patent we own. We currently own multiple patents and patent
applications which cover aspects of the technology in the solar cells and
mounting systems that we currently manufacture and market. Material patents that
relate to our systems products and services primarily relate to our rooftop
mounting products and ground-mounted tracking products. The remaining lifetimes
of such patents range from one to twenty years. We intend to continue assessing
appropriate opportunities for patent protection of those aspects of our
technology, designs, and methodologies and processes that we believe provide
significant competitive advantages to us, and for licensing opportunities of new
technologies relevant to our business. We additionally rely on trade secret
rights to protect our proprietary information and know-how. We employ
proprietary processes and customized equipment in our manufacturing
facilities.
For more
information about risks related to our intellectual property, please see “Item 1A: Risk Factors”
including “– We are
dependent on our intellectual property, and we may face intellectual property
infringement claims that could be time-consuming and costly to defend and could
result in the loss of significant rights.” and “– We rely substantially upon trade
secret laws and contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to compete and
generate revenue could suffer.” and “– We may not obtain sufficient
patent protection on the technology embodied in the solar cells or solar system
components we currently manufacture and market, which could harm our competitive
position and increase our expenses.”
Public
Policy Considerations
Different
policy mechanisms have been used by governments to accelerate the adoption of
solar power. Examples of customer-focused financial mechanisms include capital
cost rebates, performance-based incentives, feed-in tariffs, tax credits and net
metering. Capital cost rebates provide funds to customers based on the cost and
size of a customer’s solar power system. Performance-based incentives
provide funding to a customer based on the energy produced by their solar
system. Feed-in tariffs pay customers for solar power system generation based on
kilowatt-hours produced, at a rate generally guaranteed for a period of time.
Tax credits reduce a customer’s taxes at the time the taxes are due. In the
United States and other countries, net metering has often been used as a
supplemental program in conjunction with other policy mechanisms. Under net
metering, a customer can generate more energy than used, during which periods
the electricity meter will spin backwards. During these periods, the customer
“lends” electricity to the grid, retrieving an equal amount of power at a later
time. Net metering encourages customers to size their systems to match their
electricity consumption over a period of time, such as monthly or annually,
rather than limiting solar generation to matching customers’ instantaneous
electricity use.
In
addition to the mechanisms described above, new market development mechanisms to
encourage the use of renewable energy sources continue to emerge. For example,
many states in the United States have adopted renewable portfolio standards
which mandate that a certain portion of electricity delivered to customers come
from a set of eligible renewable energy resources. In certain developing
countries, governments are establishing initiatives to expand access to
electricity, including initiatives to support off-grid rural electrification
using solar power. For more information about risks related to public policies,
please see “Item 1A: Risk
Factors” including “– Existing regulations and policies
and changes to these regulations and policies may present technical, regulatory
and economic barriers to the purchase and use of solar power products, which may
significantly reduce demand for our products and services.”
Environmental
Regulations
We use,
generate and discharge toxic, volatile or otherwise hazardous chemicals and
wastes in our research and development, manufacturing and construction
activities. We are subject to a variety of foreign, federal, state and local
governmental laws and regulations related to the purchase, storage, use and
disposal of hazardous materials.
We
believe that we have all environmental permits necessary to conduct our business
and expect to obtain all necessary environmental permits for FAB3 and future
construction activities. We believe that we have properly handled our hazardous
materials and wastes and have appropriately remediated any contamination at any
of our premises. We are not aware of any pending or threatened environmental
investigation, proceeding or action by foreign, federal, state or local
agencies, or third-parties involving our current facilities. Any failure by us
to control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to substantial financial liabilities, operational
interruptions and adverse publicity, any of which could materially and adversely
affect our business, results of operations and financial condition.
Employees
As of
December 28, 2008, we had approximately 5,400 employees worldwide,
including approximately 540 employees located in the United States, 4,710
employees located in the Philippines and 150 employees located in other
countries. Of these employees, approximately 4,460 were engaged in
manufacturing, 150 employees in construction projects, 150 employees in research
and development, 470 employees in sales and marketing and 170 employees in
general and administrative. None of our employees are covered by a collective
bargaining agreement. We have never experienced a work stoppage and we believe
relations with our employees are good.
Available
Information
We make
available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 free of charge on our website at www.sunpowercorp.com, as soon as
reasonably practicable after they are electronically filed or furnished to the
Securities and Exchange Commission, or the SEC. Additionally, copies of
materials filed by us with the SEC may be accessed at the SEC’s Public Reference
Room at 100 F Street NE, Washington, D.C. or at the SEC’s website at
http://www.sec.gov. For information about the SEC’s Public Reference Room, the
public may contact 1-800-SEC-0330. Copies of material filed by us with the SEC
may also be obtained by writing to us at our corporate headquarters, SunPower
Corporation, Attention: Investor Relations, 3939 North First Street,
San Jose, California 95134, or by calling (408) 240-5500. The contents of our
website are not incorporated into, or otherwise to be regarded as a part of,
this Annual Report on Form 10-K.
ITEM 1A:
RISK
FACTORS
Our
operations and financial results are subject to various risks and uncertainties,
including risks related to our supply chain, sales channels including
availability of project financing, liquidity, operations, intellectual property,
and our debt and equity securities. Although we believe that we have identified
and discussed below the key risk factors affecting our business, there may be
additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may also adversely affect our
business, financial condition, results of operations, cash flows, and trading
price of our class A and class B common stock as well as our 1.25%
debentures and 0.75% debentures.
Risks
Related to Our Supply Chain
We
will continue to be dependent on a limited number of third-party suppliers for
certain raw materials and components for our products, which could prevent us
from delivering our products to our customers within required timeframes, which
could result in sales and installation delays, cancellations, liquidated damages
and loss of market share.
We rely
on a limited number of third-party suppliers for certain raw materials and
components for our solar cells and power systems such as polysilicon and
inverters. If we fail to develop or maintain our relationships with our limited
suppliers, we may be unable to manufacture our products or our products may be
available only at a higher cost or after a long delay, which could prevent us
from delivering our products to our customers within required timeframes and we
may experience order cancellation and loss of market share. To the extent the
processes that our suppliers use to manufacture components are proprietary, we
may be unable to obtain comparable components from alternative suppliers. In
addition, the current economic environment and credit markets could limit our
suppliers’ ability to raise capital if required to expand their production or
satisfy their operating capital requirements. As a result, they could be
unable to supply necessary raw materials, inventory and capital equipment to us
which we would require to support our planned sales operations which would in
turn negatively impact our sales volumes and cash flows. The failure of a
supplier to supply raw materials or components in a timely manner, or to supply
raw materials or components that meet our quality, quantity and cost
requirements, could impair our ability to manufacture our products or increase
their costs. If we cannot obtain substitute materials or components on a timely
basis or on acceptable terms, we could be prevented from delivering our products
to our customers within required timeframes, which could result in sales and
installation delays, cancellations, liquidated damages and loss of market share,
any of which could have a material adverse effect on our business and results of
operations.
As
polysilicon supply increases, the corresponding increase in the global supply of
solar cells and panels may cause substantial downward pressure on the prices of
such products, resulting in lower revenues and earnings.
The
scarcity of polysilicon during the past few years has resulted in the
underutilization of solar panel manufacturing capacity at many competitors or
potential competitors, particularly in China. If additional polysilicon
becomes available in the market over the next two years, solar panel production
globally could increase. Decreases in polysilicon pricing and increases in
solar panel production could each result in substantial downward pressure on the
price of solar cells and panels, including SunPower products. Such price
reductions could have a negative impact on our revenue and earnings, and
materially adversely affect our business and financial condition.
Limited
competition among suppliers has required us in some instances to enter into
long-term, firm commitment supply agreements that could result in excess or
insufficient inventory and place us at a competitive disadvantage.
Due to
the industry-wide shortage of polysilicon experienced during the past few years,
we have purchased polysilicon that we resell to third-party ingot and wafer
manufacturers who deliver wafers to us that we then use in the manufacturing of
our solar cells. Without sufficient polysilicon, some of those ingot and wafer
manufacturers would not be able to produce the wafers on which we rely. To match
our estimated customer demand forecasts and growth strategy for the next several
years, we have entered into multiple long-term supply agreements. Some
agreements provide for fixed or inflation-adjusted pricing, substantial
prepayment obligations, and firm purchase commitments that require us to pay for
the supply whether or not we accept delivery. If such agreements require us to
purchase more polysilicon, ingots or wafers than required to meet our actual
customer demand over time, the resulting excess inventory could materially and
negatively impact our results of operations. In addition, if the prices under
our long-term supply agreements result in our paying more for such supplies than
the current market prices available to our competitors, we may also be placed at
a competitive disadvantage, and our revenues could decline. However, if our
agreements provide insufficient inventory to meet customer demand, or if our
suppliers are unable or unwilling to provide us with the contracted quantities,
we may purchase additional supply at available market prices which could be
greater than expected and could materially and negatively impact our results of
operations. Such market prices could also be greater than prices paid by our
competitors, placing us at a competitive disadvantage and leading to a decline
in our revenue. Further, we face significant specific counterparty risk under
long-term supply agreements when dealing with suppliers without a long, stable
production and financial history. In the event any such supplier experiences
financial difficulties, it may be difficult or impossible, or may require
substantial time and expense, for us to recover any or all of our prepayments.
Any of the foregoing could materially harm our financial condition and results
of operations.
If
third-party manufacturers become unable or unwilling to sell their solar cells
and panels to us as a direct competitor in some markets, our business and
results of operations may be materially negatively affected.
We plan
to purchase a portion of our total product mix from third-party manufacturers of
solar cells and panels. Such products increase our inventory available for
sale to systems customers in some markets. However, such manufacturers may
be our direct competitors. If they are unable or unwilling to sell to us,
we may not have sufficient products available to sell to systems customers and
satisfy our sales commitments, thereby materially and negatively affecting our
business and results of operations.
Risks
Related to Our Sales Channels
The
execution of our growth strategy is dependent upon the continued availability of
third-party financing arrangements for our customers, and is affected by general
economic conditions.
The
general economy and limited availability of credit and liquidity could
materially and adversely affect our business and results of operations. Many
purchasers of our systems projects have entered into third-party arrangements to
finance their systems over an extended period of time while many end-customers
have chosen to purchase solar electricity under a power purchase agreement, or
PPA, with a financing company that purchases the system from us or our
authorized dealers. In addition, under our power purchase business model, we
often execute PPAs directly with the end-user customer purchasing solar
electricity, with the expectation that we will later assign the PPA to a
financier. Under such arrangements, the financier separately contracts with
us to build and acquire the solar system, and then sells the electricity to the
end-user customer under the assigned PPA. When executing PPAs with the
end-user customers, we seek to mitigate the risk that a financier will not be
available for the project by allowing termination of the PPA in such event
without penalty. However, we may not always be successful in negotiating
for penalty-free termination rights for failure to secure financing, and certain
end-user customers have required substantial financial penalties in exchange for
such rights. These structured finance arrangements are complex and may not be
feasible in many situations.
Due to
the general reduction in available credit to would-be borrowers and the poor
state of economies worldwide, customers may be unable or unwilling to finance
the cost of our products, or the parties that have historically provided this
financing may cease to do so, or only do so on terms that are substantially less
favorable for us or our customers, any of which could materially and adversely
affect our revenue and growth in all segments of our business. If economic
recovery is slow in the United States or elsewhere, we may experience decreases
in the demand for our solar power products, which may harm our operating
results. In addition, a rise in interest rates would likely increase our
customers’ cost of financing our products and could reduce their profits and
expected returns on investment in our products. Similarly, the general reduction
in available credit to would-be borrowers, the poor state of economies
worldwide, and the condition of housing markets worldwide, could delay or reduce
our sales of products to new homebuilders and authorized resellers. Collecting
payment from customers facing liquidity challenges may also be
difficult.
The
reduction, modification or elimination of government and economic incentives
could cause our revenue to decline and harm our financial results.
The
market for on-grid applications, where solar power is used to supplement a
customer’s electricity purchased from the utility network or sold to a utility
under tariff, depends in large part on the availability and size of government
mandates and economic incentives because, at present, the cost of solar power
exceeds retail electric rates in many locations. Such incentives vary by
geographic market. Various government bodies in many countries, most notably
Spain, the United States, Germany, Italy, South Korea, Canada, Japan, Portugal,
Greece, France and Australia, have provided incentives in the form of feed-in
tariffs, rebates, tax credits, renewable portfolio standards, and other
incentives and mandates to end-users, distributors, system integrators and
manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. Some of
these government mandates and economic incentives are scheduled to be reduced or
to expire, or could be eliminated altogether. Because our sales are into the
on-grid market, the reduction, modification or elimination of government
mandates and economic incentives in one or more of our customer markets would
materially and adversely affect the growth of such markets or result in
increased price competition, either of which could cause our revenue to decline
and harm our financial results.
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our products and
services.
The
market for electricity generation products is heavily influenced by federal,
state and local government regulations and policies concerning the electric
utility industry in the U.S. and abroad, as well as policies promulgated by
electric utilities. These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned electricity generation,
and could deter further investment in the research and development of
alternative energy sources as well as customer purchases of solar power
technology, which could result in a significant reduction in the potential
demand for our solar power products. We anticipate that our solar power products
and their installation will continue to be subject to oversight and regulation
in accordance
- 12
-
with
federal, state and local regulations relating to construction, safety,
environmental protection, utility interconnection and metering, and related
matters. It is difficult to track the requirements of individual states and
design equipment to comply with the varying standards. Any new regulations or
policies pertaining to our solar power products may result in significant
additional expenses to us, our resellers and resellers’ customers, which could
cause a significant reduction in demand for our solar power
products.
We
may incur unexpected warranty and product liability claims that could materially
and adversely affect our financial condition and results of
operations.
In our
Components Segment, our current standard product warranty for our solar panels
includes a 10-year warranty period for defects in materials and workmanship and
a 20-year warranty period for declines in power performance as well as a
one-year warranty on the functionality of our solar cells. We believe our
warranty periods are consistent with industry practice. Due to the long warranty
period, we bear the risk of extensive warranty claims long after we have shipped
product and recognized revenue. Although we conduct accelerated testing of our
solar cells and have several years of experience with our all-back-contact cell
architecture, our solar panels have not and cannot be tested in an environment
simulating the 20-year warranty period and it is difficult to test for all
conditions that may occur in the field. We have sold solar cells since late
2004.
In our
Systems Segment, our current standard warranty for our solar power systems
differs by geography and end-customer application and includes either a 1-, 2-
or 5-year comprehensive parts and workmanship warranty, after which the customer
may typically extend the period covered by its warranty for an additional fee.
While we generally pass through manufacturer warranties we receive from our
suppliers to our customers, we are responsible for repairing or replacing any
defective parts during our warranty period, often including those covered by
manufacturers’ warranties. If the manufacturer disputes or otherwise fails to
honor its warranty obligations, we may be required to incur substantial costs
before we are compensated, if at all, by the manufacturer. Furthermore, our
warranties may exceed the period of any warranties from our suppliers covering
components, such as inverters, included in our systems. Due to the long warranty
period, we bear the risk of extensive warranty claims long after we have
completed a project and recognized revenues.
Any
increase in the defect rate of our products would cause us to increase the
amount of warranty reserves and have a corresponding negative impact on our
results of operations. Further, potential future product failures could cause us
to incur substantial expense to repair or replace defective products, and we
have agreed to indemnify our customers and our distributors in some
circumstances against liability from defects in our solar cells. A successful
indemnification claim against us could require us to make significant damage
payments. Repair and replacement costs, as well as successful indemnification
claims, could materially and negatively impact our financial condition and
results of operations.
Like
other retailers, distributors and manufacturers of products that are used by
customers, we face an inherent risk of exposure to product liability claims in
the event that the use of the solar power products into which our solar cells
and solar panels are incorporated results in injury. We may be subject to
warranty and product liability claims in the event that our solar power systems
fail to perform as expected or if a failure of our solar power systems results,
or is alleged to result, in bodily injury, property damage or other damages.
Since our solar power products are electricity producing devices, it is possible
that our products could result in injury, whether by product malfunctions,
defects, improper installation or other causes. In addition, since we only began
selling our solar cells and solar panels in late 2004 and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether or not product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We have evaluated the potential risks we face and
believe that we have appropriate levels of insurance for product liability
claims. We rely on our general liability insurance to cover product liability
claims and have not obtained separate product liability insurance. However, a
successful warranty or product liability claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to
make significant payments of damages. In addition, quality issues can have
various other ramifications, including delays in the recognition of revenue,
loss of revenue, loss of future sales opportunities, increased costs associated
with repairing or replacing products, and a negative impact on our goodwill and
reputation, which could also adversely affect our business and operating
results.
If
we fail to successfully develop and introduce new and enhanced products and
services, we may not be able to compete effectively, and our ability to generate
revenues will suffer.
The solar
power market is characterized by continually changing technology requiring
improved features, such as increased efficiency and higher power output and
improved aesthetics. Technologies developed by our direct competitors, including
thin film solar panels, concentrating solar cells, solar thermal electric and
other solar technologies, may provide power at lower costs than our products. We
also face competition in some markets from other power generation sources,
including conventional fossil fuels, wind, biomass, and hydro. Our failure to
further refine our technology and develop and introduce new solar power products
could cause our products to become uncompetitive or obsolete, which could reduce
our market share and cause our sales to decline. This will require us to
continuously develop new solar power products and enhancements for existing
solar power products to keep pace with evolving industry standards, competitive
pricing and changing customer requirements. As we introduce new or enhanced
products or integrate new technology into our products, we will face risks
relating to such transitions
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including,
among other things, technical challenges, disruption in customers’ ordering
patterns, insufficient supplies of new products to meet customers’ demand,
possible product and technology defects arising from the integration of new
technology and a potentially different sales and support environment relating to
any new technology. Our failure to manage the transition to newer products or
the integration of newer technology into our products could adversely affect our
business’ operating results and financial condition.
A
limited number of customers are expected to continue to comprise a significant
portion of our revenues and any decrease in revenue from these customers could
have a significant adverse effect on us.
Even
though we expect our customer base to increase and our revenue streams to
diversify, a substantial portion of our net revenues could continue to depend on
sales to a limited number of customers and the loss of sales to or inability to
collect from these customers would have a significant negative impact on our
business. Our agreements with these customers may be cancelled if we fail to
meet certain product specifications or materially breach the agreement or in the
event of bankruptcy, and our customers may seek to renegotiate the terms of
current agreements or renewals. In addition, the failure by any significant
customer to pay for orders, whether due to liquidity issues or otherwise, could
materially and negatively affect our results of operations.
We
generally do not have long-term agreements with our customers and accordingly
could lose customers without warning, which could cause our operating results to
fluctuate.
In our
Components Segment, our solar cells and solar panel products are generally not
sold pursuant to long-term agreements with customers, but instead are sold on a
purchase order basis. In our Systems Segment, we typically contract to perform
large projects with no assurance of repeat business from the same customers in
the future. Although we believe that cancellations on our purchase orders to
date have been insignificant, our customers may cancel or reschedule purchase
orders with us on relatively short notice. Cancellations or rescheduling of
customer orders could result in the delay or loss of anticipated sales without
allowing us sufficient time to reduce, or delay the incurrence of, our
corresponding inventory and operating expenses. In addition, changes in
forecasts or the timing of orders from these or other customers expose us to the
risks of inventory shortages or excess inventory. These circumstances, in
addition to the completion and non-repetition of large systems projects,
variations in average selling prices, changes in the relative mix of sales of
components versus system products, and the fact that our supply agreements are
generally long-term in nature and many of our other operating costs are fixed,
in turn could cause our operating results to fluctuate and may result in a
material adverse effect in our business.
Our
Systems Segment could be adversely affected by seasonal trends and construction
cycles.
Our
Systems Segment is subject to significant industry-specific seasonal
fluctuations. Its sales have historically reflected these seasonal trends with
the largest percentage of total revenues being realized during the last two
calendar quarters. Low seasonal demand normally results in reduced shipments and
revenues in the first two calendar quarters. There are various reasons for this
seasonality, mostly related to economic incentives and weather patterns. For
example, in European countries with feed-in tariffs, the construction of solar
power systems may be concentrated during the second half of the
calendar year, largely due to the annual reduction of the applicable minimum
feed-in tariff and the fact that the coldest winter months are January through
March. In the United States, customers will sometimes make purchasing decisions
towards the end of the year in order to take advantage of tax credits or for
other budgetary reasons. In addition, sales in the new home development
market are often tied to construction market demands which tend to follow
national trends in construction, including declining sales during cold weather
months.
The competitive
environment in which our systems business operates often requires us to
undertake post-sale customer obligations, which could materially and adversely
affect our financial condition and results of operations if our post-sale
customer obligations are more costly than expected.
We are
often required as a condition of financing or at the request of our end customer
to undertake certain post-sale obligations such as:
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System
output performance guaranties;
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System
maintenance;
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Liquidated
damage payments or customer termination rights if the system we are
constructing is not commissioned within specified timeframes or other
construction milestones are not
achieved;
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Guaranties
of certain minimum residual value of the system at specified future dates;
and
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System
put-rights whereby we could be required to buy-back a customer’s system at
fair value on specified future
dates.
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Such
financing arrangements and post-sale obligations involve complex accounting
analyses and judgments regarding the timing of revenue and expense recognition
and in certain situations these factors may require us to defer revenue
recognition until projects are completed, which could adversely affect revenue
and profits in a particular period.
Risks
Related to Our Liquidity
Due
to the general economic environment and other factors, we may be unable to
generate sufficient cash flows or obtain access to external financing necessary
to fund our operations and make adequate capital investments as
planned.
We
anticipate that our expenses will increase substantially in the foreseeable
future. To develop new products, support future growth, achieve operating
efficiencies and maintain product quality, we must make significant capital
investments in manufacturing technology, facilities and capital equipment,
research and development, and product and process technology. We also anticipate
increased costs as we expand our manufacturing operations, hire additional
personnel, pay more or make advance payments for raw material, especially
polysilicon, increase our sales and marketing efforts, invest in joint
ventures and acquisitions, and continue our research and development
efforts with respect to our products and manufacturing technologies. We
expect total capital expenditures in the range of $350 million to $400
million in 2009 as we continue to increase our solar cell and solar panel
manufacturing capacity. These expenditures could be greater if we decide to
bring capacity on line more rapidly.
We
believe that our current cash and cash equivalents, cash generated from
operations, funds available under our facility agreement with the Malaysian
government, and, if necessary, borrowings under our credit agreement with Wells
Fargo Bank, N.A., or Wells Fargo, and/or potential availability of future
sources of funding will be sufficient to fund our capital and operating
expenditures over the next 12 months. The
uncollateralized revolving credit line and uncollateralized letter of credit
subfeature of the Wells Fargo credit agreement are scheduled to expire on July
3, 2009, and we are negotiating another amendment to further extend the
expiration date. If we do not agree to amend the credit agreement to futher
extend the deadline, all borrowings under the uncollateralized revolving credit
line must be repaid by July 3, 2009, and all letters of credit issued under the
uncollateralized letter of credit subfeature expire on or before July 3, 2009
unless we provide by such date collateral in the form of cash or cash
equivalents in the aggregate amount available to be drawn under letters of
credit outstanding at such time. Our cash flows from operations depend
primarily on the volume of components sold and systems installed, average
selling prices, per unit manufacturing costs and other operating
costs.
However,
if our financial results or operating plans change from our current assumptions,
or if the holders of our outstanding convertible debentures elect to convert the
debentures into cash or cash and shares of class A common stock, we may not have
sufficient resources to support our business plan or pay cash in connection with
the redemption of outstanding debentures. 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; although, the current economic environment could also limit our
ability to raise capital by issuing new equity or debt securities on acceptable
terms, and lenders may be unwilling to lend funds on acceptable terms that would
be required to supplement cash flows to support operations. Further,
following the spin-off of our shares by Cypress on September 29, 2008, our
ability to issue equity for financing purposes is subject to limits as described
in “Our agreements with
Cypress require us to indemnify Cypress for certain tax liabilities. These
indemnification obligations and related contractual restrictions may limit our
ability to obtain additional financing, participate in future acquisitions or
pursue other business initiatives.” We may also seek to sell assets,
reduce or delay capital investments, or refinance or restructure our
debt.
There can
be no assurance that we will be able to generate sufficient cash flows, find
other sources of capital or access capital markets to fund our operations and
projects, make adequate capital investments to remain competitive in terms of
technology development and cost efficiency. If adequate funds and alternative
resources are not available on acceptable terms, our ability to fund our
operations, develop and expand our manufacturing operations and
distribution network, maintain our research and development efforts or
otherwise respond to competitive pressures would be significantly impaired. Our
inability to do the foregoing could have a material adverse effect on our
business and results of operations.
If the recent
credit market conditions continue or worsen, they could have a material adverse
impact on our investment portfolio.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
During fiscal 2008, the net asset value of the Reserve Primary Fund and the
Reserve International Liquidity Fund fell below $1.00. We had $8.2 million
invested in the Reserve Funds on December 28, 2008, and we have estimated our
loss to be approximately $1.0 million based on an evaluation of the fair value
of the securities held by the Reserve Funds and the net asset value that was
last published by the Reserve Funds before the funds suspended
redemptions.
While we
expect to receive substantially all of our current holdings in the Reserve Funds
within the next nine months, it is possible we may encounter difficulties in
receiving distributions given the current credit market conditions. If market
conditions were to deteriorate even further such that the current fair value
were not achievable, we could realize additional losses in our holdings with the
Reserve Funds and distributions could be further delayed. There can be no
assurance that our other investments, particularly in this unfavorable market
and economic environment, will not face similar risks of loss.
Additionally,
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. Of the $26.1 million invested in
auction rate securities on December 28, 2008, we have estimated the loss to be
approximately $2.5 million and we recorded an impairment charge of $2.5
million in “Other, net” in our
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Consolidated
Statements of Operations thereby establishing a new cost basis of $23.6 million
for the auction rate securities. All five auction rate securities invested
in at December 28, 2008 have failed to clear at auctions. For failed auctions,
we continue to earn interest on these investments at the maximum contractual
rate as the issuer is obligated under contractual terms to pay penalty rates
should auctions fail. Even if we need to access these funds, we will not be able
to do so until a future auction is successful, the issuer redeems the
securities, a buyer is found outside of the auction process, or the securities
mature. If these auction rate securities are unable to successfully clear at
future auctions or issuers do not redeem the securities, we may be required to
further adjust the carrying value of the securities and record an impairment
charge which could materially adversely impact our results of operations and
financial condition.
If our
investment portfolio decreases in value or if we are unable to access funds held
as auction rate securities, we may have insufficient liquidity to fund our
planned operations and capital requirements, which may materially and negatively
affect our financial condition and results of operations.
Our
current tax holidays in the Philippines will expire within the next several
years.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registration with the Philippine Economic Zone
Authority, which provide that we pay no income tax in the Philippines. Our
current income tax holidays expire within the next several years beginning in
2010, and we intend to apply for extensions and renewals upon expiration.
However, these tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (a) gross income attributable to activities
covered by our Philippine Economic Zone Authority registrations will be taxed at
a 5% preferential rate, and (b) our Philippine net income attributable to
all other activities will be taxed at the statutory Philippine corporate income
tax rate, currently 32%. An increase in our tax liability could materially
and negatively affect our financial condition and results of
operations.
Because
we self-insure for certain indemnities we have made to our officers and
directors, potential claims could materially and negatively impact our financial
condition and results of operations.
Our
certificate of incorporation, by-laws and indemnification agreements require us
to indemnify our officers and directors for certain liabilities that may arise
in the course of their service to us. We primarily self-insure with respect to
potential indemnifiable claims. Although we have insured our officers and
directors against certain potential third-party claims for which we are legally
or financially unable to indemnify them, we intend to primarily self-insure with
respect to potential third-party claims which give rise to direct liability to
such third-party or an indemnification duty on our part. If we were required to
pay a significant amount on account of these liabilities for which we
self-insure, our business, financial condition and results of operations could
be materially harmed.
Our
substantial indebtedness and other contractual commitments could adversely
affect our business, financial condition and results of operations, as well as
our ability to meet any of our payment obligations under the debentures and our
other debt.
We
currently have a significant amount of debt and debt service requirements that
could have material consequences on our future operations,
including:
• making
it more difficult for us to meet our payment and other obligations under the
debentures and our other outstanding debt;
• resulting
in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default
could result in all of our debt becoming immediately due and
payable;
• reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes;
• subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new
credit facility;
• limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and
the general economy; and
• placing
us at a competitive disadvantage compared to our competitors that have less debt
or are less leveraged.
Any of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the debentures and our other debt. In addition, we also have
significant contractual commitments for the purchase of polysilicon, some of
which involve prepayments, and we may enter into additional, similar long-term
supply agreements in the future. Further, if the holders of our outstanding
debentures convert their debentures, the principal amount must be settled in
cash and to the extent that the conversion obligation exceeds the principal
amount of any
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debentures
converted, we must satisfy the remaining conversion obligation of the 1.25%
debentures in shares of our class A common stock, and we maintain the right to
satisfy the remaining conversion obligation of the 0.75% debentures in shares of
our class A common stock or cash. During the fourth quarter of fiscal 2008,
holders of $1.4 million in aggregate principal amount of the 1.25% debentures
converted their debentures. Future conversions could materially and adversely
affect our liquidity and our ability to meet our payment obligations under our
debt.
Our
credit agreements contain covenant restrictions that may limit our ability to
operate our business.
We may be
unable to respond to changes in business and economic conditions, engage in
transactions that might otherwise be beneficial to us, and obtain additional
financing, if needed because our credit agreement with Wells Fargo and facility
agreement with the Government of Malaysia contain, and any of our other future
debt agreements may contain, covenant restrictions that limit our ability to,
among other things:
• incur
additional debt, assume obligations in connection with letters of credit, or
issue guarantees;
• create
liens;
• make
certain investments or acquisitions;
• enter
into transactions with our affiliates;
• sell
certain assets;
• redeem
capital stock or make other restricted payments;
• declare
or pay dividends or make other distributions to stockholders; and
• merge
or consolidate with any person.
Our
ability to comply with these covenants is dependent on our future performance,
which will be subject to many factors, some of which are beyond our control,
including prevailing economic conditions. In addition, our failure to comply
with these covenants could result in a default under the debentures and our
other debt, which could permit the holders to accelerate such debt. If any of
our debt is accelerated, we may not have sufficient funds available to repay
such debt, which could materially and negatively affect our financial condition
and results of operation.
Risks
Related to Our Operations
We
may not be able to increase or sustain our recent growth rate, and we may not be
able to manage our future growth effectively.
We may
not be able to continue to expand our business or manage future growth. We plan
to significantly increase our production capacity between 2009 and 2010, which
will require successful execution of
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expanding
our existing manufacturing facilities and developing new manufacturing
facilities, which would increase our fixed costs and, if such facilities
are underutilized, would negatively impact our results of
operations;
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ensuring
delivery of adequate polysilicon and
ingots;
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developing
more efficient wafer-slicing
methods;
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enhancing
our customer resource management and manufacturing management
systems;
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implementing
and improving additional and existing administrative, financial and
operations systems, procedures and controls, including the need to update
and integrate our financial internal control systems in SP Systems and in
our Philippines facility with those of our San Jose, California
headquarters;
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hiring
additional employees;
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expanding
and upgrading our technological
capabilities;
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manage
multiple relationships with our customers, suppliers and other
third-parties;
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maintaining
adequate liquidity and financial resources;
and
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continuing
to increase our revenues from
operations.
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Our
recent expansion has placed, and our planned expansion and any other future
expansion will continue to place, a significant strain on our management,
personnel, systems and resources. Expanding our manufacturing facilities or
developing facilities may be delayed by difficulties such as unavailability of
equipment or supplies or equipment malfunction. Ensuring delivery of adequate
polysilicon and ingots is subject to many market risks including scarcity,
significant price fluctuations and competition. Maintaining adequate liquidity
is dependent upon a variety of factors including continued revenues from
operations and compliance with our indentures and credit agreements. In
addition, following the spin-off of our shares by Cypress on September 29, 2008,
our ability to issue equity for financing purposes will be restricted by our tax
sharing agreement with Cypress. If we are unsuccessful in any of these areas, we
may not be able to achieve our growth strategy and increase production capacity
as planned during the foreseeable future. If we are unable to manage our growth
effectively, we may not be able to take advantage of market opportunities,
develop new solar cells and other products, satisfy customer requirements,
execute our business plan or respond to competitive pressures.
We
have significant international activities and customers, and plan to continue
these efforts, which subject us to additional business risks, including
logistical complexity and political instability.
In fiscal
2008, 2007 and 2006, a substantial portion of our sales was made to customers
outside of the United States, and a substantial portion of our supply agreements
is with supply and equipment vendors located outside of the United States.
Historically, we have had significant sales in Austria, Germany, Italy, Spain
and South Korea. Currently our solar cell production lines are located at our
manufacturing facilities in the Philippines, and we plan to construct another
manufacturing facility in Malaysia. In addition, a majority of our assembly
functions have historically been conducted by a third-party subcontractor in
China. Risks we face in conducting business internationally
include:
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multiple,
conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other
government approvals, permits and
licenses;
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difficulties
and costs in staffing and managing foreign operations as well as cultural
differences;
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potentially
adverse tax consequences associated with our permanent establishment of
operations in more countries;
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relatively
uncertain legal systems, including potentially limited protection for
intellectual property rights, and laws, regulations and policies which
impose additional restrictions on the ability of foreign companies to
conduct business in certain countries or otherwise place them at a
competitive disadvantage in relation to domestic
companies;
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inadequate
local infrastructure and developing telecommunications
infrastructures;
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financial
risks, such as longer sales and payment cycles and greater difficulty
collecting accounts receivable;
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currency
fluctuations and government-fixed foreign exchange rates and the effects
of currency hedging activity or inability to hedge currency fluctuations;
and
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political
and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business
restrictions.
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If we are
unable to successfully manage any such risks, any one or more could materially
and negatively affect our business, financial condition and results of
operations.
Our
operating results will be subject to fluctuations and are inherently
unpredictable.
To
maintain our profitability, we will need to generate and sustain higher revenue
while maintaining reasonable cost and expense levels. We do not know if our
revenue will grow, or if it will grow sufficiently to outpace our expenses,
which we expect to increase as we expand our manufacturing capacity. We may not
be able to sustain or increase profitability on a quarterly or an annual basis.
Our quarterly revenue and operating results will be difficult to predict and
have in the past fluctuated from quarter to quarter. In particular, our Systems
Segment is difficult to forecast and is susceptible to large fluctuations in
financial results. The amount, timing and mix of sales of our Systems Segment,
often for a single medium or large-scale project, may cause large fluctuations
in our revenue and other financial results. Further, our revenue mix of high
margin material sales versus lower margin projects in the Systems 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 will be fixed in the short-term. If
revenue for a particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that quarter, which
would harm our operating results for that quarter. This may cause us to miss any
guidance announced by us.
If
we experience interruptions in the operation of our solar cell production lines
or are unable to add additional production lines, it would likely result in
lower revenue and earnings than anticipated.
We
currently have twelve solar cell manufacturing lines in production which are
located at our manufacturing facilities in the Philippines. If our current or
future production lines were to experience any problems or downtime, we would be
unable to meet our production targets and our business would suffer. If any
piece of equipment were to break down or experience downtime, it could cause our
production lines to go down. We have started operations in our second solar cell
manufacturing facility nearby our existing facility in the Philippines and we
plan to construct another manufacturing facility in Malaysia. This expansion has
required and will continue to require significant management attention, a
significant investment of capital and substantial engineering expenditures and
is subject to significant risks including:
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we
may experience cost overruns, delays, equipment problems and other
operating difficulties;
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we
may experience difficulties expanding our processes to larger production
capacity;
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our
custom-built equipment may take longer and cost more to engineer than
planned and may never operate as designed;
and
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we
are incorporating first-time equipment designs and technology
improvements, which we expect to lower unit capital and operating costs,
but this new technology may not be
successful.
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If we
experience any of these or similar difficulties, we may be unable to complete
the addition of new production lines on schedule in order to expand our
manufacturing facilities and our manufacturing capacity could be substantially
constrained. If this were to occur, our per-unit manufacturing costs would
increase, we would be unable to increase sales or gross margins as planned and
our earnings would likely be materially impaired.
If
we do not achieve satisfactory yields or quality in manufacturing our solar
cells, our sales could decrease and our relationships with our customers and our
reputation may be harmed.
The
manufacture of solar cells is a highly complex process. Minor deviations in the
manufacturing process can cause substantial decreases in yield and in some
cases, cause production to be suspended or yield no output. We have from time to
time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
process technologies or equipment. As we expand our manufacturing capacity and
bring additional lines or facilities into production, we may experience lower
yields initially as is typical with any new equipment or process. We also expect
to experience lower yields as we continue the initial migration of our
manufacturing processes to thinner wafers. If we do not achieve planned yields,
our product costs could increase, and product availability would decrease
resulting in lower revenues than expected.
Additionally,
products as complex as ours may contain undetected errors or defects, especially
when first introduced. For example, our solar cells and solar panels may contain
defects that are not detected until after they are shipped or are installed
because we cannot test for all possible scenarios. These defects could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and significantly affect
our customer relations and business reputation. If we deliver solar cells or
solar panels with errors or defects, including cells or panels of third-party
manufacturers, or if there is a perception that such solar cells or solar panels
contain errors or defects, our credibility and the market acceptance and sales
of our products could be harmed.
We
obtain capital equipment used in our manufacturing process from sole suppliers
and if this equipment is damaged or otherwise unavailable, our ability to
deliver products on time will suffer, which in turn could result in order
cancellations and loss of revenue.
Some of
the capital equipment used in the manufacture of our solar power products and in
our wafer-slicing operations have been developed and made specifically for us,
is not readily available from multiple vendors and would be difficult to repair
or replace if it were to become damaged or stop working. If any of these
suppliers were to experience financial difficulties or go out of business, or if
there were any damage to or a breakdown of our manufacturing or wafer-slicing
equipment at a time when we are manufacturing commercial quantities of our
products, our business would suffer. In addition, a supplier’s failure to supply
this equipment in a timely manner, with adequate quality and on terms acceptable
to us, could delay our capacity expansion of our manufacturing facility and
otherwise disrupt our production schedule or increase our costs of
production.
We
depend on a third-party subcontractor in China to assemble a significant
portion of our solar cells into solar panels and any failure to obtain
sufficient assembly and test capacity could significantly delay our ability to
ship our solar panels and damage our customer relationships.
Historically,
we have relied on Jiawei SolarChina Co., Ltd., a third-party subcontractor in
China, to assemble a significant portion of our solar cells into solar
panels and perform panel testing and to manage packaging, warehousing and
shipping of our solar panels. We do not have a long-term agreement with Jiawei
and we typically obtain its services based on short-term purchase orders that
are generally aligned with timing specified by our customers’ purchase orders
and our sales forecasts. As a result of outsourcing a significant portion of
this final step in our production, we face several significant risks, including
limited control over assembly and testing capacity, delivery schedules, quality
assurance, manufacturing yields and production costs. If the operations of
Jiawei were disrupted or its financial stability impaired, or if it were unable
or unwilling to devote capacity to our solar panels in a timely manner, our
business would suffer as we may be unable to produce finished solar panels on a
timely basis. We also risk customer delays resulting from an inability to move
module production to an alternate provider, and it may not be possible to obtain
sufficient capacity or comparable production costs at another facility in a
timely manner. In addition, migrating our design methodology to a new
third-party subcontractor or to a captive panel assembly facility could involve
increased costs, resources and development time, and utilizing additional
third-party subcontractors could expose us to further risk of losing control
over our intellectual property and the quality of our solar panels. Further, we
supply inventory to Jiawei and bear the risk of loss, theft or damage to our
inventory while it is held in its facilities. Any reduction in the supply of
solar panels could impair our revenue by significantly delaying our ability to
ship products and potentially damage our relationships with new and existing
customers.
We
established a captive solar panel assembly facility, and, if this panel
manufacturing facility is unable to produce high quality solar panels at
commercially reasonable costs, our revenue growth and gross margin could be
adversely affected.
We
currently run seven solar panel assembly lines in the Philippines. This factory
commenced commercial production during the fourth quarter of 2006. Much of the
manufacturing equipment and technology in this factory is new and ramping to
achieve their full rated capacity. In the event that this factory is unable to
ramp production with commercially reasonable yields and competitive production
costs, our anticipated revenue growth and gross margin will be adversely
affected.
Our
Systems Segment acts as the general contractor for our customers in connection
with the installations of our solar power systems and is subject to risks
associated with construction, cost overruns, delays and other contingencies tied
to performance bonds and letters of credit, which could have a material adverse
effect on our business and results of operations.
Our
Systems Segment acts as the general contractor for our customers in connection
with the installation of our solar power systems. All essential costs are
estimated at the time of entering into the sales contract for a particular
project, and these are reflected in the overall price that we charge our
customers for the project. These cost estimates are preliminary and may or may
not be covered by contracts between us or the other project developers,
subcontractors, suppliers and other parties to the project. In addition, we
require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or defective or
late execution occur, we may not achieve our expected margins or cover our
costs. Also, some systems customers require performance bonds issued by a
bonding agency or letters of credit issued by financial institutions. Due to the
general performance risk inherent in construction activities, it has become
increasingly difficult recently to secure suitable bonding agencies willing to
provide performance bonding, and obtaining letters of credit requires adequate
collateral because we have not obtained a credit rating. In the event we are
unable to obtain bonding or sufficient letters of credit, we will be unable to
bid on, or enter into, sales contracts requiring such bonding.
In
addition, some of our larger systems customers require that we pay substantial
liquidated damages for each day or other period its solar installation is not
completed beyond an agreed target date, up to and including the return of the
entire project sale price. This is particularly true in Europe, where long-term,
fixed feed-in tariffs available to investors are typically set during a
prescribed period of project completion, but the fixed amount declines over time
for projects completed in subsequent periods. We face material financial
penalties in the event we fail to meet the completion deadlines, including but
not limited a full refund of the contract price paid by the customers. In
certain cases we do not control all of the events which could give rise to these
penalties, such as reliance on the local utility to timely complete electrical
substation construction.
Furthermore,
investors often require that the solar power system generate specified levels of
electricity in order to maintain their investment returns, allocating
substantial risk and financial penalties to us if those levels are not achieved,
up to and including the return of the entire project sale price. Also, our
customers often require protections in the form of conditional payments, payment
retentions or holdbacks, and similar arrangements that condition its future
payments on performance. Delays in solar panel or other supply shipments, other
construction delays, unexpected performance problems in electricity generation
or other events could cause us to fail to meet these performance criteria,
resulting in unanticipated and severe revenue and earnings losses and financial
penalties. Construction delays are often caused by inclement weather, failure to
timely receive necessary approvals and permits, or delays in obtaining necessary
solar panels, inverters or other materials. Additionally, we sometimes purchase
land in connection with project development and assume the risk of project
completion. All such risks could have a material adverse effect on our business
and results of operations.
We may be unable
to achieve our goal of reducing the cost of installed solar systems by 50
percent by 2012, which may negatively impact our ability to sell our products in
a competitive environment, resulting in lower revenues, gross margins and
earnings.
To reduce
the cost of installed solar systems by 50 percent by 2012, as compared against
the cost in 2006, we will have to achieve cost savings across the entire value
chain from designing to manufacturing to distributing to selling and ultimately
to installing solar systems. We have identified specific areas of potential
savings and are pursuing targeted goals. However, such cost savings are
dependent upon decreasing silicon prices and lowering manufacturing costs. In
addition, we continue to explore cost effective methods of installing solar
systems. If we are unsuccessful in our efforts to reduce the cost of installed
solar systems by 50 percent by 2012, our revenues, gross margins and earnings
may be negatively impacted in the competitive environment. Such risks would be
exacerbated if governmental and fiscal incentives are reduced, or if these lower
prices have been assumed in connection with our sales commitments and we are
then unable to realize the expected reduction in cost of revenues, or if an
increase in the global supply of solar cells and solar panels causes substantial
downward pressure on prices of our products.
Acquisitions
of other companies or investments in joint ventures with other companies could
materially and adversely affect our financial condition and results of
operations, and dilute our stockholders’ equity.
To
increase our business and maintain our competitive position, we may acquire
other companies or engage in joint ventures in the future. Acquisitions and
joint ventures involve a number of risks that could harm our business and result
in the acquired business or joint venture not performing as expected,
including:
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insufficient
experience with technologies and markets in which the acquired business is
involved, which may be necessary to successfully operate and integrate the
business;
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problems
integrating the acquired operations, personnel, technologies or products
with the existing business and
products;
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diversion
of management time and attention from the core business to the acquired
business or joint venture;
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potential
failure to retain key technical, management, sales and other personnel of
the acquired business or joint
venture;
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difficulties
in retaining relationships with suppliers and customers of the acquired
business, particularly where such customers or suppliers compete with
us;
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reliance
upon joint ventures which we do not
control;
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subsequent
impairment of the acquired assets, including intangible assets;
and
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assumption
of liabilities including, but not limited to, lawsuits, tax examinations,
warranty issues, etc.
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Additionally,
we may decide that it is in our best interests to enter into acquisitions or
joint ventures that are dilutive to earnings per share or that negatively impact
margins as a whole. Acquisitions or joint ventures could also require investment
of significant financial resources and require us to obtain additional equity
financing, which may dilute our stockholders’ equity, or require us to incur
additional indebtedness. Further, following the spin-off of our shares by
Cypress on September 29, 2008, our ability to issue equity, including to acquire
companies or assets, is subject to limits as described in “Our agreements with Cypress require
us to indemnify Cypress for certain tax liabilities. These indemnification
obligations and related contractual restrictions may limit our ability to obtain
additional financing, participate in future acquisitions or pursue other
business initiatives.” To the extent these limits prevent us from
pursuing acquisitions or investments that we would otherwise pursue, our growth
and strategy could be impaired.
To the
extent that we invest in upstream suppliers or downstream channel capabilities,
we may experience competition or channel conflict with certain of our existing
and potential suppliers and customers. Specifically, existing and potential
suppliers and customers may perceive that we are competing directly with them by
virtue of such investments and may decide to reduce or eliminate their supply
volume to us or order volume from us. In particular, any supply reductions from
our polysilicon, ingot or wafer suppliers could materially reduce manufacturing
volume.
Our
agreements with Cypress require us to indemnify Cypress for certain tax
liabilities. These indemnification obligations and related contractual
restrictions may limit our ability to obtain additional financing, participate
in future acquisitions or pursue other business initiatives.
We have
entered into a tax sharing agreement with Cypress, under which we and Cypress
agree to indemnify one another for certain taxes and similar obligations that
the other party could incur under certain circumstances. In general, we will be
responsible for taxes relating to our business. As of September 29, 2008,
Cypress distributed the shares of SunPower to its shareholders, so we are no
longer eligible to file any state combined returns. To the extent that we become
entitled to certain tax benefits on our separate
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tax
returns existing as of such date, we will distribute the amount of such benefits
to Cypress. We will distribute these amounts to Cypress in cash or in our
shares, at Cypress’s option. As of December 28, 2008, potential future
payments to Cypress, which would be made over a period of several years,
aggregate approximately $18.7 million. The majority of the deductions
giving rise to these potential tax benefit payments were created by employee
stock transactions. Because there is uncertainty as to our ability to use
these deductions, the portion created by employee stock transactions are not
reflected on our Consolidated Balance Sheets. If these deductions were reflected
on the Consolidated Balance Sheets, they could be accounted for as an increase
to deferred tax assets and stockholders’ equity.
Cypress
has obtained a ruling from the Internal Revenue Service, or IRS, that the
distribution by Cypress of our class B common stock to Cypress stockholders
qualified as a tax-free distribution under Section 355 of the Internal
Revenue Code, or Code. Despite that ruling, the distribution may nonetheless be
taxable to Cypress if 50% or more of our voting power or economic value is
acquired as part of a plan or series of related transactions that includes the
distribution of our stock. The tax sharing agreement requires us to indemnify
Cypress for any liability incurred as a result of issuances or dispositions of
our stock after the distribution, other than liability attributable solely to
certain dispositions of our stock by Cypress, that cause Cypress’s distribution
of our stock to be taxable to Cypress. Under current law, for up to two years
after the distribution (or possibly longer if we are acting pursuant to a
preexisting plan), our obligation to indemnify Cypress will be triggered if we
issue stock or otherwise participate in one or more financing or acquisition
transactions in which 50% or more of our voting power or economic value is
acquired as part of a plan or series of related transactions that includes the
distribution.
In
connection with Cypress’ spin-off of its shares of our class B common stock, on
August 12, 2008, we and Cypress entered into an Amendment No. 1
to the Tax Sharing Agreement, or the Amended Tax Sharing Agreement, to address
certain transactions that may affect the tax treatment of the spin-off and
certain other matters.
Under the
Amended Tax Sharing Agreement, we are required to provide notice to Cypress
of certain transactions that could give rise to our indemnification obligation
described above. Such transactions include a conversion of any or all of our
class B common stock to class A common stock or any similar
recapitalization transaction or series of related transactions (a
“Recapitalization”). We are not required to indemnify Cypress for any taxes
which would result solely from (A) issuances and dispositions of our stock
prior to the spin-off and (B) any acquisition of our stock by Cypress after
the spin-off.
Under the
Amended Tax Sharing Agreement, we also agreed that, for a period of
25 months following the spin-off, we will not (i) effect a
Recapitalization or (ii) enter into or facilitate any other transaction
resulting in an acquisition of our stock without first obtaining the written
consent of Cypress; if such transaction (either alone or when taken together
with one or more other transactions entered into or facilitated by us
consummated after August 4, 2008 and during the 25-month period following
the spin-off) would involve the acquisition of more than 25% of our outstanding
shares of common stock. However, we need not obtain Cypress’s consent for
(A) certain qualifying acquisitions of our stock issued in connection
with the performance of services, (B) any acquisition of our stock for
which we furnish to Cypress prior to such acquisition an opinion of counsel and
supporting documentation, in form and substance reasonably satisfactory to
Cypress (a “Tax Opinion”), that such acquisition will qualify for certain “safe
harbors” specified in Treasury Regulations or (C) the adoption by us of a
standard stockholder rights plan. We further agreed that we will not
(i) effect a Recapitalization during the 36 month period following the
spin-off without first obtaining a Tax Opinion to the effect that such
Recapitalization (either alone or when taken together with any other transaction
or transactions) will not cause the spin-off to become taxable, or
(ii) seek any private ruling, including any supplemental private ruling,
from the IRS with regard to the spin-off, or any transaction having any bearing
on the tax treatment of the spin-off, without the prior written consent of
Cypress.
Our
ability to use our equity to obtain additional financing or to engage in
acquisition transactions for a period of time after the tax-free distribution of
our shares by Cypress will be restricted if we can only sell or issue a limited
amount of our stock before triggering our obligation to indemnify Cypress for
taxes relating to the distribution of our stock. Cypress made a complete
distribution of its shares of our class B common stock on September 29,
2008 when our total outstanding capital stock was 85.8 million
shares. Thus, in order to avoid causing an indemnification obligation to
Cypress, we could not, for up two years (or possibly longer) after the date
of the distribution, issue 85.8 million or more shares of our class A
common stock or participate in one or more transactions (excluding the
distribution itself) in which 42 million or more shares of our
then-existing class A common stock were acquired, if any such
transaction(s) are in connection with a plan or series of related transactions
that includes the distribution. If we were to participate in such a transaction,
and thereby triggered tax to Cypress on the distribution, then assuming that
Cypress distributed 42 million shares, Cypress’s top marginal income tax rate
was 40% for federal and state income tax purposes, the fair market value of our
class B common stock was $35.00 per share, and Cypress’s tax basis in such
stock was $5.00 per share on the date of the distribution, our liability under
our indemnification obligation to Cypress would be approximately
$504.0 million.
Our
headquarters and manufacturing facilities, as well as the facilities of certain
of our key subcontractors, are located in regions that are subject to
earthquakes and other natural disasters.
Our
headquarters and research and development operations are located in California,
our manufacturing facilities are located in the Philippines, and the facilities
of our subcontractor for assembly and test of solar panels are located in China.
Since we do not have redundant facilities, any significant earthquake, tsunami
or other natural disaster in these countries could materially disrupt our
production capabilities and could result in our experiencing a significant delay
in delivery, or substantial shortage, of our solar cells.
We
could unexpectedly be adversely affected by violations of the U.S. Foreign
Corrupt Practices Act and similar worldwide anti-bribery laws.
The U.S.
Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery laws in other
jurisdictions generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or
retaining business. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. We train our
key staff concerning FCPA issues, and we also inform many of our partners,
subcontractors, agents and others who work for us or on our behalf that they
must comply with FCPA requirements. There can be no assurance that our internal
controls and procedures will always protect us from the reckless or criminal
acts committed by our employees, subcontractors or agents. If we are found to be
liable for FCPA violations (either due to our own acts or our inadvertence, or
due to the acts or inadvertence of others), we could suffer from criminal or
civil penalties or other sanctions which could have a material adverse effect on
our business.
Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
We are
required to comply with all foreign, U.S. federal, state and local laws and
regulations regarding pollution control and protection of the environment. In
addition, under some statutes and regulations, a government agency, or other
parties, may seek recovery and response costs from operators of property where
releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for such release or otherwise at fault. We use,
generate and discharge toxic, volatile and otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations. In addition, if
more stringent laws and regulations are adopted in the future, the costs of
compliance with these new laws and regulations could be substantial. To date
such laws and regulations have not had a significant impact on our operations,
and we believe that we have all necessary permits to conduct their respective
operations as they are presently conducted. If we fail to comply with present or
future environmental laws and regulations, however, we may be required to pay
substantial fines, suspend production or cease operations.
Our
success depends on the continuing contributions of our key
personnel.
We rely
heavily on the services of our key executive officers and the loss of services
of any principal member of our management team could adversely impact our
operations. In addition, we anticipate that we will need to hire a significant
number of highly skilled technical, manufacturing, sales, marketing,
administrative and accounting personnel. The competition for qualified personnel
is intense in our industry. We may not be successful in attracting and retaining
sufficient numbers of qualified personnel to support our anticipated growth.
However, we cannot guarantee that any employee will remain employed with us for
any definite period of time since all of our employees, including our key
executive officers, serve at-will and may terminate their employment at any time
for any reason.
Risks
Related to Our Intellectual Property
Loss
of government programs that partially fund our research and development programs
would increase our research and development expenses.
We
selectively pursue contract research, product development and market development
programs funded by various agencies of the federal and state governments to
complement and enhance our own resources. Funding from government grants is
generally recorded as an offset to our research and development expense. These
government agencies may not continue their commitment to programs relevant to
our development projects. Moreover, we may not be able to compete successfully
to obtain funding through these or other programs, and generally government
agencies may unilaterally terminate or modify such agreements. A reduction or
discontinuance of these programs, or of our participation in these programs,
would increase our research and development expenses, which could materially and
adversely affect our results of operations and could impair our ability to
develop competitive solar power products and services.
Our
reliance on government programs to partially fund our research and development
programs could impair our ability to commercialize our solar power products and
services.
Government
funding of some of our research and development efforts imposes certain
restrictions on our ability to commercialize results and may grant
commercialization rights to the government. In some funding awards, the
government is entitled to intellectual property rights arising from the related
research. Such rights could include a nonexclusive, nontransferable,
irrevocable, paid-up license to practice or have practiced each subject
invention developed under an award throughout the world by or on behalf of the
government, or the right to require us to grant a license to the developed
technology or products to a third-party or, if we refuse, the government may
grant the license itself, if the government determines that action is necessary
because we fail to achieve practical application of the technology, or because
action is necessary to alleviate health or safety needs, to meet requirements of
federal regulations, or to give the United States industry preference. Accepting
government funding can also require that manufacturing of products developed
with federal funding be conducted in the United States.
We
are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.
From time
to time, we, our respective customers or third-parties with whom we work may
receive letters, including letters from various industry participants, alleging
infringement of their patents. Although we are not currently aware of any
parties pursuing or intending to pursue infringement claims against us, we
cannot assure investors that we will not be subject to such claims in the
future. Additionally, we are required by contract to indemnify some of our
customers and our third-party intellectual property providers for certain costs
and damages of patent infringement in circumstances where our products are a
factor creating the customer’s or these third-party providers’ infringement
liability. This practice may subject us to significant indemnification claims by
our customers and our third-party providers. We cannot assure investors that
indemnification claims will not be made or that these claims will not harm our
business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s
attention from our business and could have a material adverse effect on our
business, operating results or financial condition. If there is a successful
claim of infringement against us, our customers or our third-party intellectual
property providers, we may be required to pay substantial damages to the party
claiming infringement, stop selling products or using technology that contains
the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties
making infringement claims may also be able to bring an action before the
International Trade Commission that could result in an order stopping the
importation into the United States of our solar cells. Any of these judgments
could materially damage our business. We may have to develop non-infringing
technology, and our failure in doing so or in obtaining licenses to the
proprietary rights on a timely basis could have a material adverse effect on our
business.
We
have filed, and, may continue to file claims against other parties for
infringing our intellectual property that may be very costly and may not be
resolved in our favor.
To
protect our intellectual property rights and to maintain our competitive
advantage, we have, and may continue to, file suits against parties who we
believe infringe our intellectual property. Intellectual property litigation is
expensive and time consuming and could divert management’s attention from our
business and could have a material adverse effect on our business, operating
results or financial condition, and our enforcement efforts may not be
successful. In addition, the validity of our patents may be challenged in such
litigation. Our participation in intellectual property enforcement actions may
negatively impact our financial results.
We
may not be able to prevent others from using the term SunPower or similar terms
in connection with their solar power products which could adversely affect the
market recognition of our name and our revenue.
“SunPower”
is our registered trademark in certain countries, including the U.S., for use
with solar cells and solar panels. We are seeking similar registration of the
“SunPower” trademark in other countries but we may not be successful in some of
these jurisdictions. We hold registered trademarks for SunPower®, PowerLight®,
PowerGuard®, PowerTracker® and SunTile®, in certain countries, including the
U.S. We have not registered, and may not be able to register, these trademarks
in other key countries. In the foreign jurisdictions where we are unable to
obtain or have not tried to obtain registrations, others may be able to sell
their products using trademarks compromising or incorporating “SunPower,” or our
other chosen brands, which could lead to customer confusion. In addition, if
there are jurisdictions where another proprietor has already established
trademark rights in marks containing “SunPower,” or our other chosen brands, we
may face trademark disputes and may have to market our products with other
trademarks, which may undermine our marketing efforts. We may encounter
trademark disputes with companies using marks which are confusingly similar to
the SunPower mark, or our other marks, which if not resolved favorably could
cause our branding efforts to suffer. In addition, we may have difficulty in
establishing strong brand recognition with consumers if others use similar marks
for similar products.
We
rely substantially upon trade secret laws and contractual restrictions to
protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenue could
suffer.
We seek
to protect our proprietary manufacturing processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
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people
may not be deterred from misappropriating our technologies despite the
existence of laws or contracts prohibiting
it;
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policing
unauthorized use of our intellectual property may be difficult, expensive
and time-consuming, and we may be unable to determine the extent of any
unauthorized use;
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the
laws of other countries in which we market our solar cells, such as some
countries in the Asia/Pacific region, may offer little or no protection
for our proprietary technologies;
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reports
we file in connection with government-sponsored research contracts are
generally available to the public and third-parties may obtain some
aspects of our sensitive confidential
information.
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Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third-parties to benefit from our technologies without
compensating us for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, to generate revenue and to
grow our business.
We
may not obtain sufficient patent protection on the technology embodied in the
solar cells or solar system components we currently manufacture and market,
which could harm our competitive position and increase our
expenses.
Although
we substantially rely on trade secret laws and contractual restrictions to
protect the technology in the solar cells and solar system components we
currently manufacture and market, our success and ability to compete in the
future may also depend to a significant degree upon obtaining patent protection
for our proprietary technology. We currently own multiple patents and patent
applications which cover aspects of the technology in the solar cells and
mounting systems that we currently manufacture and market. Material patents that
relate to our systems products and services primarily relate to our rooftop
mounting products and ground-mounted tracking products. We intend to continue to
seek patent protection for those aspects of our technology, designs, and
methodologies and processes that we believe provide significant competitive
advantages.
Our
patent applications may not result in issued patents, and even if they result in
issued patents, the patents may not have claims of the scope we seek or we may
have to refile patent applications due to newly discovered prior art. In
addition, any issued patents may be challenged, invalidated or declared
unenforceable, or even if we obtain an award of damages for infringement by a
third-party, such award could prove insufficient to compensate for all damages
incurred as a result of such infringement. The term of any issued patents would
be 20 years from their filing date and if our applications are pending for a
long time period, we may have a correspondingly shorter term for any patent that
may issue. Our present and future patents may provide only limited protection
for our technology and may not be sufficient to provide competitive advantages
to us. For example, competitors could develop similar or more advantageous
technologies on their own or design around our patents. Also, patent protection
in certain foreign countries may not be available or may be limited in scope and
any patents obtained may not be as readily enforceable as in the United States,
making it difficult for us to effectively protect our intellectual property from
misuse or infringement by other companies in these countries. Our inability to
obtain and enforce our intellectual property rights in some countries may harm
our business. In addition, given the costs of obtaining patent protection, we
may choose not to protect certain innovations that later turn out to be
important.
Risks
Related to Our Debt and Equity Securities
Conversion
of our outstanding debentures, future substantial issuances or dispositions of
our class A or class B common stock or other securities, could dilute
ownership and earnings per share or cause the market price of our stock to
decrease.
To the
extent we issue class A common stock upon conversion of debentures, the
conversion of some or all of such debentures will dilute the ownership interests
of existing stockholders, including holders who had previously converted their
debentures. Any sales in the public market of the class A and class B
common stock issuable upon such conversion could adversely affect prevailing
market prices of our class A and class B common stock. Sales of our
class A or class B common stock in the public market or sales of any of our
other securities could dilute ownership and earnings per share, and even the
perception that such sales could occur and could cause the market prices of our
class A and class B common stock to decline. In addition, the existence of
our outstanding debentures may encourage short selling of our common stock by
market participants who expect that the conversion of the debentures could
depress the prices of our class A and class B common stock.
Approximately
4.7 million shares of class A common stock were lent to underwriters of our
debenture offerings, including approximately 2.9 million shares lent to Lehman
Brothers International (Europe) Limited, or LBIE, and approximately 1.8 million
shares lent to Credit Suisse International, or CSI. Such shares were lent
to facilitate later hedging arrangements of future purchases for debentures in
the after-market. Shares still held by CSI may be freely sold into the market at
any time, and such sales could depress our stock price. In addition, any hedging
activity facilitated by our debenture underwriters would involve short sales or
privately negotiated derivatives transactions. Due to the September 15, 2008
bankruptcy filing of Lehman and commencement of administrative proceedings for
LBIE in the U.K., we recorded the shares lent to LBIE as issued and outstanding
as of September 15, 2008, for the purpose of computing and reporting basic and
diluted earnings per share. If Credit Suisse Securities (USA) LLC or its
affiliates, including CSI, were to file bankruptcy or commence similar
administrative, liquidating, restructuring or other proceedings, we may have to
consider approximately 1.8 million shares lent to CSI as issued and outstanding
for purposes of calculating earnings per share which would further dilute our
earnings per share. These or other similar transactions could further negatively
affect our stock price.
The
price of our class A common stock, and therefore of our outstanding
debentures, as well as our class B common stock may fluctuate significantly, and
a liquid trading market for our class A and class B common stock may not be
sustained.
Our
class A and class B common stock has a limited trading history in the
public markets, and during that period has experienced extreme price and volume
fluctuations. The trading price of our class A and class B common stock
could be subject to wide fluctuations due to the factors discussed in this risk
factors section. In addition, the stock market in general, and The Nasdaq Global
Select Market and the securities of technology companies and solar companies in
particular, have experienced severe price and volume fluctuations. These trading
prices and valuations, including our own market valuation and those of companies
in our industry generally, may not be sustainable. These broad market and
industry factors may decrease the market price of our class A and class B
common stock, regardless of our actual operating performance. Because the
debentures are convertible into our class A common stock, volatility or
depressed prices of our class A common stock could have a similar effect on
the trading price of these debentures.
The
difference in the voting rights and liquidity could result in different market
values for shares of our class A and our class B common
stock.
The
rights of class A and class B common stock are substantially similar,
except with respect to voting. The class B common stock is entitled to
eight votes per share and the class A common stock is entitled to one vote
per share. Additionally, our restated certificate of incorporation imposed
certain limitations on the rights of holders of class B common stock to vote the
full number of their shares. The difference in the voting rights of our
class A and class B common stock could reduce the value of our
class A common stock to the extent that any investor or potential future
purchaser of our common stock ascribes value to the right of our class B
common stock to eight votes per share. In addition, the lack of a long trading
history and lower trading volume of the class B common stock, compared to the
class A common stock, could result in lower trading prices for the class B
common stock.
Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions, our outstanding debentures provide for a right to convert upon
certain events, and our board of directors entered into a rights agreement and
declared a rights dividend, any of which could delay or discourage takeover
attempts that stockholders may consider favorable.
Provisions
in our restated certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include the following:
• the
right of the board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors;
• the
prohibition of cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
• the
requirement for advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders’
meeting;
• the
ability of the board of directors to issue, without stockholder approval, up to
approximately 10.0 million shares of preferred stock with terms set by the board
of directors, which rights could be senior to those of common stock;
and
• our
board of directors is divided into three classes of directors, with the classes
to be as nearly equal in number as possible;
• no
action can be taken by stockholders except at an annual or special meeting of
the stockholders called in accordance with our bylaws, and stockholders may not
act by written consent;
• stockholders
may not call special meetings of the stockholders;
• limitations
on the voting rights of our stockholders with more than 15% of our class B
common stock subject to receipt by Cypress of a supplemental ruling from
the IRS that the effectiveness of the restriction will not prevent the favorable
rulings received by Cypress with respect to certain tax issues arising under
Section 355 of the Code in connection with the spin-off from having full
force and effect; and
• our
board of directors is able to alter our bylaws without obtaining stockholder
approval.
Certain
provisions of our outstanding debentures could make it more difficult or more
expensive for a third-party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of our outstanding
debentures will have the right, at their option, to require us to repurchase, at
a cash repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest on the debentures, all of their debentures or any portion of the
principal amount of such debentures in integral multiples of $1,000. We may also
be required to issue additional shares of our class A common stock upon
conversion of such debentures in the event of certain fundamental
changes. In addition, on August 12, 2008, we entered into a Rights
Agreement with Computershare Trust Company, N.A. and our board of directors
declared an accompanying rights dividend. The Rights Agreement became effective
upon completion of Cypress’ spin-off of our shares of class B common stock to
the holders of Cypress common stock. The Rights Agreement contains specific
features designed to address the potential for an acquirer or significant
investor to take advantage of our capital structure and unfairly discriminate
between classes of our common stock. Specifically, the Rights Agreement is
designed to address the inequities that could result if an investor, by
acquiring 20% or more of the outstanding shares of class B common stock,
were able to gain significant voting influence over our company without making a
correspondingly significant economic investment. Our board of directors
determined that the rights dividend became payable to the holders of record of
our common stock as of the close of business on September 29, 2008. The rights
dividend and Rights Agreement, commonly referred to as a “poison pill,” could
delay or discourage takeover attempts that stockholders may consider
favorable.
ITEM 1B:
UNRESOLVED STAFF
COMMENTS
None.
ITEM 2:
PROPERTIES
Our
corporate headquarters is located in San Jose, California, where we occupy
approximately 60,000 square feet under a lease from Cypress that expires in
April 2011. In Richmond, California, we occupy approximately 207,000 square feet
for office, light industrial and research and development use under a lease from
an unaffiliated third-party that expires in December 2018. In addition to these
facilities, we also have our European headquarters located in Geneva,
Switzerland where we occupy approximately 4,000 square feet 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.
We leased
from Cypress an approximately 215,000 square foot building in the Philippines
from fiscal 2003 through April 2008, which serves as FAB1 with four solar cell
manufacturing lines in operation. In May 2008, we purchased FAB1 from Cypress
and assumed the lease for the land from an unaffiliated third-party for a total
purchase price of $9.5 million. The lease for the land expires in May 2048 and
is renewable for an additional 25 years. In August 2006, we purchased a 344,000
square foot building (FAB2) in the Philippines. FAB2 is approximately 20 miles
from FAB1 and is being developed to house up to twelve solar cell manufacturing
lines. We currently operate twelve 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
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 January 2008, we completed the construction of an approximately
175,000 square foot building in the Philippines. This facility serves as our
solar panel assembly facility that currently operates seven solar panel
manufacturing lines with a rated manufacturing capacity of 210 megawatts of
solar panels per year. We may require additional space in the future, which may
not be available on commercially reasonable terms or in the location we
desire.
Because
of the interrelation of our business segments, both the Components Segment and
Systems Segment use substantially all of the properties at least in part, and we
retain the flexibility to use each of the properties in whole or in part for
each of the segments. Therefore, we do not identify or allocate assets by
business segment. For more information on property, plant and equipment by
country, see Note 17 of Notes to our Consolidated Financial Statements in "Item 8: Financial Statements and
Supplemental Data."
ITEM 3:
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.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of fiscal 2008.
Our class
A and class B common stock is listed on the Nasdaq Global Select Market under
the trading symbol “SPWRA” and “SPWRB,” respectively. The high and low trading
prices of our class A and class B common stock during fiscal 2008 and 2007 are
as follows:
|
SPWRA
|
SPWRB*
|
|||||||||||||||
|
For
the year ended December 28, 2008
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
Fourth
quarter
|
$
|
77.25
|
$
|
19.00
|
$
|
71.47
|
$
|
11.94
|
||||||||
|
Third quarter
|
97.55
|
61.23
|
—
|
—
|
||||||||||||
|
Second quarter
|
99.58
|
72.71
|
—
|
—
|
||||||||||||
|
First quarter
|
131.29
|
54.95
|
—
|
—
|
||||||||||||
|
For
the year ended December 30, 2007
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
Fourth
quarter
|
$
|
164.49
|
$
|
81.50
|
$
|
—
|
$
|
—
|
||||||||
|
Third quarter
|
86.93
|
59.64
|
—
|
—
|
||||||||||||
|
Second quarter
|
65.55
|
45.84
|
—
|
—
|
||||||||||||
|
First
quarter
|
48.11
|
35.40
|
—
|
—
|
||||||||||||
|
*
|
Our
class B common stock started trading publicly on September 30,
2008.
|
As of
February 13, 2009, there were approximately 608 and 1,054 record
holders of our class A and class B common stock, respectively. A substantially
greater number of holders of our class A and class B common stock are in “street
name” or beneficial holders, whose shares are held of record by banks, brokers
and other financial institutions.
Dividends
We have
never declared or paid any cash dividend on our common stock, and we do not
currently intend to pay any cash dividend on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to finance the operation
and expansion of our business.
Our
credit facilities place restrictions on us and our subsidiaries’ ability to pay
cash dividends. Additionally, our debentures issued in February 2007 and July
2007 allow the holders to convert their bonds into our class A common stock if
we declare a dividend that on a per share basis exceeds 10% of our class A
common stock’s market price.
Recent
Sales of Unregistered Securities
We
conducted no unregistered sales of equity securities during the fourth quarter
of fiscal 2008.
Issuer
Purchases of Equity Securities
|
Period
|
Total Number
of
Shares
Purchased(1)
(in
thousands)
|
Average
Price
Paid
Per Share
|
Total
Number of Shares Purchased as
Part of Publicly Announced Plans
or Programs
|
Maximum
Number of Shares That May Yet
Be Purchased Under the Publicly Announced
Plans or Programs
|
|||
|
October
27, 2008 through November 23, 2008
|
15
|
$34.95
|
—
|
—
|
|||
|
November
24, 2008 through December 28, 2008
|
9
|
$32.82
|
—
|
—
|
|||
|
Total
|
24
|
$34.16
|
—
|
—
|
|||
|
(1)
|
The
total number of shares purchased includes shares surrendered to satisfy
tax withholding obligations in connection with the vesting of restricted
stock issued to employees.
|
Equity
Compensation Plan Information
The
following table provides certain information as of December 28, 2008 with
respect to our equity compensation plans under which shares of class A common
stock are authorized for issuance (in thousands, except dollar
figures):
|
Plan
Category
|
Number of securities to
be issued upon exercise
of outstanding
options,
warrants
and rights
|
Weighted average
exercise
price of
outstanding
options,
warrants
and
rights
|
Number of securities remaining
available
for future issuance
under
equity compensation
plans
(excluding securities
reflected
in the first column)
|
||||
|
Equity
compensation plans approved by security holders
|
2,008
|
$8.99
|
1,268
|
||||
|
Equity
compensation shares not approved by security holders
|
17
|
(1)
|
$2.00
|
—
|
|||
|
Total
|
2,025
|
(2)
|
$8.93
|
1,268
|
|||
|
(1)
|
Represents
one option to purchase shares of class A common stock issued to one
SunPower employee on June 17, 2004 with an exercise price of $2.00,
vesting over five years.
|
|
(2)
|
This
table excludes options to purchase an aggregate of approximately 520,000
shares of class A common stock, at a weighted average exercise price of
$9.03 per share, that we assumed in connection with the acquisition of
PowerLight (now known as SP Systems) in January
2007.
|
Company
Stock Price Performance
The
following graph compares the performance of an investment in our class A common
stock from the pricing of our IPO on November 17, 2005 through
December 28, 2008, with the NASDAQ Market Index and with four comparable
issuers: Evergreen Solar, Inc., Energy Conversion Devices, Inc., Suntech Power
Holdings Co., Ltd. and First Solar, Inc. The graph assumes $100 was invested on
November 17, 2005 in our class A common stock at the closing price of
$25.45 per share and at the closing prices for the NASDAQ Market Index,
Evergreen Solar, Inc. and Energy Conversion Devices, Inc. The graph also assumes
$100 was invested at the closing prices of the common stock for Suntech Power
Holdings Co., Ltd. on December 14, 2005 and First Solar, Inc. on November 17,
2006. In addition, the graph also assumes that any dividends were reinvested on
the date of payment without payment of any commissions. The performance shown in
the graph represents past performance and should not be considered an indication
of future performance.
ASSUMES
$100 INVESTED ON NOVEMBER 17, 2005
ASSUMES
DIVIDEND REINVESTED
FISCAL
YEAR ENDED DECEMBER 28, 2008
|
11/17/05
|
12/30/05
|
12/31/06
|
12/30/07
|
12/28/08
|
||||||||||||||||
|
SunPower
Corporation
|
$
|
100.00
|
$
|
133.56
|
$
|
146.05
|
$
|
514.93
|
$
|
139.02
|
||||||||||
|
NASDAQ
Market Index
|
100.00
|
99.32
|
108.77
|
120.45
|
68.92
|
|||||||||||||||
|
Evergreen
Solar, Inc.
|
100.00
|
89.27
|
63.45
|
144.34
|
23.55
|
|||||||||||||||
|
Energy
Conversion Devices, Inc.
|
100.00
|
130.15
|
108.53
|
105.78
|
74.77
|
|||||||||||||||
|
Suntech
Power Holdings Co., Ltd.(1)
|
181.67
|
226.73
|
545.27
|
68.60
|
||||||||||||||||
|
First
Solar, Inc.(2)
|
149.20
|
1,330.20
|
675.05
|
|||||||||||||||||
|
(1)
|
The
common stock of Suntech Power Holdings Co., Ltd. started trading publicly
on December 14, 2005.
|
|
(2)
|
The
common stock of First Solar, Inc. started trading publicly on November 17,
2006.
|
The
following selected consolidated financial data should be read together with
“Item
7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Item 8: Financial Statements and
Supplementary Data” included elsewhere in this Annual Report on Form
10-K.
On
November 9, 2004, Cypress acquired 100% ownership of all outstanding shares
of our capital stock, excluding unexercised warrants and options. This
transaction resulted in the “push down” of the effect of the acquisition of
SunPower by Cypress and created a new basis of accounting. The Consolidated
Balance Sheets and Statements of Operations data in this Annual Report on Form
10-K prior and up to November 8, 2004 refer to the Predecessor Company and
this period is referred to as the pre-merger period, while the Consolidated
Balance Sheets and Statements of Operations data subsequent to November 8,
2004 refer to the Successor Company and this period is referred to as the
post-merger period. A black line has been drawn between the accompanying
financial statements to distinguish between the pre-merger and post-merger
periods. After the close of trading on September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock, in the
form of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock.
On
January 10, 2007, we completed the acquisition of PowerLight Corporation, a
leading global provider of large-scale solar power systems, which we renamed
SunPower Corporation, Systems (SP Systems) in June 2007. SP Systems designs,
manufactures, markets and sells solar electric power system technology that
integrates solar cells and solar panels manufactured by us and other suppliers
to convert sunlight to electricity compatible with the utility network. The
results of SP Systems have been included in the following selected consolidated
financial information from January 10, 2007. See Note 3 of Notes to
our Consolidated Financial Statements.
We report
our results of operations on the basis of 52- or 53-week periods, ending on the
Sunday closest to December 31. The combined periods of fiscal 2004 ended on
January 2, 2005 and included 53 weeks. Fiscal 2005 ended on January 1,
2006, fiscal 2006 ended on December 31, 2006, fiscal 2007 ended on December
30, 2007, fiscal 2008 ended on December 28, 2008 and each fiscal year included
52 weeks. Our fiscal quarters end on the Sunday closest to the end of the
applicable calendar quarter, except in a 53-week fiscal year in which the
additional week falls into the fourth quarter of that fiscal year.
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||||||||
|
Year Ended
|
Nov.
9, 2004
Through
Jan.
2, 2005
|
Dec.
29, 2003
Through
Nov.
8, 2004
|
|||||||||||||||||||||||
|
(In
thousands, except per share data)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||||||||||||||
|
Consolidated
Statements of Operations Data
|
|||||||||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||||||||
|
Systems
|
$
|
820,632
|
$
|
464,178
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||||||
|
Components
|
614,287
|
310,612
|
236,510
|
78,736
|
4,055
|
6,830
|
|||||||||||||||||||
|
Total
revenue
|
1,434,919
|
774,790
|
236,510
|
78,736
|
4,055
|
6,830
|
|||||||||||||||||||
|
Cost
of revenue:
|
|||||||||||||||||||||||||
|
Cost of systems
revenue
|
653,569
|
386,511
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Cost of components
revenue
|
417,669
|
240,475
|
186,042
|
74,353
|
6,079
|
9,498
|
|||||||||||||||||||
|
Total cost of
revenue
|
1,071,238
|
626,986
|
186,042
|
74,353
|
6,079
|
9,498
|
|||||||||||||||||||
|
Gross
margin
|
363,681
|
147,804
|
50,468
|
4,383
|
(2,024
|
)
|
(2,668
|
)
|
|||||||||||||||||
|
Operating
income (loss)
|
168,467
|
2,342
|
19,107
|
(12,985
|
)
|
(4,552
|
)
|
(19,499
|
)
|
||||||||||||||||
|
Income
(loss) before income taxes and equity in earnings of unconsolidated
investees
|
147,584
|
3,560
|
28,461
|
(15,793
|
)
|
(5,609
|
)
|
(23,302
|
)
|
||||||||||||||||
|
Income
(loss) before equity in earnings of unconsolidated
investees
|
78,216
|
9,480
|
26,516
|
(15,843
|
)
|
(5,609
|
)
|
(23,302
|
)
|
||||||||||||||||
|
Net
income (loss)
|
$
|
92,293
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
$
|
(5,609
|
)
|
$
|
(23,302
|
)
|
||||||||||
|
Net
income (loss) per share of class A and class B common
stock:
|
|||||||||||||||||||||||||
|
Basic(1)
|
$
|
1.15
|
$
|
0.12
|
$
|
0.40
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
||||||||||
|
Diluted(1)
|
$
|
1.09
|
$
|
0.11
|
$
|
0.37
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
||||||||||
|
Weighted-average
shares:
|
|||||||||||||||||||||||||
|
Basic
(1)
|
80,522
|
75,413
|
65,864
|
23,306
|
2
|
4,230
|
|||||||||||||||||||
|
Diluted(1)
|
84,446
|
81,227
|
71,087
|
23,306
|
2
|
4,230
|
|||||||||||||||||||
|
(1)
|
As
of September 15, 2008, the date on which Lehman filed a petition for
protection under Chapter 11 of the U.S. bankruptcy code and LBIE commenced
administrative proceedings (analogous to bankruptcy) in the United
Kingdom, 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
CSI in connection with the 0.75% debentures. See Note 15 of Notes to our
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used in computing basic and diluted net income
(loss) per share.
|
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
January
2,
2005
|
|||||||||||||||
|
Consolidated
Balance Sheets Data
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments (excluding restricted
cash)
|
$
|
219,510
|
$
|
390,667
|
$
|
182,092
|
$
|
143,592
|
$
|
3,776
|
||||||||||
|
Working
capital (deficiency)
|
396,849
|
93,953
|
228,269
|
155,243
|
(54,314
|
)
|
||||||||||||||
|
Total
assets
|
2,076,135
|
1,653,738
|
576,836
|
317,654
|
89,646
|
|||||||||||||||
|
Long-term
debt
|
54,598
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Convertible
debt
|
423,608
|
425,000
|
—
|
—
|
—
|
|||||||||||||||
|
Deferred
tax liability
|
8,115
|
6,213
|
46
|
336
|
—
|
|||||||||||||||
|
Customer
advances, net of current portion
|
91,359
|
60,153
|
27,687
|
28,438
|
—
|
|||||||||||||||
|
Other
long-term liabilities
|
25,950
|
14,975
|
—
|
—
|
—
|
|||||||||||||||
|
Notes
payable to Cypress, net of current portion
|
—
|
—
|
—
|
—
|
21,673
|
|||||||||||||||
|
Convertible
preferred stock
|
—
|
—
|
—
|
—
|
8,552
|
|||||||||||||||
|
Total
stockholders’ equity (deficit)
|
1,021,374
|
864,090
|
488,771
|
258,650
|
(10,664
|
)
|
||||||||||||||
General
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 business segment, or Components
Segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our Systems Segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other
suppliers.
In
November 2005, we raised net proceeds of $145.6 million in an initial public
offering, or IPO, of 8.8 million shares of class A common stock at a price
of $18.00 per share. In June 2006, we completed a follow-on public offering of
7.0 million shares of our class A common stock, at a per share price of
$29.50, and received net proceeds of $197.4 million. In July 2007, we completed
a follow-on public offering of 2.7 million shares of our class A common stock,
at a discounted per share price of $64.50, and received net proceeds of $167.4
million.
In February
2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures to Lehman Brothers Inc., or Lehman Brothers, and lent
approximately 2.9 million shares of our class A common stock to Lehman Brothers
International (Europe) Limited, or LBIE. Net proceeds from the issuance of our
1.25% senior convertible debentures in February 2007 were $194.0 million. We did
not receive any proceeds from the approximate 2.9 million loaned shares of our
class A common stock, but received a nominal lending fee. In July 2007, we
issued $225.0 million in principal amount of our 0.75% senior convertible
debentures to Credit Suisse Securities (USA) LLC, or Credit Suisse, and lent
approximately 1.8 million shares of our class A common stock to Credit Suisse
International, or CSI. Net proceeds from the issuance of our 0.75% senior
convertible debentures in July 2007 were $220.1 million. We did not receive any
proceeds from the approximate 1.8 million loaned shares of class A common stock,
but received a nominal lending fee. See Note 11 of Notes to our Consolidated
Financial Statements.
In
January 2007, we completed the acquisition of PowerLight, a privately-held
company which developed, engineered, manufactured and delivered large-scale
solar power systems for residential, commercial, government and utility
customers worldwide. These activities are now performed by our Systems Segment.
As a result of the acquisition, PowerLight became our wholly-owned subsidiary.
In June 2007, we changed PowerLight’s name to SunPower Corporation, Systems (SP
Systems) to capitalize on SunPower’s name recognition. We believe the
acquisition will enable us to develop the next generation of solar products and
solutions that will accelerate reduction in solar system cost to compete with
retail electric rates without incentives and simplify and improve customer
experience. The total purchase consideration and future stock compensation for
the transaction was $334.4 million, consisting of $120.7 million in cash and
$213.7 million in common stock, restricted stock, stock options and related
acquisition costs. See Note 3 of Notes to our Consolidated Financial
Statements.
After
completion of our IPO in November 2005, Cypress Semiconductor Corporation, or
Cypress, held, in the aggregate, approximately 52.0 million shares of our class
B common stock, representing all of our then-outstanding class B common stock.
On May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5
million shares and 2.5 million shares, respectively, of our class B common stock
in offerings pursuant to Rule 144 of the Securities Act. Such shares converted
to 10.0 million shares of class A common stock upon the sale. We were a
majority-owned subsidiary of 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 our class B common stock, in the form of a pro rata dividend to the
holders of record as of September 17, 2008 of Cypress common stock. As a result,
our class B common stock now trades publicly and is listed on the Nasdaq Global
Select Market, along with our class A common stock.
Financial
Operations Overview
The
following describes certain line items in our Consolidated Statements of
Operations:
Total
Revenue
Systems
Segment Revenue: Our systems revenue represents sales of engineering,
procurement and construction, or EPC, projects and other services relating to
solar electric power systems that integrate our solar panels and balance of
systems components, as well as materials sourced from other manufacturers. In
the United States, where customers often utilize rebate and tax credit programs
in connection with projects rated one megawatt or less of capacity, we typically
sell solar systems rated up to one megawatt of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. In
Europe and South Korea, 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. The U.S. utility and power plant market demand for renewable
energy is expected to grow over 50% annually over the next five
years.
Components
Segment Revenue: Our components revenue represents sales of our solar
cells, solar panels and inverters to solar systems installers and other
resellers. Factors affecting our components revenue include unit volumes of
solar cells and 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 the Systems Segment which
reduces the inventory available to sell through our Components Segment. We have
experienced quarter-over-quarter unit volume increases in shipments of our solar
power products since we began commercial production in the fourth quarter of
2004. From fiscal 2005 through 2008, we have experienced increases in average
selling prices for our solar power products primarily due to the strength of
end-market demand and favorable currency exchange rates. Accordingly, our
Components Segment's average selling prices were slightly higher during fiscal
2008 compared to the same period in fiscal 2007 and 2006. Over the next
several years, we expect average selling prices for our solar power products to
decline as the market becomes more competitive, as certain products mature and
as manufacturers are able to lower their manufacturing costs and pass on some of
the savings to their customers.
Cost
of Revenue
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 60% of its
solar panel installations with SunPower solar panels in fiscal 2008 compared to
27% in fiscal 2007. Over time, we expect that our Systems Segment will increase
the percentage of its construction projects sourced with SunPower solar panels
to as much as 80% in fiscal 2009. 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.
In
connection with the acquisition of PowerLight (now known as SP Systems) in
January 2007, there were $79.5 million of identifiable purchased intangible
assets, of which $56.8 million was being amortized to cost of systems revenue on
a straight-line basis over periods ranging from one to five years. As a result
of our new branding strategy, during the quarter ended July 1, 2007, the
PowerLight tradename asset with a net book value of $14.1 million was written
off as an impairment of acquisition-related intangible assets. As such, the
remaining balance of $41.2 million of intangible assets, which are related to
purchased patents, technology and backlog are being amortized to cost of systems
revenue on a straight-line basis over periods ranging from one to four
years.
Our cost
of systems revenue will also fluctuate from period to period due to the mix of
projects completed and recognized as revenue, in particular between large
projects and large commercial installation projects. Our gross profit each
quarter is affected by a number of factors, including the types of projects in
process and their various stages of completion, the gross margins estimated for
those projects in progress and the actual system group department overhead
costs. Historically, 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 profit. Our Systems
Segment gross profit may also be impacted by certain adjustments for inventory
reserves. We are seeking to improve gross profit over time as we implement cost
reduction efforts, improve manufacturing processes, and seek better and less
expensive materials globally, as we grow the business to attain economies of
scale on fixed costs. Any increase in gross profit based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenue in line with expectations, and other
competitive pressures on gross margin.
Components
Segment Cost of Revenue: Our cost of components revenue consists
primarily of silicon ingots and wafers used in the production of solar cells,
along with other materials such as chemicals and gases that are needed to
transform silicon wafers into solar cells. For our solar panels, our cost of
revenue includes the cost of solar cells and raw materials such as glass, frame,
backing and other materials, as well as the assembly costs we pay to our
third-party subcontractor in China. Our Components Segment gross profit each
quarter is affected by a number of factors, including average selling prices for
our products, our product mix, our actual manufacturing costs, the utilization
rate of our solar cell manufacturing facilities and changes in amortization of
intangible assets.
From time
to time, we enter into agreements whereby the selling price for certain of our
solar power products is fixed over a defined period. An increase in our
manufacturing costs over such a defined period could have a negative impact on
our overall gross profit. Our gross profit may also be impacted by fluctuations
in manufacturing yield rates and certain adjustments for inventory reserves. We
expect our gross profit to increase over time as we improve our manufacturing
processes and as we grow our business and leverage certain of our fixed costs.
An expected increase in gross profit based on manufacturing efficiencies,
however, could be partially or completely offset by increased raw material costs
or decreased revenue. Our inventory policy is described in more detail under
“Critical Accounting Policies and Estimates.”
Other
Cost of Revenue Factors: Other factors contributing to cost of
revenue include depreciation, provisions for estimated warranty, salaries,
personnel-related costs, freight, royalties, facilities expenses and
manufacturing supplies associated with contracting 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. To date, demand for our solar power
products has been robust and our production output has increased allowing us to
spread a significant amount of our fixed costs over relatively high production
volume, thereby reducing our per unit fixed cost. We currently operate twelve
solar cell manufacturing lines in our two solar cell manufacturing facilities,
with a total rated manufacturing capacity of 414 megawatts per year. In
addition, we currently operate seven solar panel manufacturing lines in our
solar panel assembly facility, with a total rated manufacturing capacity of 210
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. 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.
Operating
Expenses
Our
operating expenses include research and development expense, sales, general and
administrative expense, purchased in-process research and development expense
and impairment of acquisition-related intangible assets. 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. We
expect our research and development expense to continually increase in absolute
dollars as we continue to develop new processes to further improve the
conversion efficiency of our solar cells and reduce their manufacturing cost,
and as we develop new products to diversify our product offerings.
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 25%, 21% and 8% in fiscal 2008, 2007 and 2006,
respectively.
Sales,
general and administrative expense for our business consists primarily of
salaries and related personnel costs, professional fees, insurance and other
selling and marketing expenses. We expect our sales, general and administrative
expense to increase in absolute dollars as we expand our sales and marketing
efforts, hire additional personnel and improve our information technology
infrastructure to support our growth. However, assuming our revenue increases as
we expect, over time we anticipate that our sales, general and administrative
expense will continue to decrease as a percentage of revenue.
Purchased
in-process research and development expense for fiscal 2007 of $9.6 million
resulted from the acquisition of PowerLight (now known as SP Systems), as
technological feasibility associated with the in-process research and
development projects had not been established and no alternative future use
existed. In addition, as a result of the change in our branding strategy during
the quarter ended July 1, 2007, the net book value of the PowerLight tradename
of $14.1 million was written off as an impairment of acquisition-related
intangible assets.
Other
Income (Expense), Net
Interest income
consists of interest earned on cash, cash equivalents, restricted cash and
investments. Interest expense primarily relates to interest due on convertible
debt and outstanding customer advance payments (see Note 8 of Notes to our
Consolidated Financial Statements). In February 2007, we issued $200.0 million
in principal amount of our 1.25% senior convertible debentures and in July 2007,
we issued $225.0 million in principal amount of our 0.75% senior convertible
debentures (see Note 11 of Notes to our Consolidated Financial Statements).
Other, net consists primarily of the write-off of unamortized debt issuance
costs as a result of the market price conversion trigger on our senior
convertible debentures being met in December 2007, amortization of debt issuance
costs, impairment of investments, gains or losses from derivatives and foreign
exchange.
Income
Taxes
For
financial reporting purposes, during periods when we were a subsidiary of
Cypress, income tax expense and deferred income tax balances has historically
been calculated as if we were a separate entity and had prepared our own
separate tax return. Effective with the closing of our follow-on public offering
of common stock in June 2006, we are no longer eligible to file federal and most
state consolidated tax returns with Cypress. As of September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock to its
shareholders, so we are no longer eligible to file any state combined tax
returns with Cypress. Accordingly, we have agreed to pay Cypress for any federal
income tax credit or net operating loss carryforwards utilized in our federal
tax returns in subsequent periods that originated while our results were
included in Cypress’s federal tax returns. Deferred tax assets and liabilities
are recognized for temporary differences between financial statement and income
tax bases of assets and liabilities. Valuation allowances are provided against
deferred tax assets when management cannot conclude that it is more likely than
not that some portion or all deferred tax assets will be realized. See Notes 1,
2 and 13 of Notes to our Consolidated Financial Statements.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registration with the Philippine Economic Zone
Authority, which provide that we pay no income tax in the Philippines. Our
current income tax holidays expire within the next several years beginning in
2010, and we intend to apply for extensions and renewals upon expiration.
However, these tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (a) gross income attributable to activities
covered by our Philippine Economic Zone Authority registrations will be taxed at
a 5% preferential rate, and (b) our Philippine net income attributable to
all other activities will be taxed at the statutory Philippine corporate income
tax rate, currently 32%. Fiscal 2007 was the first year for which
profitable operations benefitted from the Philippine tax ruling.
Equity
in Earnings of Unconsolidated Investees
In the
third quarter of fiscal 2006, we entered into an agreement to form Woongjin
Energy Co., Ltd, or Woongjin Energy, a joint venture to manufacture
monocrystalline silicon ingots. This joint venture is located in South Korea and
began manufacturing in the third quarter of fiscal 2007. In October 2007, we
entered into an agreement to form First Philec Solar Corporation, or First
Philec Solar, a joint venture to provide wafer slicing services of silicon
ingots. This joint venture is located in the Philippines and became operational
in the second quarter of fiscal 2008. We account for these investments
using the equity method, in which the equity investments are classified as
“Other long-term assets” in the Consolidated Balance Sheets and our share of the
investees’ earnings is included in “Equity in earnings of unconsolidated
investees” in the Consolidated Statements of Operations. See Note 10 of Notes to
our Consolidated Financial Statements.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Our most
critical policies include: (a) revenue recognition, which impacts the
recording of revenue; (b) allowance for doubtful accounts and sales
returns, which impacts sales, general and administrative expense;
(c) warranty reserves, which impact cost of revenue and gross margin;
(d) valuation of inventories, which impacts cost of revenue and gross
margin; (e) accounting for equity in earnings of joint ventures, which
impacts net income; (f) valuation of long-lived assets, which impacts
write-offs of goodwill and other intangible assets; (g) valuation of
goodwill impairment, which impacts operating expense; (h) purchase accounting,
which impacts fair value of goodwill, other intangible assets and in-process
research and development expense; (i) fair value of financial instruments; and
(j) accounting for income taxes which impacts our tax provision (benefit).
We also have other key accounting policies that are less subjective and,
therefore, judgments in their application would not have a material impact on
our reported results of operations. The following is a discussion of our most
critical policies as of and for the year ended December 28, 2008, as well
as the estimates and judgments involved.
Revenue
Recognition
Our
systems revenue is primarily comprised of EPC projects which are governed by
customer contracts that require us to deliver functioning solar power systems
and are generally completed within three to nine months from commencement of
construction. In addition, our Systems Segment also derives revenue from sales
of certain solar power products and services that are smaller in scope than an
EPC contract. We recognize revenue from fixed price construction contracts under
American Institute of Certified Public Accountants, or AICPA, Statement of
Position, or SOP, 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts,” or SOP 81-1, using the
percentage-of-completion method of accounting. Under this method, systems
revenue arising from fixed price construction contracts is recognized as work is
performed based on the percentage of incurred costs to estimated total
forecasted costs utilizing the most recent estimates of forecasted
costs.
In
addition to the EPC deliverable, a limited number of arrangements also include
multiple deliverables such as post-installation systems monitoring and
maintenance and system output performance guarantees. For contracts with
separately priced performance guarantees or maintenance, we recognize revenue
related to such separately priced elements on a straight-line basis over the
contract period in accordance with Financial Accounting Standards Board, or
FASB, Technical Bulletin, or FTB, 90-1, “Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts,” or FTB 90-1. For contracts
including performance guarantees or maintenance contracts not separately priced,
we follow the guidance in Emerging Issues Task Force Issue, or EITF, No. 00-21,
“Revenue Arrangements with Multiple Deliverables,” or EITF 00-21, to determine
whether the entire contract has more than one unit of
accounting.
We have
determined that post-installation systems monitoring and maintenance, and system
output performance guarantees qualify as separate units of accounting under EITF
00-21. Such post-installation elements are deferred at the time the contract is
executed and are recognized to income over the contractual term under Staff
Accounting Bulletin, or SAB, No. 104. The remaining EPC is recognized to income
on a percentage-of-completion basis under SOP 81-1.
In
addition, when arrangements include contingent revenue clauses such as
liquidated damages or customer termination or put rights for non-performance, we
defer the contingent revenue until such time as the contingencies
expire.
Incurred
costs include all direct material, labor, subcontract costs and those indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Job material costs are included in incurred costs when the job materials
have been installed. Revenue is deferred and recognized upon installation, in
accordance with the percentage-of-completion method of accounting. Job materials
are considered installed materials when they are permanently attached or fitted
to the solar power system as required by the job’s engineering
design.
Due to
inherent uncertainties in estimating cost, job costs estimates are reviewed
and/or updated by management working within the Systems Segment. The Systems
Segment determines the completed percentage of installed job materials at the
end of each month; generally this information is also reviewed with the
customer’s on-site representative. The completed percentage of installed job
materials is then used for each job to calculate the month-end job material
costs incurred. Direct labor, subcontractor and other costs are charged to
contract costs as incurred. Provisions for estimated losses on uncompleted
contracts, if any, are recognized in the period in which the loss first becomes
probable and reasonably estimable. Contracts may include profit incentives such
as milestone bonuses. These profit incentives are included in the contract value
when their realization is reasonably assured.
We sell
our components products, as well as our balance of systems products from the
Systems Segment, to system integrators and original equipment manufacturers, or
OEMs, and recognize revenue, net of accruals for estimated sales returns, when
persuasive evidence of an arrangement exists, the product has shipped, title and
risk of loss has passed to the customer, the sales price is fixed and
determinable, collectability of the resulting receivable is reasonably assured
and the rights and risks of ownership have passed to the customer. We do not
currently have any significant post-shipment obligations, including
installation, training or customer acceptance clauses with any of our customers,
which could have an impact on revenue recognition. As such, we record revenue
and trade receivables for the selling price when the above conditions are met.
Our revenue recognition is consistent across product lines and sales practices
are consistent across all geographic locations.
Allowance
for Doubtful Accounts and Sales Returns
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. A considerable amount
of judgment is required to assess the likelihood of the ultimate realization of
accounts receivables. We make our estimates of the collectability of our
accounts receivable by analyzing historical bad debts, specific customer
creditworthiness and current economic trends. The allowance for doubtful
accounts was $1.9 million and $1.4 million as of December 28, 2008 and
December 30, 2007, respectively.
In
addition, at the time revenue is recognized, we simultaneously record estimates
for sales returns which reduces revenue. These estimates are based on historical
sales returns, analysis of credit memo data and other known factors. Actual
returns could differ from these estimates. The allowance for sales returns was
$0.2 million and $0.4 million as of December 28, 2008 and December 30,
2007, respectively.
Warranty
Reserves
It is
customary in our business and industry to warrant or guarantee the performance
of our solar panels at certain levels of conversion efficiency for extended
periods, often as long as 20 years. It is also customary to warrant or guarantee
the functionality of our solar cells for at least 10 years. In addition, we
generally provide a warranty on our systems for a period of 5 to 10
years. We also pass through to customers long-term warranties from the OEMs of
certain system components. Warranties of 20 years from solar panels suppliers
are standard, while inverters typically carry a 2-, 5- or 10-year warranty.
We therefore maintain warranty reserves to cover potential liability that could
arise from these guarantees. Our potential liability is generally in the form of
product replacement or repair. Our warranty reserves reflect our best estimate
of such liabilities and are based on our
- 37
-
analysis
of product returns, results of industry-standard accelerated testing, unique
facts and circumstances involved in each particular construction contract and
various other assumptions that we believe to be reasonable under the
circumstances. We recognize our warranty reserve as a component of cost of
revenue. Our warranty reserve includes specific accruals for known product and
system issues and an accrual for an estimate of incurred but not reported
product and system issues based on historical activity. Due to effective product
testing and the short turnaround time between product shipment and the detection
and correction of product failures, accruals for warranties issued were $14.2
million, $10.8 million and $3.2 million during fiscal 2008, 2007 and 2006,
respectively, and the year-over-year increase is primarily attributable to
increased sales of our products. See Note 9 of Notes to our Consolidated
Financial Statements.
Valuation
of Inventory
Inventory
is valued at the lower of cost or market. Certain factors could impact the
realizable value of our inventory, so we continually evaluate the recoverability
based on assumptions about customer demand and market conditions. The evaluation
may take into consideration historic usage, expected demand, anticipated sales
price, new product development schedules, the effect new products might have on
the sale of existing products, product obsolescence, customer concentrations,
product merchantability and other factors. The reserve or write-down is equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves or write-downs may be required that could
negatively impact our gross margin and operating results. If actual market
conditions are more favorable, we may have higher gross margin when products
that have been previously reserved or written down are eventually
sold.
Equity
in Earnings of Unconsolidated Investees
We
account for our investment in Woongjin Energy located in South Korea and First
Philec Solar located in the Philippines 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
Consolidated Balance Sheets and our share of the investees’ earnings is included
in “Equity in earnings of unconsolidated investees” in the Consolidated
Statements of Operations. As of December 28, 2008 and December 30, 2007, we had
a 40.0% and 19.9% equity investment, respectively, in Woongjin Energy. As
of December 28, 2008 and December 30, 2007, we had a 19.0% and 16.9% equity
investment, respectively, in First Philec Solar. To calculate our share of the
investees’ earnings, we adjust the net income (loss) of each joint venture to
conform to U.S. GAAP and multiply that by our equity investment.
We
periodically evaluate the qualitative and quantitative attributes of our
relationship with Woongjin Energy and First Philec Solar to determine whether we
are the primary beneficiary of the joint ventures and need to consolidate their
financial results into our financial statements in accordance with FASB Staff
Position, or FSP, Interpretation No. 46 “Consolidation of Variable Interest
Entities,” or FSP FIN 46(R). We do not consolidate the financial results of
Woongjin Energy and First Philec Solar as we have concluded that we are not the
primary beneficiary of any of the above joint ventures and we do not absorb a
majority of the joint ventures’ income (loss) or receive a majority of the
expected residual returns. See Note 10 of the Notes to our Consolidated
Financial Statements for discussions of our joint ventures.
Valuation
of Long-Lived Assets
Our
long-lived assets include manufacturing equipment and facilities as well as
certain intangible assets. Our business requires heavy investment in
manufacturing facilities that are technologically advanced but can quickly
become significantly under-utilized or rendered obsolete by rapid changes in
demand for solar power products produced in those facilities. In
November 2004, Cypress acquired 100% ownership of all outstanding shares of
our capital stock, and as a result of that transaction, we were required to
record Cypress’s cost of acquiring us in our financial statement by recording
intangible assets including purchased technology, patents, trademarks,
distribution agreement and goodwill. In January 2007, we acquired PowerLight,
and in January 2008 and July 2008, we acquired Solar Solutions (subsequently
renamed SunPower Italia S.r.l., or SunPower Italia) and Solar Sales Pty. Ltd.
(subsequently renamed SunPower Corporation Australia Pty. Ltd., or SunPower
Australia), respectively. In connection with the transactions, we recorded
all the acquired assets and liabilities at their fair values on the date of the
acquisition, including goodwill and identified intangible assets.
We
evaluate our long-lived assets, including property, plant and equipment and
purchased intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. Prior to fiscal 2007, we operated in one business segment and
therefore impairment of long-lived assets was assessed at the enterprise level.
As a result of the acquisition of PowerLight, we began operating in two business
segments, the Systems Segment and Components Segment, and impairment of
long-lived assets is assessed at the business segment level. 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 or the
strategy for our business and significant negative industry or economic trends.
Impairments are recognized based on the difference between the fair value of the
asset and its carrying value, and fair value is generally measured based on
discounted cash flow analyses.
In fiscal
2008, we recorded a $2.2 million impairment charge to cost of components revenue
for manufacturing equipment located in a Texas wafer fabrication facility. As a
result of Cypress’s announcement to close its Texas wafer fabrication facility
that manufactured our imaging and infrared detector products, we evaluated our
alternatives relating to the future plans for this business and decided to
wind-down our activities related to the imaging detector product line in the
first quarter of fiscal 2008. In fiscal 2007, we recorded $14.4 million of
impairment charges relating to long-lived assets, primarily related to a $14.1
million write-off of the carrying value of the PowerLight tradename resulting
from a change in our branding strategy.
Goodwill
Impairment Testing
On
November 9, 2004, Cypress acquired 100% ownership of all outstanding shares
of our capital stock, excluding unexercised warrants and options. As a result of
that transaction, we were required to record Cypress’ cost of acquiring us,
including its equity investment and pro rata share of our losses in our
financial statements by recording intangible assets including purchased
technology, patents, trademarks, distribution agreement and goodwill. In
January 2007, we acquired PowerLight, and in January 2008 and July 2008, we
acquired SunPower Italia and SunPower Australia, respectively, and as a result
of the transactions, we were required to record all assets and liabilities
acquired under the purchase acquisition, including goodwill and identified
intangible assets, at fair value in our financial statements. We perform a
goodwill impairment test on an annual basis and will perform an assessment
between annual tests in certain circumstances. The process of evaluating the
potential impairment of goodwill is highly subjective and requires significant
judgment at many points during the analysis. In estimating the fair value of our
business, we make estimates and judgments about our future cash flows. Our cash
flow forecasts are based on assumptions that are consistent with the plans and
estimates we use to manage our business. See Note 4 of Notes to our Consolidated
Financial Statements.
Purchase
Accounting
We record
all assets and liabilities acquired in purchase acquisitions, including
goodwill, identified intangible assets and in-process research and development,
at fair value as required by SFAS No. 141 “Business Combinations.” The
initial recording of goodwill, identified intangible assets and in-process
research and development requires certain estimates and assumptions especially
concerning the determination of the fair values and useful lives of the acquired
intangible assets. The judgments made in the context of the purchase price
allocation can materially impact our future results of operations. Accordingly,
for significant acquisitions, we obtain assistance from third-party valuation
specialists. The valuations are based on information available at the
acquisition date. Goodwill is not amortized but is subject to annual tests for
impairment or more often if events or circumstances indicate they may be
impaired. Other identified intangible assets are amortized over their estimated
useful lives and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount. See Note 3 and 4 of
Notes to our Consolidated Financial Statements.
Fair
Value of Financial Instruments
Effective
December 31, 2007, we adopted the provisions of SFAS No. 157 “Fair
Value Measurements,” or SFAS No. 157, which defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Our
financial assets and financial liabilities that require recognition under SFAS
No. 157 include available-for-sale securities under SFAS No. 115
“Accounting for Investment in Certain Debt and Equity Securities,” or SFAS No.
115, and foreign currency derivatives. We enter into over-the-counter, or OTC,
foreign currency derivatives and use a valuation model to derive the value of
option and forward contracts. In determining fair value, we use various
valuation techniques, including market and income approaches to value
available-for-sale securities and foreign currency derivatives. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of us.
Unobservable inputs are inputs that reflect our assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. As such,
fair value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
|
•
|
Level
1—Valuations based on quoted prices in active markets for identical assets
or liabilities that we have the ability to access. Since valuations are
based on quoted prices that are readily and regularly available in an
active market, valuation of these products does not entail a significant
degree of judgment. Financial assets utilizing Level 1 inputs include most
money market funds and bank notes.
|
|
•
|
Level
2—Valuations based on quoted prices in markets that are not active or for
which all significant inputs are observable, directly or indirectly.
Financial assets utilizing Level 2 inputs include foreign currency option
contracts and forward exchange contracts and some corporate securities.
The selection of a particular model to value an OTC foreign currency
derivative depends upon the contractual term of, and specific risks
inherent with, the instrument as well as the availability of pricing
information in the market. We generally use similar models to value
similar instruments. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit curves
and measures of volatility. For OTC foreign currency derivatives that
trade in liquid markets, such as generic forward, option and swap
contracts, model inputs can generally be verified and model selections do
not involve significant management
judgment.
|
|
•
|
Level
3—Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. Financial assets utilizing Level 3 inputs
include money market funds comprised of the Reserve Primary Fund and the
Reserve International Liquidity Fund, collectively referred to as the
Reserve Funds, and corporate securities comprised of auction rate
securities. We use the market approach to estimate the price that would be
received to sell our Reserve Funds in an orderly transaction between
market participants ("exit price"). We reviewed the underlying holdings
and estimated the price of underlying fund holdings to estimate the fair
value of these funds. We use an income approach valuation model to
estimate the exit price of the auction rate securities, which is derived
as the weighted average present value of expected cash flows over various
periods of illiquidity, using a risk adjusted discount rate that is based
on the credit risk and liquidity risk of the
securities.
|
Availability
of observable inputs can vary from instrument to instrument and to the
extent that valuation is based on inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by our management in
determining fair value is greatest for instruments categorized in Level 3. In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. In
regards to our Reserve Funds, the market approach was based on both Level 2
(term, maturity dates, rates and credit risk) and Level 3 inputs. We determined
that the Level 3 inputs, particularly the liquidity premium, were the most
significant to the overall fair value measurement. In regards to our
auction rate securities, the income approach valuation model was based on both
Level 2 (credit quality and interest rates) and Level 3 inputs. We determined
that the Level 3 inputs were the most significant to the overall fair value
measurement, particularly the estimates of risk adjusted discount rates and
ranges of expected periods of illiquidity.
Unrealized
gains and losses of our available-for-sale securities and foreign currency
derivatives are excluded from earnings and reported as a component of other
comprehensive income (loss) on the Consolidated Balance Sheets.
Additionally, we assess whether an other-than-temporary impairment loss on our
available-for-sale securities has occurred due to declines in fair value or
other market conditions. Declines in fair value that are considered
other-than-temporary are recorded in other, net in the Consolidated Statements
of Operations.
In
general, investments with original maturities of greater than ninety days and
remaining maturities of less than one year are classified as short-term
investments. Investments with maturities beyond one year may also be classified
as short-term based on their highly liquid nature and because such investments
represent the investment of cash that is available for current
operations.
We also
invest in auction rate securities that are typically over-collateralized and
secured by pools of student loans originated under the Federal Family Education
Loan Program, or 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, or NRSRO, as
triple-A. Historically, these securities have provided liquidity through a Dutch
auction at pre-determined intervals every seven to 49 days. When auction
rate securities fail to clear at auction and we are unable to estimate when the
impacted auction rate securities will clear at the next auction, we classify
these as long-term, consistent with the stated contractual maturities of the
securities. The “stated” or “contractual” maturities for these securities
generally are between 20 to 30 years. A failed auction results in a lack of
liquidity, which occurs when sell orders exceed buy orders, and does not
necessarily signify a default by the issuer. Beginning in February 2008,
the auction rate securities market experienced a significant increase in the
number of failed auctions. See “Item 1A Risk Factors – If the recent credit market
conditions continue or worsen, they could have a material adverse impact on our
investment portfolio.” See also Note 6 of Notes
to our Consolidated Financial Statements.
Accounting
for Income Taxes
Our
global operations involve manufacturing, research and development and selling
activities. Profit from non-U.S. activities is subject to local country taxes
but not subject to United States tax until repatriated to the United States. It
is our intention to indefinitely reinvest these earnings outside the United
States. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. In assessing the need for a
valuation allowance, we consider historical levels of income, expectations and
risks associated with the estimates of future taxable income and ongoing prudent
and feasible tax planning strategies. In the event we determine that we would be
able to realize additional deferred tax assets in the future in excess of the
net recorded amount, or if we subsequently determine that realization of an
amount previously recorded is unlikely, we would record an adjustment to the
deferred tax asset valuation allowance, which would change income in the period
of adjustment.
On
January 1, 2007, we adopted the provisions for FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes, and Related Implementation Issues,”
or FIN 48, which is an interpretation of SFAS No. 109. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on de-recognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition issues. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement.
The
calculation of tax liabilities involves dealing with uncertainties in the
application of complex global tax regulations. We recognize potential
liabilities for anticipated tax audit issues in the United States and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If the estimate of tax liabilities proves to be less than the
ultimate tax assessment, a further charge to expense would result. We
accrue interest and penalties on tax contingencies as required by FIN 48 and
SFAS No. 109. This interest and penalty accrual is classified as income tax
provision (benefit) in the Consolidated Statements of Operations and is not
considered material. See Note 13 of Notes to our Consolidated Financial
Statements.
In
addition, foreign exchange gains (losses) may result from estimated tax
liabilities, which are expected to be realized in currencies other than the U.S.
dollar.
Results
of Operations
Revenue
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Systems
revenue
|
$
|
820,632
|
$
|
464,178
|
$
|
—
|
||||||
|
Components
revenue
|
614,287
|
310,612
|
236,510
|
|||||||||
|
Total
revenue
|
$
|
1,434,919
|
$
|
774,790
|
$
|
236,510
|
||||||
Total
Revenue: During fiscal 2008 and 2007, our total revenue was $1,434.9
million and $774.8 million, respectively, an increase of 85%. Our fiscal 2007
revenue increased 228% compared to our total revenue in 2006 of $236.5 million.
The significant increase in our total revenue from fiscal 2007 to 2008 is
attributable in part to the Systems Segment’s installation of more than 40
megawatts of production for several large-scale solar power plants in Spain, the
Components Segment’s continued increase in the demand for our solar cells and
solar panels and the continued increases in unit production and unit
shipments of both solar cells and solar panels as we have expanded our
manufacturing capacity. The significant increase in our total revenue from
fiscal 2006 to 2007 resulted from the combination of an increase in components
revenue of approximately $74.1 million during fiscal 2007, and the addition of
$464.2 million in systems revenue for fiscal 2007, as a result of the
acquisition of PowerLight (now known as SP Systems). We had twelve, seven and
four solar cell manufacturing lines in our two solar cell manufacturing
facilities as of December 28, 2008, December 30, 2007 and December 31, 2006,
respectively, with a total rated manufacturing capacity of 414 megawatts, 214
megawatts and 108 megawatts, respectively, per year. During fiscal 2008, 2007
and 2006, our two solar cell manufacturing facilities produced 236.9
megawatts, 100.1 megatwatts and 66.7 megawatts, respectively.
Sales
outside the United States represented approximately 64%, 55% and 68% of our
total revenue for fiscal 2008, 2007 and 2006, respectively, and we expect
international sales to remain a significant portion of overall sales for the
foreseeable future. International sales as a percentage of our total revenue
increased approximately 9% from fiscal 2007 to 2008 as our Systems Segment
installed more than 40 megawatts of production for several large-scale solar
power plants in Spain in fiscal 2008, and our Components Segment continues to
expand our global dealer network, with an emphasis on European expansion.
International sales as a percentage of our total revenue decreased approximately
13% from fiscal 2006 to 2007 primarily due to the completion of an approximately
14 megawatt solar power plant at Nellis Air Force Base in Nevada that currently
represents our largest installed solar power project in North
America.
Concentrations: We
have eight customers that each accounted for more than 10 percent of our total
revenue in one or more of fiscal 2008, 2007 and 2006 as follows:
|
Year Ended
|
|||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||
|
Significant
customers:
|
Business
Segment
|
||||||
|
Naturener
Group
|
Systems
|
18%
|
*
|
—%
|
|||
|
Sedwick
Corporate, S.L.
|
Systems
|
11%
|
*
|
—%
|
|||
|
SolarPack
|
Systems
|
*
|
18%
|
—%
|
|||
|
MMA
Renewable Ventures
|
Systems
|
*
|
16%
|
—%
|
|||
|
Conergy
AG
|
Components
|
*
|
*
|
25%
|
|||
|
Solon
AG
|
Components
|
*
|
*
|
24%
|
|||
|
PowerLight**
|
Components
|
n.a.
|
n.a.
|
16%
|
|||
|
General
Electric Company***
|
Components
|
*
|
*
|
10%
|
|||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
We
generate revenue from two business segments, as follows:
Systems
Segment Revenue: Our systems revenue for fiscal 2008 and 2007 was
$820.6 million and $464.2 million, respectively, which accounted for 57% and
60%, respectively, of our total revenue. We had no systems revenue in fiscal
2006. For fiscal 2008 and 2007, 92% and 84%, respectively, of systems
revenue was from EPC construction contracts and the remaining 8% and 16%,
respectively, was from materials-only sales contracts. Our systems revenue is
largely dependent on the timing of revenue recognition on large construction
projects and, accordingly, will fluctuate from period to period. For fiscal
2008, our Systems Segment benefited from strong power plant scale demand in
Europe, primarily in Spain, and reflected the completion of Spain based projects
before the expiration of the pre-existing feed-in tariff in September 2008. For
fiscal 2007, our Systems Segment benefited from strong demand for our solar
power systems in a rapidly growing solar business environment, particularly with
respect to the ongoing evolution of country-specific customer incentive
programs.
Naturener
Group, Sedwick Corporate, S.L., SolarPack and MMA Renewable Ventures purchased
systems from us as central-station power plants which generate electricity for
sale to commercial customers and under tariff to regional and public utilities
customers. In fiscal 2008 and 2007, approximately 37% and 32%, 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.
Components
Segment Revenue: Components revenue for fiscal 2008, 2007 and 2006
was $614.3 million, $310.6 million and $236.5 million, respectively, or 43%, 40%
and 100%, respectively, of our total revenue. During fiscal 2008, our
Components Segment benefited from strong demand in the residential and small
commercial roof-top markets through our dealer network in both Europe and the
United States. During fiscal 2008, we tripled the size of our dealer
network by adding more than 350 dealers worldwide. During fiscal 2007 and 2006,
our Components Segment benefited from continued strong world-wide demand for our
solar power products, increasing sequential quarterly average selling prices and
production volume output.
Cost
of Revenue
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Cost
of systems revenue
|
$
|
653,569
|
$
|
386,511
|
$
|
—
|
||||||
|
Cost
of components revenue
|
417,669
|
240,475
|
186,042
|
|||||||||
|
Total
cost of revenue
|
$
|
1,071,238
|
$
|
626,986
|
$
|
186,042
|
||||||
|
Total
cost of revenue as a percentage of revenue
|
75
|
%
|
81
|
%
|
79
|
%
|
||||||
|
Total
gross margin percentage
|
25
|
%
|
19
|
%
|
21
|
%
|
||||||
Details
to cost of systems revenue is as follows:
|
Year
Ended
|
||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
||||||
|
Amortization
of purchased intangible assets
|
$
|
7,691
|
$
|
20,085
|
||||
|
Stock-based
compensation
|
10,745
|
8,187
|
||||||
|
Factory
pre-operating costs
|
1,069
|
939
|
||||||
|
All
other cost of revenue
|
634,064
|
357,300
|
||||||
|
Total
cost of revenue
|
$
|
653,569
|
$
|
386,511
|
||||
|
Cost
of systems revenue as a percentage of revenue
|
80
|
%
|
83
|
%
|
||||
|
Total
gross margin percentage
|
20
|
%
|
17
|
%
|
||||
Details
to cost of components revenue is as follows:
|
Year
Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Amortization
of purchased intangible assets
|
$
|
4,305
|
$
|
4,767
|
$
|
4,690
|
||||||
|
Stock-based
compensation
|
8,144
|
4,213
|
846
|
|||||||||
|
Impairment
of long-lived assets
|
2,203
|
—
|
—
|
|||||||||
|
Factory
pre-operating costs
|
1,870
|
3,964
|
383
|
|||||||||
|
All
other cost of revenue
|
401,147
|
227,531
|
180,123
|
|||||||||
|
Total
cost of revenue
|
$
|
417,669
|
$
|
240,475
|
$
|
186,042
|
||||||
|
Cost
of components revenue as a percentage of revenue
|
68
|
%
|
77
|
%
|
79
|
%
|
||||||
|
Total
gross margin percentage
|
32
|
%
|
23
|
%
|
21
|
%
|
||||||
Total
Cost of Revenue: During fiscal 2008 and 2007, our total cost of
revenue was $1,071.2 million and $627.0 million, respectively, which represents
an increase of 71%. Our fiscal 2007 cost of revenue increased 237% compared to
our total cost of revenue in 2006 of $186.0 million. The increase in total cost
of revenue resulted from increased volume in all cost of revenue spending
categories and corresponds with an increase of 85% in total revenue from fiscal
2007 to 2008 and 228% from fiscal 2006 to 2007. As a percentage of total
revenue, our total cost of revenue decreased from 81% in fiscal 2007 to 75% in
fiscal 2008. This decrease in total cost of revenue as a percentage of total
revenue is reflective of decreased costs of polysilicon beginning in the second
quarter of fiscal 2008 and improved manufacturing economies of scale associated
with markedly higher production volume, partially offset by (i) a one-time asset
impairment charge of $2.2 million in fiscal 2008 relating to the
wind-down of our imaging detector product line; (ii) a more favorable mix of
business in our Systems Segment that benefited gross margin by approximately
five percentage points during fiscal 2007; and (iii) the $2.7 million settlement
received from one of our suppliers in the Components Segment during fiscal 2007
in connection with defective materials sold to us during 2006 that was reflected
as a reduction to total cost of revenue.
As a
percentage of total revenue, our total cost of revenue increased from 79% in
fiscal 2006 to 81% in fiscal 2007 primarily due to a $20.1 million increase in
amortization of intangible assets charged to cost of systems revenue for fiscal
2007 and an additional $8.2 million in stock-based compensation expense charged
to cost of systems revenue incurred in fiscal 2007, both associated with our
acquisition of PowerLight (now known as SP Systems). Additionally, costs of raw
materials such as polysilicon continued to increase from fiscal 2006 to 2007 and
we began incurring pre-operating costs associated with FAB2 and solar panel
assembly facility starting in the fourth quarter of 2006. The additional cost of
revenue in fiscal 2007 was only partially offset by improved manufacturing
economies of scale associated with markedly higher production volume and
improved yields.
Since the
second half of 2006, we have increased our estimated warranty reserve provision
rates based on results of our recent testing that simulates adverse
environmental conditions and potential failure rates our solar panels could
experience during their 20-year warranty period. Provisions for
warranty reserves charged to cost of revenue were $14.2 million, $10.8
million, and $3.2 million during fiscal 2008, 2007 and 2006, respectively. As a
result of the acquisitions of SunPower Italia and SunPower Australia in fiscal
2008 and PowerLight (now known as SP Systems) in fiscal 2007, amortization of
intangible assets charged to cost of revenue totaled $12.0 million in fiscal
2008, as compared to $24.9 million in fiscal 2007 and $4.7 million in fiscal
2006. Amortization of intangible assets charges represent amortization of
purchased technology, patents, trademarks and other intangible assets.
Stock-based compensation charges to cost of revenue were $18.9 million, $12.4
million, and $0.8 million during fiscal 2008, 2007 and 2006,
respectively. The substantial increase in stock-based compensation expense
in fiscal 2008 and 2007 as compared to fiscal 2006 primarily relates to the
acquisition of PowerLight (now known as SP Systems).
Systems
Segment Gross Margin: Gross margin was $167.1 million and $77.7
million for fiscal 2008 and 2007, respectively, or 20% and 17% of systems
revenue, respectively. Gross margin increased due to a higher percentage of
SunPower solar panels used in its projects as well as cost savings we realized
from more efficient field implementation of our systems trackers.
Components
Segment Gross Margin: Gross margin was $196.6 million, $70.1 million
and $50.5 million for fiscal 2008, 2007 and 2006, respectively, or 32%, 23% and
21%, respectively, of components revenue. Gross margin increased due to higher
average solar cell conversion efficiency and better silicon utilization,
continued reduction in silicon costs, higher volume, and slightly higher average
selling prices.
Research
and Development
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Research
& development
|
$
|
21,474
|
$
|
13,563
|
$
|
9,684
|
||||||
|
As
a percentage of revenue
|
1
|
%
|
2
|
%
|
4
|
%
|
||||||
During
fiscal 2008 and 2007, our research and development expense was $21.5 million and
$13.6 million, respectively, which represents an increase of 58%. Our fiscal
2007 research and development expense increased 40% compared to $9.7 million in
fiscal 2006. The increase in spending year-over-year resulted primarily from:
(i) increases in salaries, benefits and stock-based compensation costs as a
result of increased headcount from approximately 40 on December 31, 2006 to 70
on December 30, 2007 to 150 on December 28, 2008; and (ii) costs related to the
development of our second generation of more efficient solar cells and thinner
polysilicon wafers for solar cell manufacturing, as well as development of new
processes to automate solar panel assembly operations. These increases were
partially offset by grants and cost reimbursements received from various
government entities in the United States.
Sales,
General and Administrative
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Sales,
general & administrative
|
$
|
173,740
|
$
|
108,256
|
$
|
21,677
|
||||||
|
As
a percentage of revenue
|
12
|
%
|
14
|
%
|
9
|
%
|
||||||
During
fiscal 2008 and 2007, our sales, general and administrative expense, or SG&A
expense, was $173.7 million and $108.3 million, respectively, which represents
an increase of 60%. Our fiscal 2007 SG&A expense increased 399% compared to
$21.7 million in fiscal 2006. The increase in costs year-over-year resulted
primarily from higher spending in all of the functional areas to support the
growth of our business. Headcount related to SG&A expense increased
from approximately 90 on December 31, 2006 to 230 on December 30, 2007 to 640 on
December 28, 2008. Additional costs increases were related to sales and
marketing spending to expand our global dealer network primarily in Europe and
global branding initiatives, as well as increased expenses associated with
deployment of a new enterprise resource planning system, legal and accounting
services. During fiscal 2008, 2007 and 2006, stock-based compensation included
in our SG&A expense was approximately $47.3 million, $37.0 million and $2.8
million, respectively. As a percentage of revenue, SG&A
expense decreased to 12% in fiscal 2008 from 14% in fiscal 2007,
because these expenses increased at a lower rate than the rate of growth of
our revenue. SG&A expense increased from 9% in fiscal 2006 to 14% in
fiscal 2007 largely due to the acquisition and integration of PowerLight (now
known as SP Systems).
Purchased
In-Process Research and Development, or IPR&D
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Purchased
in-process research and development
|
$ |
—
|
$ |
9,575
|
$ |
—
|
||||||
|
As
a percentage of revenue
|
n.a.
|
1
|
% |
n.a.
|
||||||||
For
fiscal 2007, we recorded an IPR&D charge of $9.6 million in connection
with the acquisition of PowerLight (now known as SP Systems) in January 2007, as
technological feasibility associated with the IPR&D projects had not been
established and no alternative future use existed. No in-process research and
development expense was recorded for fiscal 2008 and 2006. See Note 3 of Notes
to our Consolidated Financial Statements.
Impairment
of Acquisition-Related Intangible Assets
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Impairment
of acquisition-related intangible assets
|
$
|
—
|
$
|
14,068
|
$
|
—
|
||||||
|
As
a percentage of revenue
|
n.a.
|
2
|
%
|
n.a.
|
||||||||
For
fiscal 2007, we recognized a charge for the impairment of acquisition-related
intangible assets of $14.1 million. In June 2007, we changed our branding
strategy and consolidated all of our product and service offerings under the
SunPower tradename. As a result of the change in our branding
strategy, during the quarter ended July 1, 2007, the net book value of the
PowerLight tradename of $14.1 million was written off as an impairment of
acquisition-related intangible assets. See Note 3 and 4 of Notes to our
Consolidated Financial Statements.
Other
Income (Expense), Net
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Interest
income
|
$
|
10,789
|
$
|
13,882
|
$
|
10,086
|
||||||
|
As
a percentage of revenue
|
1
|
%
|
2
|
%
|
4
|
%
|
||||||
|
Interest
expense
|
$
|
(4,387)
|
$
|
(5,071)
|
$
|
(1,809)
|
||||||
|
As
a percentage of revenue
|
(0)
|
%
|
(1)
|
%
|
(1)
|
%
|
||||||
|
Other,
net
|
$
|
(27,285)
|
$
|
(7,593)
|
$
|
1,077
|
||||||
|
As
a percentage of revenue
|
(2)
|
%
|
(1)
|
%
|
0
|
%
|
||||||
Interest
income during fiscal 2008, 2007 and 2006 primarily represents interest income
earned on our cash, cash equivalents, restricted cash and investments during
these periods. The decrease in interest income of 22% from fiscal 2007 to 2008
resulted from lower cash holdings related to capital expenditures for our
manufacturing capacity expansion. The increase in interest income of 38% from
fiscal 2006 to 2007 is primarily the effect of interest earned on $581.5 million
in net proceeds from our class A common stock and convertible debenture
offerings in February and July 2007, partially offset by the use of cash for
capital expenditures for our manufacturing capacity expansion.
Interest
expense during fiscal 2008 and 2007 relates to interest due on convertible
debt and customer advance payments. Interest expense during fiscal 2006
primarily relates to customer advance payments. The decrease in interest expense
of 13% from fiscal 2007 to 2008 resulted from capitalized interest of $1.4
million in fiscal 2008. The increase in interest expense of 180% from fiscal
2006 to 2007 is primarily due to interest related to the aggregate of $425.0
million in convertible debentures issued in February and July 2007. Our
convertible debt was used in part to fund our capital expenditures for our
manufacturing capacity expansion.
In May
2008, the FASB issued FSP 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, which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our convertible debt by requiring us to
separately account for the liability and equity components of the convertible
debt in a manner that reflects interest expense equal to our non-convertible
debt borrowing rate. FSP APB 14-1 may result in significantly higher non-cash
interest expense on our convertible debt. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
The
following table summarizes the components of other, net:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Write-off
of unamortized debt issuance costs
|
$
|
(972
|
)
|
$
|
(8,260
|
)
|
$
|
—
|
||||
|
Amortization
of debt issuance costs
|
—
|
(1,710
|
)
|
—
|
||||||||
|
Impairment
of investments
|
(5,408
|
)
|
—
|
—
|
||||||||
|
Gain
(loss) on derivatives and foreign exchange, net of tax
|
(20,602
|
)
|
2,086
|
863
|
||||||||
|
Other
income (expense),
net
|
(303
|
)
|
291
|
214
|
||||||||
|
Total
other, net
|
$
|
(27,285
|
)
|
$
|
(7,593
|
)
|
$
|
1,077
|
||||
Other,
net expenses during fiscal 2008 consists primarily of losses totaling $6.5
million from expensing the time value of option contracts, losses totaling
$14.1 million on derivatives and foreign exchange largely due to the volatility
in the current markets, a $1.0 million write-off of unamortized debt
issuance costs as a result of the market price conversion trigger on our senior
convertible debentures being met in December 2007 and impairment charges
totaling $5.4 million for auction rate securities, certain money market
securities and non-publicly traded investments. Other, net expenses during
fiscal 2007 consists primarily of a write-off of unamortized debt issuance costs
totaling $8.3 million and amortization of debt issuance costs totaling $1.7
million, offset slightly by gains totaling $2.1 million from derivatives and
foreign exchange. For fiscal 2006, other, net income consists primarily of gains
from derivatives and foreign exchange.
Income
Taxes
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Income
tax provision (benefit)
|
$
|
69,368
|
$
|
(5,920)
|
$
|
1,945
|
||||||
|
As
a percentage of revenue
|
5
|
%
|
(1)
|
%
|
1
|
%
|
||||||
In fiscal
2008, our income tax expense was primarily composed of domestic and foreign
income taxes in certain jurisdictions where our operations are profitable. In
fiscal 2007, our income tax benefit was principally the result of recognition of
deferred tax assets to the extent of deferred tax liabilities created by the
acquisition of PowerLight (now known as SP Systems) in January 2007, net of
foreign income taxes in profitable jurisdictions where the tax rates are less
than the U.S. statutory rate. In fiscal 2006, our income tax expense was
predominately for foreign income taxes in certain jurisdictions where operations
were profitable.
As of
December 28, 2008, we had federal net operating loss carryforwards of
approximately $57.6 million. These federal net operating loss carryforwards will
expire in 2027. We had California state net operating loss carryforwards of
approximately $73.6 million as of December 28, 2008, which expire at
various dates from 2011 to 2017. We also had research and development credit
carryforwards of approximately $4.0 million for federal tax purposes and $4.6
million for state tax purposes. 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 December 28, 2008. In the event we determine that the realization
of these deferred tax assets associated with our acquisition of PowerLight (now
known as SP Systems) and Cypress’s acquisition of us is more likely than not to
occur, the reversal of the related valuation allowance will first reduce
goodwill, then intangible assets and lastly as a reduction to the provision for
taxes. Due in part to equity financings, we experienced “ownership changes” as
defined in Section 382 of the Internal Revenue Code, or the Code.
Accordingly, our use of a portion of the net operating loss carryforwards and
credit carryforwards is limited by the annual limitations described in
Sections 382 and 383 of the Code. The majority of the net operating loss
carryforwards were created by employee stock transactions. Because there is
uncertainty as to the realizability of the loss carryforwards, the portion
created by employee stock transactions are not reflected on our Consolidated
Balance Sheets.
Equity in earnings of unconsolidated
investees
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Equity
in earnings of unconsolidated investees, net of taxes
|
$
|
14,077
|
$
|
(278)
|
$
|
—
|
||||||
|
As
a percentage of revenue
|
1
|
%
|
(0)
|
%
|
n.a.
|
|||||||
During
fiscal 2008 and 2007, our equity in earnings of unconsolidated investees were
gains of $14.1 million and losses of $0.3 million, respectively. Our share
of Woongjin Energy’s income totaled $14.2 million in fiscal 2008 as compared to
a loss of $0.3 million in fiscal 2007 due to 1) increases in production since
Woongjin Energy began manufacturing in the third quarter of fiscal 2007; 2) our
equity investment increased from 19.9% as of December 30, 2007 to 40.0% as of
December 28, 2008; and 3) a $6.3 million foreign currency transaction gain that
resulted from the strengthening of the U.S. dollar versus the Korean Won. 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 fiscal 2008. See Note
10 of Notes to our Consolidated Financial Statements.
Liquidity
and Capital Resources
In
December 2008, we borrowed Malaysian Ringgit 190.0 million, or approximately
$54.6 million, from the Malaysian Government under a Malaysian Ringgit 1.0
billion, or approximately $287.4 million, facility agreement we entered into in
connection with the construction of FAB3 in Malaysia. In February 2007, we
raised $194.0 million net proceeds from the issuance of 1.25% senior convertible
debentures. In July 2007, we raised $220.1 million net proceeds from the
issuance of 0.75% senior convertible debentures and $167.4 million net proceeds
from the completion of a follow-on offering of 2.7 million shares of our class A
common stock. In June 2006, we received net proceeds of approximately $197.4
million from a follow-on offering of 7.0 million shares of class A common
stock.
Cash
Flows
A summary
of the sources and uses of cash and cash equivalents is as follows:
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
$
|
153,647
|
$
|
2,372
|
$
|
(45,966
|
)
|
|||||
|
Net
cash used in investing activities
|
(325,790
|
)
|
(474,118
|
)
|
(133,330
|
)
|
||||||
|
Net
cash provided by financing activities
|
93,381
|
584,625
|
201,300
|
|||||||||
Operating
Activities
Net cash
provided by operating activities of $153.6 million in fiscal 2008 was primarily
the result of net income of $92.3 million, plus non-cash charges totaling $149.3
million for depreciation, impairment of investments and long-lived assets,
amortization, write-off of debt issuance costs and stock-based compensation
expense, less non-cash income of $14.1 million for our equity share in earnings
of joint ventures, as well as increases in accounts payable and other accrued
liabilities of $147.2 million, mainly due to capital expenditures for our
manufacturing capacity expansion, and customer advances of $40.1 million,
primarily for future polysilicon purchases by customers that manufacture ingots
which are sold back to us under an ingot supply
- 46
-
agreement.
These items were partially offset by decreases in billings in excess of costs
and estimated earnings of $57.4 million related to contractual timing of system
project billings, as well as increases in inventories of $99.0 million, mainly
due to our agreement to design and build two solar photovoltaic power plants for
Florida Power & Light Company, or FPL, accounts receivable of $57.6 million
and other changes in operating assets and liabilities totaling $47.2 million.
The significant increases in substantially all of our operating assets and
liabilities resulted from our substantial revenue increase in fiscal
2008 compared to previous years which impacted net income and working
capital.
Net cash
generated from operating activities of $2.4 million in fiscal 2007 was primarily
the result of net income of $9.2 million, plus non-cash charges totaling $141.0
million for depreciation, amortization, purchased in-process research and
development, impairment of acquisition-related intangible assets, write-off of
debt issuance costs, stock-based compensation expense and equity share in loss
of joint ventures. In addition, cash provided by operating activities in fiscal
2007 resulted from increases in accounts payable and other accrued liabilities
of $42.3 million, billings in excess of costs and estimated earnings of $29.9
million and customer advances of $29.4 million. These items were partially
offset by increases in inventory of $69.2 million, advances to suppliers of
$83.6 million related to our existing supply agreements, accounts receivable of
$42.7 million, costs and estimated earnings in excess of billings of $32.6
million related to contractual timing of system project billings and other
changes in operating assets and liabilities totaling $21.3 million. The
significant increases in substantially all of our operating assets and
liabilities resulted from the acquisition of PowerLight (now known as SP
Systems), as well as our substantial revenue increase in fiscal 2007 compared to
previous years which impacted net income and working capital.
Net cash
used in operating activities was $46.0 million in fiscal 2006, which primarily
represents our net income of $26.5 million, offset by $77.4 million of advance
payments to raw material suppliers. The net impact of all other sources and uses
of fiscal 2006 cash flows from operations was a net increase of $4.9 million
comprised of non-cash charges for depreciation, amortization and stock-based
compensation and changes in operating assets and liabilities.
Investing
Activities
Net cash
used in investing activities during fiscal 2008, 2007 and 2006 was $325.8
million, $474.1 million and $133.3 million, respectively, which primarily
relates to capital expenditures of $265.5 million, $193.4 million and $100.2
million, respectively, incurred during each year. Capital expenditures were
mainly associated with manufacturing capacity expansion in the Philippines. Also
during fiscal 2008, (i) restricted cash increased by $107.4 million for advanced
payments received from customers that we provided security in the form of
cash collateralized bank standby letters of credit and for the first
drawdown under the facility agreement with the Malaysian government; (ii) we
paid cash of $18.3 million for the acquisitions of SunPower Italia and SunPower
Australia, net of cash acquired; and (iii) we invested an additional $24.6
million in joint ventures and other private companies. Cash used in investing
activities was partially offset by $90.1 million in proceeds received from the
sales of available-for-sale securities, net of available-for-sale securities
purchased during the period and investment in the Reserve Funds re-designated
from cash and cash equivalents to short-term investments.
During
fiscal 2007, (i) we used $118.0 million of cash for purchases of
available-for-sale securities, net of available-for-sale securities sold during
the year; (ii) we paid $98.6 million in cash for the acquisition of PowerLight,
net of cash acquired; (iii) we had $63.2 million of restricted cash for
advanced payments received from customers that we provided security in the form
of cash collateralized bank standby letters of credit; and (iv) we invested
$0.9 million in our First Philec Solar joint venture. During fiscal 2006, (i) we
used $16.5 million to purchase short-term marketable investment securities, net
of short-term marketable investment securities sold during the year;
(ii) we loaned $10.0 million to PowerLight, which we subsequently acquired
on January 10, 2007 and (iii) we invested $5.0 million in our Woongjin
Energy joint venture.
Financing
Activities
Net cash
provided by financing activities during fiscal 2008 reflects proceeds received
of Malaysian Ringgit 190.0 million (approximately $54.6 million) from the
Malaysian Government under our facility agreement, $5.1 million from stock
option exercises and $41.5 million in excess tax benefits from stock-based award
activity, partially offset by cash paid of $6.7 million for treasury stock
purchases that were used to pay withholding taxes on vested restricted stock and
$1.2 million for conversion of convertible debt.
Net cash
provided by financing activities during fiscal 2007 primarily reflects (i)
$194.0 million in net proceeds from the issuance of $200.0 million in principal
amount of 1.25% senior convertible debentures in February 2007; (ii) $220.1
million in net proceeds from the issuance of $225.0 million in principal amount
of 0.75% senior convertible debentures in July 2007; and (iii) $167.4 million in
net proceeds from our follow-on public offering of 2.7 million shares of our
class A common stock in July 2007. Also during fiscal 2007, we paid $3.6 million
on an outstanding line of credit, paid $2.0 million for treasury stock purchases
used to pay withholding taxes on vested restricted stock, received $8.5 million
in proceeds from stock option exercises and received $0.2 million from
employees for the conversion of stock appreciation rights to restricted stock
units.
Net cash
provided by financing activities during fiscal 2006 reflects $197.4 million in
net proceeds from our follow-on public offering of 7.0 million shares of our
class A common stock in June 2006 and receipt of $3.9 million in proceeds from
exercises of employee stock options.
Debt
and Credit Sources
Line
of Credit
On
July 13, 2007, we entered into a credit agreement with Wells Fargo Bank,
N.A., or Wells Fargo, that was amended from time to time, 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 December 28, 2008. We may borrow
up to $50.0 million and request that Wells Fargo issue up to $50.0 million in
letters of credit under the uncollateralized letter of credit subfeature.
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 July 31, 2012. 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 1.0% and 0.2% 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. In February 2009, we amended the
credit agreement to extend the expiration date for the uncollateralized
revolving credit line and uncollateralized letter of credit subfeature from
April 4, 2009 to July 3, 2009. In addition, we are negotiating another amendment
to revise the existing credit agreement with Wells Fargo to further extend the
expiration date for the uncollateralized revolving credit line and
uncollateralized letter of credit subfeature. All letters of credit issued under
the collateralized letter of credit facility expire no later than July 31, 2012.
If we and Wells Fargo do not agree to amend the credit agreement to futher
extend the deadline, all borrowings under the uncollateralized revolving credit
line must be repaid by July 3, 2009, and all letters of credit issued under the
uncollateralized letter of credit subfeature expire on or before July 3, 2009
unless we provide by such date collateral in the form of cash or cash
equivalents in the aggregate amount available to be drawn under letters of
credit outstanding at such time.
In
connection with the credit agreement, we entered into a security agreement with
Wells Fargo, granting a security interest in a securities account and deposit
account to secure our obligations in connection with any letters of credit that
might be issued under the credit agreement. SunPower North America, Inc., SP
Systems and SunPower Systems SA, our wholly-owned subsidiaries, also entered
into an associated continuing guaranty with Wells Fargo. The terms of the credit
agreement include certain conditions to borrowings, representations and
covenants, and events of default customary for financing transactions of this
type. If we fail 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
December 28, 2008 and December 30, 2007, letters of credit totaling $29.9
million and $32.0 million, respectively, were issued by Wells Fargo under the
uncollateralized letter of credit subfeature. In addition, letters of credit
totaling $76.5 million and $47.9 million were issued by Wells Fargo under
the collateralized letter of credit facility as of December 28, 2008 and
December 30, 2007, respectively. On December 28, 2008 and December 30, 2007,
cash available to be borrowed under the uncollateralized revolving credit line
was $20.1 million and $18.0 million, respectively, and includes letter of credit
capacities available to be issued by Wells Fargo under the uncollateralized
letter of credit subfeature of $20.1 million and $8.0 million, respectively.
Letters of credit available under the collateralized letter of credit facility
at December 28, 2008 and December 30, 2007 totaled $73.5 million and $2.1
million, respectively. See Note 11 of Notes to our Consolidated Financial
Statements.
Debt
Issuance with the Malaysian Government
On
December 18, 2008, we entered into a facility agreement with the Malaysian
Government. In connection with the facility agreement, we 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., our wholly-owned subsidiary, to secure our obligations
under the facility agreement.
Under the
terms of the facility agreement, we may borrow up to Malaysian Ringgit 1.0
billion, or approximately $287.4 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. As of December 28, 2008, we had borrowed Malaysian Ringgit 190.0
million, or approximately $54.6 million, under the facility agreement. In
January 2009, we borrowed an additional Malaysian Ringgit 185.0 million, or
approximately $51.0 million, under the facility agreement. We have 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.
1.25%
and 0.75% Convertible Debt Issuance
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures, or the 1.25% debentures, and received net proceeds of
$194.0 million. Interest on the 1.25% debentures is payable on
February 15 and August 15 of each year, commencing August 15,
2007. The 1.25% debentures will 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.
In July
2007, we issued $225.0 million in principal amount of our 0.75% senior
convertible debentures, or the 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, commencing February 1, 2008. The 0.75%
debentures will 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. 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. Therefore, the
0.75% debentures will be classified as short-term debt in our Consolidated
Balance Sheets beginning on August 1, 2009. See Note 11 of Notes to our
Consolidated Financial Statements.
Liquidity
As
of December 28, 2008, we had cash and cash equivalents of $202.3 million as
compared to $285.2 million as of December 30, 2007. 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 $17.2
million and $23.6 million as of December 28, 2008, respectively, as compared to
$105.5 million and $29.1 million as of December 30, 2007, respectively. The
decrease in the balance of our cash and cash equivalents, short-term investments
and long-term investments as of December 28, 2008 compared to the balance as of
December 30, 2007 was due primarily to the liquidation of a substantial portion
of our investment portfolio to fund our capital expenditures for our
manufacturing capacity expansion.
Of the
$26.1 million invested in auction rate securities on December 28, 2008, we have
estimated the loss to be approximately $2.5 million and we recorded an
impairment charge of $2.5 million in “Other, net” in our Consolidated Statements
of Operations thereby establishing a new cost basis of $23.6 million for the
auction rate securities. 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. As of
December 28, 2008, we held five auction rate securities totaling $23.6 million
as compared to ten auction rate securities totaling $50.8 million as of December
30, 2007. These auction rate securities are typically over-collateralized and
secured by pools of student loans originated under the FFELP and are
guaranteed and insured by the U.S. Department of Education. In addition, all
auction rate securities held are rated by one or more of the NRSROs as triple-A.
Beginning in February 2008, the auction rate securities market experienced a
significant increase in the number of failed auctions, resulting from a lack of
liquidity, which occurs when sell orders exceed buy orders, and does not
necessarily signify a default by the
issuer. All auction rate securities invested in at December 28, 2008 and $29.1
million out of $50.8 million invested in auction rate securities at December 30,
2007 have failed to clear at auctions in subsequent periods. For failed
auctions, we continue to earn interest on these investments at the maximum
contractual rate as the issuer is obligated under contractual terms to pay
penalty rates should auctions fail. Historically, failed auctions have rarely
occurred, however, such failures could continue to occur in the future. In the
event we need to access these funds, we will not be able to do so until a future
auction is successful, the issuer redeems the securities, a buyer is found
outside of the auction process or the securities mature. Accordingly,
auction rate securities at December 28, 2008 and December 30, 2007 totaling
$23.6 million and $29.1 million, respectively, are classified as long-term
investments on the Consolidated Balance Sheets, because they are not expected to
be used to fund current operations and consistent with the stated contractual
maturities of the securities.
In the
second quarter of fiscal 2008, we sold auction rate securities with a carrying
value of $12.5 million for their stated par value of $13.0 million to the issuer
of the securities outside of the auction process. On February 4, 2009,
we sold an additional auction rate security with a carrying value of
$4.5 million on December 28, 2008 for $4.6 million to a third-party outside
of the auction process.
For the
year ended December 30, 2007, the closing price of our class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the 1.25% debentures and the $82.24 per share initial
effective conversion price governing the 0.75% debentures, for 20 out of 30
consecutive trading days ending on December 30, 2007. As a result, the market
price conversion trigger pursuant to the terms of both debentures was satisfied.
As of the first trading day of the first quarter in fiscal 2008, holders of the
1.25% debentures and 0.75% debentures were able to exercise their right to
convert the debentures any day in that fiscal quarter. Therefore, since holders
of the 1.25% debentures and 0.75% debentures were able to exercise their
right to convert the debentures in the first quarter of fiscal 2008, we
classified the $425.0 million in aggregate convertible debt as short-term debt
in our Consolidated Balance Sheets as of December 30, 2007. In addition, we
wrote off $8.2 million and $1.0 million of unamortized debt issuance costs in
the fourth quarter of fiscal 2007 and first quarter of fiscal 2008,
respectively. No holders of the 1.25% debentures and 0.75% debentures
exercised their right to convert the debentures in the first quarter of fiscal
2008.
For the
quarter ended September 28, 2008, the closing price of our class A common stock
equaled or exceeded $70.94, or 125% of the applicable conversion price for our
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, we received notices for the conversion of approximately $1.4 million
of the 1.25% debentures which we have settled for approximately $1.2
million in cash and 1,000 shares of class A common stock.
Because
the closing price of our class A common stock on at least 20 of the last 30
trading days during the fiscal quarter ended 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 both debentures are unable to exercise their
right to convert the debentures, based on the market price conversion trigger,
any day in the first quarter of fiscal 2009, which began on December 29, 2008.
Accordingly, we classified the $423.6 million in aggregate convertible debt as
long-term debt in our Consolidated Balance Sheets as of 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 11 of Notes to our
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. On 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.
We
believe that our current cash and cash equivalents, cash generated from
operations, and funds available from the credit agreement with Wells Fargo and
facility agreement with the Malaysian Government will be sufficient to meet our
working capital and capital expenditure commitments for at least the next 12
months. However, there can be no assurance that our liquidity will be adequate
over time. For instance, we expect to continue to make significant capital
expenditures in our manufacturing facilities, including through building
purchases or long-term leases, and, in May 2008, we announced plans to construct
FAB3 which will be located in Malaysia. We expect total capital
expenditures in the range of $350 million to $400 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 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. 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 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 December 28,
2008:
|
Payments Due by Period
|
||||||||||||||||||||
|
(In thousands)
|
Total
|
2009
|
2010 – 2011
|
2012 – 2013
|
Beyond
2013
|
|||||||||||||||
|
Customer
advances, including interest
|
$
|
111,440
|
$
|
19,800
|
$
|
27,640
|
$
|
16,000
|
$
|
48,000
|
||||||||||
|
Loan
from Malaysian Government
|
54,598
|
—
|
—
|
—
|
54,598
|
|||||||||||||||
|
Convertible
debt, including interest
|
499,965
|
4,170
|
8,340
|
8,340
|
479,115
|
|||||||||||||||
|
Lease
commitments
|
41,970
|
5,502
|
8,935
|
5,997
|
21,536
|
|||||||||||||||
|
Utility
obligations
|
750
|
—
|
—
|
—
|
750
|
|||||||||||||||
|
Royalty
obligations
|
585
|
585
|
—
|
—
|
—
|
|||||||||||||||
|
Non-cancelable
purchase orders
|
113,127
|
112,477
|
650
|
—
|
—
|
|||||||||||||||
|
Purchase
commitments under agreements
|
3,253,823
|
344,009
|
1,051,213
|
568,218
|
1,290,383
|
|||||||||||||||
|
Total
|
$
|
4,076,258
|
$
|
486,543
|
$
|
1,096,778
|
$
|
598,555
|
$
|
1,894,382
|
||||||||||
Customer
advances and interest on customer advances relate to advance payments received
from customers for future purchases of solar power products. Loan from the
Malaysian Government relates to amounts borrowed for the financing and operation
of FAB3 to be constructed in Malaysia. Convertible debt and interest on
convertible debt relate to the aggregate of $423.6 million in 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. 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 eleven
years and there are certain consequences, such as forfeiture of advanced
deposits and liquidated damages relating to previous purchases, in the
event that we terminate the arrangements.
As of
December 28, 2008 and December 30, 2007, total liabilities associated with
uncertain tax positions under FIN 48 were $12.8 million and $4.1 million,
respectively, and are included in other long-term liabilities on our
Consolidated Balance Sheets at December 28, 2008 and December 30, 2007,
respectively, as they are not expected to be paid within the next twelve months.
Due to the complexity and uncertainty associated with our tax positions, we
cannot make a reasonably reliable estimate of the period in which cash
settlement will be made for our liabilities associated with uncertain tax
positions in other long-term liabilities, therefore, they have been excluded
from the table above. See Note 9 of Notes to our Consolidated Financial
Statements.
Polysilicon
Supply Agreement
In
January 2009, we entered into a polysilicon supply agreement with Hemlock
Semiconductor Corporation, or Hemlock. The agreement provides the general terms
and conditions pursuant to which we will purchase, on a firm commitment basis,
fixed annual quantities of polysilicon at specified prices from 2011 through
2020. Under the agreement, we are required to make prepayments to Hemlock of
$14.5 million in 2009, $101.8 million in 2010, $101.8 million in 2011, and $72.7
million in 2012, and such prepayments will be credited against future deliveries
of polysilicon to us. We expect to supply the polysilicon to third-parties that
will manufacture ingots and wafers for us using such polysilicon. The aggregate
quantity of polysilicon to be purchased over the term of the agreement is
expected to support approximate 3.5 gigawatts of solar cell manufacturing
production based on our expected silicon utilization during such
period.
Off-Balance-Sheet
Arrangements
As of
December 28, 2008, we did not have any significant off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
Recent
Accounting Pronouncements
See Note
1 of Notes to our Consolidated Financial Statements for a description of certain
other recent accounting pronouncements including the expected dates of adoption
and effects on our results of operations and financial condition.
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 becoming more significant to our Systems
Segment, which is placing increasing reliance upon direct sales to financial
institutions which sell electricity to end customers under a power purchase
agreement. This sales model is highly sensitive to interest rate fluctuations
and the availability of liquidity, and would be adversely affected by increases
in interest rates or liquidity constraints.
In
addition, our investment portfolio consists of a variety of financial
instruments that exposes us to interest rate risk, including, but not limited
to, money market funds, bank notes, commercial paper and corporate securities.
These investments are generally classified as available-for-sale and,
consequently, are recorded on our balance sheet at fair market value with their
related unrealized gain or loss reflected as a component of accumulated other
comprehensive income (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
At
December 28, 2008, we had $7.2 million invested in Reserve Funds. The net asset
value per share for the Reserve Funds fell below $1.00 because the funds had
investments in Lehman, which filed for bankruptcy on September 15, 2008. As a
result of this event, the Reserve Funds wrote down their investments in Lehman
to zero. We have estimated our loss on the Reserve Funds to be approximately
$1.0 million based on an evaluation of the fair value of the securities held by
the Reserve Funds and the net asset value that was last published by the Reserve
Funds before the funds suspended redemptions. We recorded an impairment
charge of $1.0 million during fiscal 2008 in “Other, net” in
our Consolidated Statements of Operations, thereby establishing a new cost
basis for each fund.
On
January 30, 2009 and February 20, 2009, we received a distribution of $2.1
million and $1.6 million, respectively, from the Reserve Funds. We expect that
the remaining distribution of $3.5 million from the Reserve Funds will occur
over the remaining nine months as the investments held in the funds mature.
While we expect to receive substantially all of our current holdings in the
Reserve Funds within the next nine 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 6 of Notes to our 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 seven to 49
days. The “stated” or “contractual” maturities for these securities generally
are between 20 to 30 years. The auction rate securities are classified as
available for sale under SFAS No. 115 and are recorded at fair value. Typically,
the carrying value of auction rate securities approximates fair value due to the
frequent resetting of the interest rates. Of the $26.1 million invested in
auction rate securities on December 28, 2008, we have estimated the loss to be
approximately $2.5 million and we recorded an impairment charge of $2.5
million in “Other, net” in our Consolidated Statements of Operations thereby
establishing a new cost basis of $23.6 million for the auction rate securities.
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 auction rate securities invested in at
December 28, 2008 and $29.1 million out of $50.8 million invested in auction
rate securities at December 30, 2007 have failed to clear at auctions in
subsequent periods. These auction rate securities are typically
over-collateralized and secured by pools of student loans originated under
the FFELP and are guaranteed and insured by the U.S. Department of Education. In
addition, all auction rate securities held are rated by one or more of the
NRSROs as triple-A. We continue to earn interest on these investments at the
maximum contractual rate as the issuer is obligated under contractual terms to
pay penalty rates should auctions fail. In the second quarter of fiscal 2008, we
sold auction rate securities with a carrying value of $12.5 million for their
stated par value of $13.0 million to the issuer of the securities outside
of the auction process. On February 4, 2009, we sold an additional
auction rate security with a carrying value of $4.5 million on December 28,
2008 for $4.6 million to a third-party outside of the auction process. See
Note 6 of Notes to our Consolidated Financial Statements. We will continue to
analyze our auction rate securities each reporting period for impairment and may
be required to record additional impairment charges if the issuer of the auction
rate securities is unable to successfully close future auctions or does not
redeem the securities.
Convertible
Debt
The fair
market value of our 1.25% debentures and 0.75% 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. As of December 28, 2008 and
December 30, 2007, the estimated fair value of the debentures was approximately
$310.7 million and $831.9 million, respectively, based on quoted market prices
as reported by Bloomberg. A 10% increase in quoted market prices would increase
the estimated fair value of the debentures to approximately $341.8 million and
$915.1 million as of December 28, 2008 and December 30, 2007, respectively, and
a 10% decrease in the quoted market prices would decrease the estimated fair
value of the debentures to $279.7 million and $748.7 million,
respectively.
Investments
in Non-Public Companies
Our
investments held in non-public companies expose us to equity price risk. As
of December 28, 2008, non-publicly traded investments of $3.1 million are
accounted for using the cost method and $29.0 million are accounted for using
the equity method. As of December 30, 2007, non-publicly traded investments of
$5.3 million were 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
regularly 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 fiscal 2008, we recorded an
other-than-temporary impairment charge of $1.9 million in our Consolidated
Statements 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 6 and 10 of Notes to our Consolidated Financial
Statements.
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 57%, 50% and 58% of
our total revenue for fiscal 2008, 2007 and 2006, respectively. A 10% change in
the Euro exchange rate would have impacted our revenue by $72.0 million, $35.9
million and $13.8 million in fiscal 2008, 2007 and 2006, respectively. In
connection with our global tax planning, we recently changed the functional
currency of certain European subsidiaries from U.S. dollar to Euro, resulting in
greater exposure to changes in the value of the Euro. Implementation of this tax
strategy had, and will continue to have, the ancillary effect of limiting our
ability to fully hedge certain Euro-denominated revenue. From December 28, 2008
to February 13, 2009, the exchange rate to convert one Euro to U.S. dollars
decreased from approximately $1.40 to $1.29. 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, inventory 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
December 28, 2008, we held option and forward contracts totaling $147.5 million
and $431.1 million, respectively. As of December 30, 2007, we held forward
contracts totaling $202.8 million. We have experienced losses on derivatives and
foreign exchange, net of tax of $20.6 million in fiscal 2008 largely due to the
volatility in the current markets as compared to gains of $2.1 million and $0.9
million in fiscal 2007 and 2006, respectively. 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.
SUNPOWER
CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
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|
55
|
|
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|
FINANCIAL
STATEMENTS
|
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|
56
|
|
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|
57
|
|
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|
58
|
|
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|
59
|
|
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|
60
|
|
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|
61
|
|
|||
|
109
|
|
|||
To the
Board of Directors and Stockholders of
SunPower
Corporation:
In our
opinion, the consolidated financial statements listed in the accompanying index
appearing under Item 8 present fairly, in all material respects, the financial
position of SunPower Corporation and its subsidiaries (the “Company”) at
December 28, 2008 and December 30, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December 28,
2008 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index appearing under Item 8 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 28, 2008, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management
is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company's
internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
discussed in Note 12 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in
2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
|
|
/s/ PricewaterhouseCoopers
LLP
|
San Jose,
California
February
25, 2009
SunPower
Corporation
Consolidated
Balance Sheets
(In thousands, except share and per
share data)
|
December
28,
2008
|
December 30,
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
202,331
|
$
|
285,214
|
||||
|
Restricted
cash, current portion
|
13,240
|
—
|
||||||
|
Short-term
investments
|
17,179
|
105,453
|
||||||
|
Accounts
receivable, net
|
194,222
|
138,250
|
||||||
|
Costs
and estimated earnings in excess of billings
|
30,326
|
39,136
|
||||||
|
Inventories
|
251,388
|
148,820
|
||||||
|
Advances
to suppliers, current portion
|
43,190
|
52,277
|
||||||
|
Prepaid
expenses and other current assets
|
96,104
|
33,110
|
||||||
|
Total
current assets
|
847,980
|
802,260
|
||||||
|
Restricted
cash, net of current portion
|
162,037
|
67,887
|
||||||
|
Long-term
investments
|
23,577
|
29,050
|
||||||
|
Property,
plant and equipment, net
|
612,687
|
377,994
|
||||||
|
Goodwill
|
196,720
|
184,684
|
||||||
|
Intangible
assets, net
|
39,490
|
50,946
|
||||||
|
Advances
to suppliers, net of current portion
|
119,420
|
108,943
|
||||||
|
Other
long-term assets
|
74,224
|
31,974
|
||||||
|
Total
assets
|
$
|
2,076,135
|
$
|
1,653,738
|
||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
263,241
|
$
|
124,723
|
||||
|
Accrued
liabilities
|
157,049
|
79,434
|
||||||
|
Billings
in excess of costs and estimated earnings
|
11,806
|
69,900
|
||||||
|
Customer
advances, current portion
|
19,035
|
9,250
|
||||||
|
Convertible
debt, current portion
|
—
|
425,000
|
||||||
|
Total
current liabilities
|
451,131
|
708,307
|
||||||
|
Long-term
debt
|
54,598
|
—
|
||||||
|
Convertible
debt, net of current portion
|
423,608
|
—
|
||||||
|
Deferred
tax liability, net of current portion
|
8,115
|
6,213
|
||||||
|
Customer
advances, net of current portion
|
91,359
|
60,153
|
||||||
|
Other
long-term
liabilities
|
25,950
|
14,975
|
||||||
|
Total
liabilities
|
1,054,761
|
789,648
|
||||||
|
Commitments
and Contingencies (Note 9)
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Preferred
stock, $0.001 par value, 10,042,490 shares authorized; none issued and
outstanding
|
—
|
—
|
||||||
|
Common
stock, $0.001 par value, 217,500,000 shares of class A common stock
authorized; $0.001 par value, 150,000,000 shares and 157,500,000 shares of
class B common stock authorized; 44,055,644 and 40,289,719 shares of class
A common stock issued; 43,849,566 and 40,176,957 shares of class A common
stock outstanding; 42,033,287 and 44,533,287 shares of class B common
stock issued and outstanding, at December 28, 2008 and December 30,
2007, respectively
|
86
|
85
|
||||||
|
Additional
paid-in capital
|
1,003,954
|
883,033
|
||||||
|
Accumulated
other comprehensive income (loss)
|
(25,611)
|
5,762
|
||||||
|
Retained
earnings (deficit)
|
51,602
|
(22,815
|
)
|
|||||
|
1,030,031
|
866,065
|
|||||||
|
Less:
shares of class A common stock held in treasury, at cost; 206,078 and
112,762 shares at December 28, 2008 and December 30, 2007,
respectively
|
(8,657
|
)
|
(1,975
|
)
|
||||
|
Total
stockholders’ equity
|
1,021,374
|
864,090
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
2,076,135
|
$
|
1,653,738
|
||||
The
accompanying notes are an integral part of these financial
statements.
SunPower
Corporation
Consolidated
Statements of Operations
(In thousands, except per share
data)
|
Year
Ended
|
||||||||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Systems
|
$
|
820,632
|
$
|
464,178
|
$
|
—
|
||||||
|
Components
|
614,287
|
310,612
|
236,510
|
|||||||||
|
Total
revenue
|
1,434,919
|
774,790
|
236,510
|
|||||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of systems revenue
|
653,569
|
386,511
|
—
|
|||||||||
|
Cost
of components revenue
|
417,669
|
240,475
|
186,042
|
|||||||||
|
Research
and development
|
21,474
|
13,563
|
9,684
|
|||||||||
|
Sales,
general and administrative
|
173,740
|
108,256
|
21,677
|
|||||||||
|
Purchased
in-process research and development
|
—
|
9,575
|
—
|
|||||||||
|
Impairment
of acquisition-related intangible assets
|
—
|
14,068
|
—
|
|||||||||
|
Total
costs and expenses
|
1,266,452
|
772,448
|
217,403
|
|||||||||
|
Operating
income
|
168,467
|
2,342
|
19,107
|
|||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
10,789
|
13,882
|
10,086
|
|||||||||
|
Interest
expense
|
(4,387)
|
(5,071
|
)
|
(1,809
|
)
|
|||||||
|
Other,
net
|
(27,285)
|
(7,593
|
)
|
1,077
|
||||||||
|
Other
income (expense), net
|
(20,883)
|
1,218
|
9,354
|
|||||||||
|
Income
before income taxes and equity in earnings of unconsolidated
investees
|
147,584
|
3,560
|
28,461
|
|||||||||
|
Income
tax provision (benefit)
|
69,368
|
(5,920
|
)
|
1,945
|
||||||||
|
Income
before equity in earnings of unconsolidated investees
|
78,216
|
9,480
|
26,516
|
|||||||||
|
Equity
in earnings of unconsolidated investees, net of taxes
|
14,077
|
(278
|
)
|
—
|
||||||||
|
Net
income
|
$
|
92,293
|
$
|
9,202
|
$
|
26,516
|
||||||
|
Net
income per share of class A and class B common stock:
|
||||||||||||
|
Basic
|
$
|
1.15
|
$
|
0.12
|
$
|
0.40
|
||||||
|
Diluted
|
$
|
1.09
|
$
|
0.11
|
$
|
0.37
|
||||||
|
Weighted-average
shares:
|
||||||||||||
|
Basic
|
80,522
|
75,413
|
65,864
|
|||||||||
|
Diluted
|
84,446
|
81,227
|
71,087
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
SunPower
Corporation
Consolidated
Statements of Stockholders’ Equity
(In thousands)
|
Class
A and Class B Common Stock
|
||||||||||||||||||||||||||||
|
Shares
|
Value
|
Additional
Paid-in
Capital
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Retained
Earnings
(Deficit)
|
Total
Stockholders’
Equity
|
||||||||||||||||||||||
|
Balances
at January 1, 2006
|
61,092
|
$
|
61
|
$
|
316,617
|
$
|
—
|
$
|
505
|
$
|
(58,533
|
)
|
$
|
258,650
|
||||||||||||||
|
Issuance
of common stock upon exercise of options
|
1,529
|
2
|
3,867
|
—
|
—
|
—
|
3,869
|
|||||||||||||||||||||
|
Issuance
of restricted stock to employees, net of cancellations
|
228
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
Issuance
of common stock in relation to follow-on offering, net of offering
expenses
|
7,000
|
7
|
197,424
|
—
|
—
|
—
|
197,431
|
|||||||||||||||||||||
|
Stock-based
compensation expense
|
—
|
—
|
4,911
|
—
|
—
|
—
|
4,911
|
|||||||||||||||||||||
|
Net
unrealized loss on derivatives and investments, net of tax
|
—
|
—
|
—
|
—
|
(2,606
|
)
|
—
|
(2,606
|
)
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
26,516
|
26,516
|
|||||||||||||||||||||
|
Balances
at December 31, 2006
|
69,849
|
70
|
522,819
|
—
|
(2,101
|
)
|
(32,017
|
)
|
488,771
|
|||||||||||||||||||
|
Issuance
of common stock upon exercise of options
|
2,817
|
3
|
8,718
|
—
|
—
|
—
|
8,721
|
|||||||||||||||||||||
|
Issuance
of restricted stock to employees, net of cancellations
|
608
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
Issuance
of common stock in relation to follow-on offering, net of offering
expenses
|
2,695
|
3
|
167,376
|
—
|
—
|
—
|
167,379
|
|||||||||||||||||||||
|
Issuance
of common stock in relation to share lending arrangements
|
4,747
|
5
|
—
|
—
|
—
|
—
|
5
|
|||||||||||||||||||||
|
Issuance
of common stock for purchase acquisition
|
4,107
|
4
|
111,262
|
—
|
—
|
—
|
111,266
|
|||||||||||||||||||||
|
Stock
options assumed in relation to acquisition
|
—
|
—
|
21,280
|
—
|
—
|
—
|
21,280
|
|||||||||||||||||||||
|
Stock-based
compensation expense
|
—
|
—
|
51,578
|
—
|
—
|
—
|
51,578
|
|||||||||||||||||||||
|
Purchases
of treasury stock
|
(113
|
)
|
—
|
—
|
(1,975
|
)
|
—
|
—
|
(1,975
|
)
|
||||||||||||||||||
|
Cumulative
translation adjustment, net of tax
|
—
|
—
|
—
|
—
|
9,746
|
—
|
9,746
|
|||||||||||||||||||||
|
Net
unrealized loss on derivatives and investments, net of tax
|
—
|
—
|
—
|
—
|
(1,883
|
)
|
—
|
(1,883
|
)
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
9,202
|
9,202
|
|||||||||||||||||||||
|
Balances
at December 30, 2007
|
84,710
|
85
|
883,033
|
(1,975
|
)
|
5,762
|
(22,815
|
)
|
864,090
|
|||||||||||||||||||
|
Issuance
of common stock upon exercise of options
|
1,129
|
1
|
5,127
|
—
|
—
|
—
|
5,128
|
|||||||||||||||||||||
|
Issuance
of restricted stock to employees, net of cancellations
|
96
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
Issuance
of common stock for purchase acquisition
|
40
|
—
|
3,054
|
—
|
—
|
—
|
3,054
|
|||||||||||||||||||||
|
Issuance
of common stock for conversion of convertible debt
|
1
|
—
|
40
|
—
|
—
|
—
|
40
|
|||||||||||||||||||||
|
Excess
tax benefits from stock-based award activity
|
—
|
—
|
41,524
|
—
|
—
|
—
|
41,524
|
|||||||||||||||||||||
|
Stock-based
compensation expense
|
—
|
—
|
71,176
|
—
|
—
|
—
|
71,176
|
|||||||||||||||||||||
|
Distribution
to Cypress under tax sharing agreement
|
—
|
—
|
—
|
—
|
—
|
(17,876
|
)
|
(17,876
|
)
|
|||||||||||||||||||
|
Purchases
of treasury stock
|
(93
|
)
|
—
|
—
|
(6,682
|
)
|
—
|
—
|
(6,682
|
)
|
||||||||||||||||||
|
Cumulative
translation adjustment, net of tax
|
—
|
—
|
—
|
—
|
(9,264
|
)
|
—
|
(9,264
|
)
|
|||||||||||||||||||
|
Net
unrealized loss on derivatives and investments, net of tax
|
—
|
—
|
—
|
—
|
(22,109
|
)
|
—
|
(22,109
|
)
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
92,293
|
92,293
|
|||||||||||||||||||||
|
Balances
at December 28, 2008
|
85,883
|
$
|
86
|
$
|
1,003,954
|
$
|
(8,657
|
)
|
$
|
(25,611
|
)
|
$
|
51,602
|
$
|
1,021,374
|
|||||||||||||
The
accompanying notes are an integral part of these financial
statements.
SunPower
Corporation
Consolidated
Statements of Comprehensive Income
(In thousands)
|
Year Ended
|
||||||||||||
|
December 28,
2008
|
December 30,
2007
|
December
31,
2006
|
||||||||||
|
Net
income
|
$
|
92,293
|
$
|
9,202
|
$
|
26,516
|
||||||
|
Other
comprehensive income:
|
||||||||||||
|
Cumulative
translation adjustment, net of tax
|
(9,264
|
)
|
9,746
|
—
|
||||||||
|
Unrealized
loss on derivatives, net of tax
|
(22,145
|
)
|
(1,843
|
)
|
(2,602
|
)
|
||||||
|
Unrealized
gain (loss) on investments, net of tax
|
36
|
(40
|
)
|
(4
|
)
|
|||||||
|
Total
comprehensive income
|
$
|
60,920
|
$
|
17,065
|
$
|
23,910
|
||||||
The
accompanying notes are an integral part of these financial
statements.
SunPower
Corporation
Consolidated
Statements of Cash Flows
(In thousands)
|
Year Ended
|
||||||||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$
|
92,293
|
$
|
9,202
|
$
|
26,516
|
||||||
|
Adjustments to
reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Stock-based
compensation
|
70,220
|
51,212
|
4,864
|
|||||||||
|
Depreciation
|
53,743
|
27,315
|
16,347
|
|||||||||
|
Amortization of
intangible assets
|
16,762
|
28,540
|
4,690
|
|||||||||
|
Impairment of
long-lived assets
|
2,203
|
14,068
|
—
|
|||||||||
|
Purchased
in-process research and development
|
—
|
9,575
|
—
|
|||||||||
|
Impairment of
investments
|
5,408
|
—
|
—
|
|||||||||
|
Amortization of
debt issuance costs
|
972
|
9,970
|
—
|
|||||||||
|
Equity in earnings
of unconsolidated investees
|
(14,077)
|
278
|
—
|
|||||||||
|
Excess tax benefits
from stock-based award activity
|
(41,524)
|
—
|
—
|
|||||||||
|
Deferred income
taxes and other tax liabilities
|
46,116
|
(9,424
|
)
|
(290
|
)
|
|||||||
|
Changes in operating
assets and liabilities, net of effect of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(57,575
|
)
|
(42,749
|
)
|
(26,182
|
)
|
||||||
|
Costs
and estimated earnings in excess of billings
|
8,680
|
(32,634
|
)
|
—
|
||||||||
|
Inventories
|
(98,999
|
)
|
(69,229
|
)
|
(9,586
|
)
|
||||||
|
Prepaid
expenses and other assets
|
(61,790
|
)
|
(11,794
|
)
|
(3,697
|
)
|
||||||
|
Advances to
suppliers
|
1,297
|
(83,584
|
)
|
(77,358
|
)
|
|||||||
|
Accounts
payable and other accrued liabilities
|
147,216
|
42,291
|
16,139
|
|||||||||
|
Billings in
excess of costs and estimated earnings
|
(57,423
|
)
|
29,923
|
—
|
||||||||
|
Customer
advances
|
40,125
|
29,412
|
2,591
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
153,647
|
2,372
|
(45,966
|
)
|
||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Increase
in restricted cash
|
(107,390
|
)
|
(63,176
|
)
|
—
|
|||||||
|
Purchase
of property, plant and equipment
|
(265,549
|
)
|
(193,394
|
)
|
(100,201
|
)
|
||||||
|
Purchase
of available-for-sale securities
|
(65,748
|
)
|
(209,607
|
)
|
(33,996
|
)
|
||||||
|
Proceeds
from sales or maturities of available-for-sale securities
|
155,833
|
91,600
|
17,500
|
|||||||||
|
Cash
paid for acquisitions, net of cash acquired
|
(18,311
|
)
|
(98,645
|
)
|
—
|
|||||||
|
Cash
paid for investments in joint ventures and other non-public
companies
|
(24,625
|
)
|
(896
|
)
|
(16,633
|
)
|
||||||
|
Net
cash used in investing activities
|
(325,790
|
)
|
(474,118
|
)
|
(133,330
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of long-term debt
|
54,598
|
—
|
—
|
|||||||||
|
Proceeds
from issuance of convertible debt, net of issuance costs
|
—
|
414,058
|
—
|
|||||||||
|
Cash
paid for conversion of convertible debt
|
(1,187
|
)
|
—
|
—
|
||||||||
|
Proceeds
from issuance of common stock under share lending
arrangements
|
—
|
5
|
—
|
|||||||||
|
Proceeds
from follow-on offering of common stock, net of offering
expenses
|
—
|
167,379
|
197,431
|
|||||||||
|
Proceeds
from exercise of stock options
|
5,128
|
8,721
|
3,869
|
|||||||||
|
Excess
tax benefits from stock-based award activity
|
41,524
|
—
|
—
|
|||||||||
|
Purchases
of stock for tax withholding obligations on vested restricted
stock
|
(6,682
|
)
|
(1,975
|
)
|
—
|
|||||||
|
Principal
payments on line of credit and notes payable
|
—
|
(3,563
|
)
|
—
|
||||||||
|
Net
cash provided by financing activities
|
93,381
|
584,625
|
201,300
|
|||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(4,121
|
)
|
6,739
|
—
|
||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(82,883
|
)
|
119,618
|
22,004
|
||||||||
|
Cash
and cash equivalents at beginning of period
|
285,214
|
165,596
|
143,592
|
|||||||||
|
Cash
and cash equivalents at end of period
|
$
|
202,331
|
$
|
285,214
|
$
|
165,596
|
||||||
|
Non-cash
transactions:
|
||||||||||||
|
Issuance of common
stock for purchase acquisition
|
$
|
3,054
|
$
|
111,266
|
$
|
—
|
||||||
|
Issuance of common
stock for conversion of convertible debt
|
40
|
—
|
—
|
|||||||||
|
Stock options
assumed in relation to acquisition
|
—
|
21,280
|
—
|
|||||||||
|
Additions
to property, plant and equipment acquired under accounts payable and other
accrued liabilities
|
28,485
|
8,436
|
8,015
|
|||||||||
|
Change in goodwill
relating to adjustments to acquired net assets
|
1,176
|
6,639
|
—
|
|||||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Cash paid for
interest, net of amount capitalized
|
4,220
|
3,497
|
1,690
|
|||||||||
|
Cash paid for
income taxes
|
13,431
|
887
|
—
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
SunPower
Corporation
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’s solar power products are sold through
its components and systems business segments.
In
November 2005, the Company raised net proceeds of $145.6 million in an initial
public offering (“IPO”) of 8.8 million shares of class A common stock at a
price of $18.00 per share. In June 2006, the Company completed a follow-on
public offering of 7.0 million shares of its class A common stock, at a per
share price of $29.50, and received net proceeds of $197.4 million. In July
2007, the Company completed a follow-on public offering of 2.7 million shares of
its class A common stock, at a discounted per share price of $64.50, and
received net proceeds of $167.4 million.
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures to Lehman Brothers Inc. (“Lehman Brothers”)
and lent approximately 2.9 million shares of its class A common stock to Lehman
Brothers International (Europe) Limited (“LBIE”). Net proceeds from the issuance
of senior convertible debentures in February 2007 were $194.0 million. The
Company did not receive any proceeds from the approximate 2.9 million loaned
shares of its class A common stock, but received a nominal lending fee. On
September 15, 2008, Lehman Brothers Holding Inc. (“Lehman”), filed a petition
for protection under Chapter 11 of the U.S. bankruptcy code, and LBIE commenced
administration proceedings (analogous to bankruptcy) in the United Kingdom (see
Note 11). In July 2007, the Company issued $225.0 million in principal amount of
its 0.75% senior convertible debentures to Credit Suisse Securities (USA) LLC
(“Credit Suisse”) and lent approximately 1.8 million shares of its class A
common stock to Credit Suisse International (“CSI”). Net proceeds from the
issuance of senior convertible debentures in July 2007 were $220.1 million. The
Company did not receive any proceeds from the approximate 1.8 million loaned
shares of class A common stock, but received a nominal lending fee (see Note
11).
In
January 2007, the Company completed the acquisition of PowerLight Corporation
(“PowerLight”), a privately-held company which developed, engineered,
manufactured and delivered large-scale solar power systems for residential,
commercial, government and utility customers worldwide. These activities are now
performed by the Company’s systems business segment. As a result of the
acquisition, PowerLight became a wholly-owned subsidiary of the Company. In June
2007, the Company changed PowerLight’s name to SunPower Corporation, Systems
(“SP Systems”), to capitalize on SunPower’s name recognition (see Note
3).
After
completion of the Company’s IPO in November 2005, Cypress Semiconductor
Corporation (“Cypress”) held, in the aggregate, approximately 52.0 million
shares of class B common stock, representing all of the Company’s
then-outstanding class B common stock. On May 4, 2007 and August 18, 2008,
Cypress completed the sale of 7.5 million shares and 2.5 million shares,
respectively, of the Company’s class B common stock in offerings pursuant to
Rule 144 of the Securities Act. Such shares converted to 10.0 million shares of
class A common stock upon the sale. The Company was a majority-owned subsidiary
of Cypress through September 29, 2008. After the close of trading on the New
York Stock Exchange (“NYSE”) on September 29, 2008, Cypress completed a
spin-off of all of its shares of the Company’s class B common stock, in the form
of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock. As a result, the Company’s class B common stock now trades
publicly and is listed on the Nasdaq Global Select Market, along with the
Company’s class A common stock. See Note 2 for additional information regarding
transactions with Cypress.
The
Company is subject to a number of risks and uncertainties including, but not
limited to, availability of third-party financing arrangements for the Company’s
customers, potential downward pressure on product pricing as new polysilicon
manufacturers begin operating and the worldwide supply of solar cells and panels
increases, the possible reduction or elimination of government and economic
incentives that encourage industry growth, the challenges of achieving its goal
to reduce costs of installed solar systems by 50% by 2012 to maintain
competitiveness, difficulties in maintaining or increasing the Company’s growth
rate and managing such growth, and accurately predicting warranty
claims.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("United States"
or "U.S.") and include the accounts of the Company and all of its subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
Reclassifications
Certain
prior period balances have been reclassified to conform to the current period
presentation in the Company’s Consolidated Financial Statements and the
accompanying notes. Such reclassification had no effect on previously reported
results of operations or retained earnings (deficit).
Fiscal
Years
The
Company reports results of operations on the basis of 52- or 53-week periods,
ending on the Sunday closest to December 31. Fiscal 2008 ended on
December 28, 2008, fiscal 2007 ended on December 30, 2007 and fiscal 2006
ended on December 31, 2006. Each of fiscal 2008, 2007 and 2006 consisted of 52
weeks.
Management
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“U.S. GAAP”) 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, certain accrued liabilities including accrued
warranty reserves, income taxes and tax valuation allowances and investments in
joint ventures. Actual results could differ from those estimates.
Fair
Value of Financial Instruments
The fair
value of a financial instrument is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The carrying values of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their respective fair values due to their short-term maturities. The
Company’s outstanding convertible debt is recorded at its principal amount, not
its estimated fair values. Investments in available-for-sale securities are
carried at fair value based on quoted market prices or estimated based on market
conditions and risks existing at each balance sheet date. Foreign currency
derivatives are carried at fair value based on quoted market prices for
financial instruments with similar characteristics. Unrealized gains and losses
of the Company’s available-for-sale securities and foreign currency derivatives
are excluded from earnings and reported as a component of other comprehensive
income (loss) in the Consolidated Balance Sheets. Additionally, the Company
assesses whether an other-than-temporary impairment loss on its
available-for-sale securities has occurred due to declines in fair value or
other market conditions. Declines in fair value that are considered
other-than-temporary are included in “Other, net” in the Consolidated Statements
of Operations.
Comprehensive
Income
Comprehensive
income is defined as the change in equity during a period from non-owner
sources. The Company’s comprehensive income for each period presented is
comprised of (i) the Company’s net income; (ii) foreign currency translation
adjustment of the Company’s wholly-owned foreign subsidiaries whose assets and
liabilities are translated from their respective functional currencies at
exchange rates in effect at the balance sheet date, and revenues and expenses
are translated at average exchange rates prevailing during the applicable period
and (iii) changes in unrealized gains or losses, net of tax, for derivatives
designated as cash flow hedges (see Note 12) and available-for-sale
securities carried at their fair value (see Note 6). Comprehensive income is
presented in the Consolidated Statements of Comprehensive Income.
Cash
Equivalents
Highly
liquid investments with original or remaining maturities of ninety days or less
at the date of purchase are considered cash equivalents.
Cash
in Restricted Accounts
As of
December 28, 2008 and December 30, 2007, the Company provided security for
advance payments received in fiscal 2007 from a customer in the form
of $20.0 million held in an escrow account, all of which is considered
“Restricted cash, net of current portion” on the Company’s Consolidated Balance
Sheets. Commencing in 2010 and continuing through 2019, the balance in the
escrow account will be reduced as the advance payments are to be applied as a
credit against the customer’s polysilicon purchases from the Company. Such
polysilicon is expected to be used by the customer to manufacture ingots, and
potentially wafers, which are to be sold to the Company under an ingot supply
agreement. The funds held in the escrow account may be released at any time in
exchange for bank guarantees, letters of credit issued under the collateralized
letter of credit facility and/or asset collateralization (see Note
8).
The
Company also enters into various contractual agreements to build turnkey
photovoltaic projects for customers in Europe, Korea and the United
States. As part of the contractual agreements with the customers in Europe
and Korea, the Company may receive advance payments that are collateralized by
providing letters of credit issued by Wells Fargo Bank, National Association
(“Wells Fargo”) to the customers. In certain customer contracts, the Company is
required to provide construction period letters of credit, to assure the
customers of contract completion, for a period of approximately one
year. In many cases, the Company is also asked to issue warranty period
letters of credit to assure the customers that the Company will meet its
warranty obligations, typically for the first two years after the project is
installed. The Company issues letters of credit for such purposes through
its line of credit facility with Wells Fargo. The credit agreement with
Wells Fargo requires the Company to collateralize the full value of letters of
credit issued under the collateralized letter of credit facility for such
purposes with cash placed in an interest bearing restricted account with Wells
Fargo. As long as the collateralized letters of credit are outstanding, the
Company will not be able to withdraw the associated funds in the restricted
account, though all interest earned on such restricted funds can be withdrawn
periodically. As of December 28, 2008 and December 30, 2007, outstanding
collateralized letters of credit issued by Wells Fargo totaled $76.5 million and
$47.9 million, respectively, of which $67.8 million and $45.4 million,
respectively, relate to contractual agreements with customers in Europe and
Korea (see Note 11).
In
January 2008, the Company entered into an Option Agreement with NorSun AS
(“NorSun”) pursuant to which the Company will deliver cash advance payments
to NorSun for the purchase of polysilicon under a long-term polysilicon supply
agreement with NorSun. As of December 28, 2008, the Company deposited $16.0
million in an escrow account to secure NorSun’s right to such advance payments,
all of which is considered “Restricted cash, net of current portion” on the
Company’s Consolidated Balance Sheets (see Note 10).
In
addition, the Company entered into a facility agreement with the Malaysian
Government on December 18, 2008, in which the Company may borrow up to Malaysian
Ringgit 1.0 billion (approximately $287.4 million) to finance the construction
of its planned third solar cell manufacturing facility in Malaysia. As of
December 28, 2008, the Company borrowed Malaysian Ringgit 190.0 million
(approximately $54.6 million) under the facility agreement, all of which is
considered “Restricted cash, net of current portion” on the Company’s
Consolidated Balance Sheets (see Note 11).
Short-Term
and Long-Term Investments
The
Company invests in auction rate securities which are carried at their market
values. Such securities are bought and sold in the marketplace through a bidding
process sometimes referred to as a “Dutch auction.” After the initial issuance
of the securities, the interest rate on the securities resets periodically at
pre-determined intervals every 7 to 49 days, based on the market demand at the
reset period. Historically, all auction rate securities were classified as
short-term investments because the Company was able to liquidate these at its
discretion at the reset period. When auction rate securities fail to clear at
auction and the Company is unable to estimate when the impacted auction rate
securities will clear at the next auction, the Company classifies these as
long-term consistent with the stated contractual maturities of the securities.
The “stated” or “contractual” maturities for these securities generally are
between 20 to 30 years.
The
Company also invests in money market securities, bank notes, commercial paper
and corporate securities with maturities greater than ninety days. In general,
investments with original maturities of greater than ninety days and remaining
maturities of less than one year are classified as short-term investments.
Investments with maturities beyond one year may be classified as short-term
based on their highly liquid nature and because such investments represent the
investment of cash that is available for current operations. Despite the
long-term maturities, the Company has the ability and intent, if necessary, to
liquidate any of these investments in order to meet the Company’s working
capital needs within its normal operating cycles. The Company has classified
these investments as available-for-sale securities under Statement of Financial
Accounting Standards (“SFAS”) No. 115 “Accounting for Investment in Certain
Debt and Equity Securities” (“SFAS No. 115”) (see Note 6).
Inventories
Inventories
are stated at the lower of cost or market. Standard cost approximates actual
cost on a first-in, first-out basis. The Company routinely evaluates quantities
and values of inventory in light of current market conditions and market trends,
and records reserves for quantities in excess of demand and product
obsolescence. The evaluation may take into consideration historic usage,
expected demand, anticipated sales price, new product development schedules, the
effect new products might have on the sale of existing products, product
obsolescence, customer concentrations, product merchantability and other
factors. Market conditions are subject to change and actual consumption of
inventory could differ from forecasted demand. The Company’s products have a
long life cycle and obsolescence has not historically been a significant factor
in the valuation of inventories. The Company also regularly reviews the cost of
inventory against their estimated market value and records a lower of cost or
market reserve for inventories that have a cost in excess of estimated market
value. Inventory reserves, once recorded, are not reversed until the inventories
have been subsequently disposed of.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets as presented
below. Leasehold improvements are amortized over the shorter of the estimated
useful lives of the assets or the remaining term of the lease. Repairs and
maintenance costs are expensed as incurred.
|
Useful Lives
in
Years
|
||||
|
Building
|
15
|
|||
|
Manufacturing
equipment
|
2 to 7
|
|||
|
Computer
equipment
|
2
to 7
|
|||
|
Furniture
and fixtures
|
3
to 5
|
|||
|
Leasehold
improvements
|
5 to 15
|
|||
Long-Lived
Assets
The
Company evaluates its long-lived assets, including property, plant and equipment
and intangible assets with finite lives, 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. Impairments are recognized
based on the difference between the fair value of the asset and its carrying
value. Fair value is generally measured based on either quoted market prices, if
available, or discounted cash flow analyses.
Goodwill
and Intangible Assets
The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”).
Goodwill and intangible assets with indefinite lives are not amortized but are
tested for impairment on an annual basis or whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. The Company performs its annual test of impairment for goodwill in
the third quarter of its fiscal year. Intangible assets with finite useful lives
are amortized using the straight-line method over their useful lives ranging
primarily from one to six years and are reviewed for impairment in accordance
with SFAS No. 144 (see Note 4).
Product
Warranties
The
Company warrants or guarantees the performance of solar panels that the Company
manufactures at certain levels of conversion efficiency for extended periods,
often as long as 20 years. It also warrants that the solar cells will be free
from defects for at least 10 years. In addition, the Company generally
provides warranty on systems they install for a period of 5 to 10
years. The Company also passes through to customers long-term warranties from
the original equipment manufacturers (“OEMs”) of certain system components.
Warranties of 20 years from solar panels suppliers are standard, while inverters
typically carry a 2-, 5- or 10-year warranty. Therefore, 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 historical
experience of similar products as well as various other assumptions that are
considered reasonable under the circumstances. The warranty reserve includes
specific accruals for known product and system issues and an accrual for an
estimate of incurred but not reported product and system issues based on
historical activity (see Note 9).
Revenue
Recognition
Construction
Contracts
Systems
revenue is primarily comprised of engineering, procurement and construction
(“EPC”) projects which are governed by customer contracts that require the
Company to deliver functioning solar power systems and are generally completed
within three to nine months from commencement of construction. In addition, the
Systems Segment also derives revenues from sales of certain solar power products
and services that are smaller in scope than an EPC contract. The Company
recognizes revenues from fixed price contracts under American Institute of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 81-1
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts” (“SOP 81-1”) using the percentage-of-completion method of accounting.
Under this method, systems revenue arising from fixed price construction
contracts is recognized as work is performed based on the percentage of incurred
costs to estimated total forecasted costs utilizing the most recent estimates of
forecasted costs.
In
addition to the EPC deliverable, a limited number of arrangements also include
multiple deliverables such as post-installation systems monitoring and
maintenance and system output performance guarantees. For contracts with
separately priced performance guarantees or maintenance, the Company recognizes
revenue related to such separately priced elements over the contract period in
accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin
(“FTB”) 90-1, “Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts” (“FTB
90-1”). For contracts including performance guarantees or maintenance contracts
not separately priced, the Company follows the guidance in Emerging Issues Task
Force Issue (“EITF”) No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”) to determine whether the entire
contract has more than one unit of accounting.
The
Company has determined that post-installation systems monitoring and
maintenance, and system output performance guarantees qualify as separate units
of accounting under EITF 00-21. Such post-installation elements are deferred at
the time the contract is executed and are recognized to income over the
contractual term under Staff Accounting Bulletin (“SAB”) No. 104. The remaining
EPC is recognized to income on a percentage-of-completion basis under SOP
81-1.
In
addition, when arrangements include contingent revenue clauses such as
liquidated damages or customer termination or put rights for non-performance,
the Company defers the contingent revenue until such time as the contingencies
expire.
Incurred
costs include all direct material, labor, subcontract costs, and those indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Job material costs are included in incurred costs when the job materials
have been installed. Revenue is deferred and recognized upon installation, in
accordance with the percentage-of-completion method of accounting. Job materials
are considered installed materials when they are permanently attached or fitted
to the solar power system as required by the job’s engineering
design.
Due to
inherent uncertainties in estimating cost, job costs estimates are reviewed
and/or updated by management working within the Systems Segment. The Systems
Segment determines the completed percentage of installed job materials at the
end of each month; generally this information is also reviewed with the
customer’s on-site representative. The completed percentage of installed job
materials is then used for each job to calculate the month-end job material
costs incurred. Direct labor, subcontractor, and other costs are charged to
contract costs as incurred. Provisions for estimated losses on uncompleted
contracts, if any, are recognized in the period in which the loss first becomes
probable and reasonably estimable. Contracts may include profit incentives such
as milestone bonuses. These profit incentives are included in the contract value
when their realization is reasonably assured.
Components
Products
The
Company sells its components products, as well as its balance of systems
products from the Systems Segment, to system integrators and OEMs and recognizes
revenue, net of accruals for estimated sales returns, when persuasive evidence
of an arrangement exists, delivery of the product has occurred and title and
risk of loss has passed to the customer, the sales price is fixed or
determinable, collectability of the resulting receivable is reasonably assured
and the rights and risks of ownership have passed to the customer. Other than
standard warranty obligations, there are no rights of return and there are no
significant post-shipment obligations, including installation, training or
customer acceptance clauses, with any of its customers that could have an impact
on revenue recognition. As such, the Company records a trade receivable for the
selling price when the above conditions are met, and reduces inventory for the
carrying value of goods shipped. The Company’s revenue recognition policy is
consistent across its product lines and sales practices are consistent across
all geographic areas. In addition, the Company records a charge to operating
expense and a credit to allowance for doubtful accounts when customer accounts
receivable are deemed uncollectible.
The
provision for estimated sales returns on product sales is recorded in the same
period the related revenues are recorded. These estimates are based on
historical sales returns, analysis of credit memo data and other known factors.
Actual returns could differ from these estimates. The Company recorded charges
for sales returns on product sales of $0.1 million, $2.2 million and $0.8
million in fiscal 2008, 2007 and 2006, respectively. Amounts utilized
against the sales return allowance aggregated $0.2 million, $2.2 million and
$0.5 million in fiscal 2008, 2007 and 2006, respectively. The allowance for
sales returns was $0.2 million and $0.4 million as of December 28, 2008 and
December 30, 2007, respectively.
Shipping
and Handling Costs
The
Company records costs related to shipping and handling in cost of
revenue.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense totaled approximately $2.2
million, $2.3 million and $0.8 million in fiscal 2008, 2007 and 2006,
respectively.
Research
and Development Costs
Research
and development costs consist primarily of compensation and related costs for
personnel, materials, supplies and equipment depreciation. All research and
development costs are expensed as incurred. In the third quarter of 2007, the
Company signed a Solar America Initiative research and development agreement
with the U.S. Department of Energy in which it was awarded $10.8 million in
the first budgetary period. Total funding for the three-year effort is estimated
to be $24.9 million. The Company’s cost share requirement under this program,
including lower-tier subcontract awards, is anticipated to be $28.1 million.
Amounts invoiced under these arrangements are offset against research and
development expense as costs are incurred in accordance with the agreements with
the government agency. Payments received under these contracts offset research
and development expense by approximately 25%, 21% and 8% in fiscal 2008, 2007
and 2006, respectively.
Remeasurement
of Foreign Currency Transactions
The
Company and the majority of its subsidiaries use their respective local currency
as their functional currency. Accordingly, foreign currency assets and
liabilities are remeasured using exchange rates in effect at the end of the
period, except for non-monetary assets, such as property, plant and equipment,
which are remeasured using historical exchange rates. Revenues and costs are
remeasured using average exchange rates for the period, except for income items
related to non-monetary assets and liabilities, such as depreciation, that are
remeasured using historical exchange rates. The Company includes gains or losses
from foreign currency remeasurement in other, net of the Consolidated Statements
of Operations with the other hedging activities described in Note 11. The
Company experienced losses on derivatives and foreign exchange, net of tax of
$20.6 million in fiscal 2008 largely due to the volatility in the current
markets as compared to gains of $2.1 million and $0.9 million in fiscal 2007 and
2006, respectively. Certain foreign subsidiaries designate the local currency as
their functional currency, and the Company records the translation of their
assets and liabilities into U.S. dollars at the balance sheet date, and the
translation of their revenues and expenses into U.S. dollars using average
exchange rates for the period, as translation adjustments and includes them as a
component of accumulated other comprehensive income (loss) in the Consolidated
Balance Sheets.
As of
December 28, 2008 and December 30, 2007, the Company had Euro-denominated
accounts receivable of 69.0 million (approximately $96.8 million) and 53.7
million (approximately $79.0 million), respectively. In addition, as of December
28, 2008 and December 30, 2007, the Company had Euro-denominated customer
advances (see Note 8) of 19.7 million (approximately $28.1 million) and
19.7 million (approximately $29.0 million), respectively.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily cash, cash equivalents, restricted cash and investments,
hedging instruments and trade accounts receivable. The Company’s investment
policy requires cash, cash equivalents, restricted cash and investments to be
placed with high-credit quality institutions and to limit the amount of credit
risk from any one issuer. The Company performs ongoing credit evaluations of its
customers’ financial condition whenever deemed necessary and generally does not
require collateral. The Company maintains an allowance for doubtful accounts
based upon the expected collectability of all accounts receivable, which takes
into consideration an analysis of historical bad debts, specific customer
creditworthiness and current economic trends. The allowance for doubtful
accounts was $1.9 million and $1.4 million as of December 28, 2008 and December
30, 2007, respectively. For fiscal 2008, 2007 and 2006, the Company provided
$2.2 million, $0.8 million and $0.3 million, respectively, for allowance for
doubtful accounts. During fiscal 2008, 2007 and 2006, the Company wrote off
$1.7 million, zero and $32,000 of bad debts, respectively. No customer
accounted for 10% or more of accounts receivable as of December 28, 2008 and one
customer accounted for 21% of accounts receivable as of December 30,
2007.
Income
Taxes
For
financial reporting purposes, income tax expense and deferred income tax
balances were calculated as if the Company were a separate entity and had
prepared its own separate tax return. Deferred tax assets and liabilities are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities. Valuation allowances are provided against
deferred tax assets when management cannot conclude that it is more likely than
not that some portion or all deferred tax assets will be realized. The Company
accrues interest and penalties on tax contingencies as required by the FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues” (“FIN 48”) and SFAS No. 109 “Accounting for Income Taxes”
(“SFAS No. 109”). This interest and penalty accrual is classified as income
tax provision (benefit) in the Consolidated Statements of Operations and was not
material for any periods presented.
In
addition, foreign exchange gains (losses) may result from estimated tax
liabilities, which are expected to be settled in currencies other than the U.S.
dollar.
Effective
with the closing of the Company’s follow-on public offering of 7.0 million
shares of its class A common stock in June 2006, the Company was no longer
eligible to file federal and most state consolidated tax returns with Cypress.
As of September 29, 2008, Cypress distributed all of its shares of the Company’s
class B common stock to its shareholders, so the Company is no longer eligible
to file any state combined returns with Cypress. Accordingly, the Company has
agreed to pay Cypress for any federal income tax credit or net operating loss
carryforwards utilized in its federal tax returns in subsequent
periods that originated while the Company’s results were included in
Cypress’s federal tax returns. Cypress and the Company have entered into a tax
sharing agreement providing for each company’s obligations concerning various
tax liabilities (see Notes 2 and 14).
Investments
in Equity Interests
Investments
in entities in which the Company can exercise significant influence, but does
not own a majority equity interest or otherwise control, are accounted for under
APB Opinion No. 18 “The Equity Method of Accounting for Investments in Common
Stock” (“equity method”). The Company records its share of the results of these
entities as equity in earnings of unconsolidated investees on the
Consolidated Statements of Operations. The Company monitors its investments for
other-than-temporary impairment by considering factors such as current economic
and market conditions and the operating performance of the entities and records
reductions in carrying values when necessary. The fair value of privately held
investments is estimated using the best available information as of the
valuation date, including current earnings trends, undiscounted cash flows,
quoted stock prices of comparable public companies, and other company specific
information, including recent financing rounds.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business
Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141
"Business Combinations" ("SFAS No. 141"). SFAS No. 141(R) will
significantly change the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and restructuring costs.
In addition, under SFAS No. 141(R), changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income tax expense. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008 and will be
adopted by the Company for any purchase business combinations consummated
subsequent to December 28, 2008.
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 160 on its financial
position and results of operations.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS
157-2 “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP
157-2 deferred the effective date of SFAS No. 157 “Fair Value Measurements”
(“SFAS No. 157”) for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning after November 15,
2008. With the exception of investments and foreign currency derivatives held,
this deferral makes SFAS No. 157 effective for the Company beginning in the
first quarter of fiscal 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 157 on measurement of fair
value of its nonfinancial assets, including goodwill, and nonfinancial
liabilities.
In
March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS
No. 161”), which expands the disclosure requirements for derivative instruments
and hedging activities. SFAS No. 161 specifically requires entities to provide
enhanced disclosures addressing the following: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 “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. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 161 on its financial
position, results of operations and disclosures.
In April
2008, the FASB issued FSP SFAS No. 142-3 “Determination of Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors that should be
considered in developing the renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142. FSP
142-3 also requires expanded disclosure related to the determination of
intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the potential
impact, if any, of the adoption of FSP 142-3 on its financial position, results
of operations and disclosures.
In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”), which identifies the sources of
accounting principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. This
Statement is effective 60 days following the SEC's approval of the Public
Company Accounting Oversight Board amendments to AU Section 411 “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles.” The
Company currently adheres to the hierarchy of U.S. GAAP as presented in SFAS No.
162 and the adoption of SFAS No. 162 during the fourth quarter in fiscal 2008
did not have a material impact on its financial position, results of operations
and disclosures.
In
May 2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion, including partial
cash settlement. FSP APB 14-1 significantly impacts the accounting for
instruments commonly referred to as Instruments B, Instruments C and Instruments
X from EITF Issue No. 90-19 “Convertible Bonds with Issuer Option to Settle for
Cash upon Conversion” (“EITF 90-19”), and any other convertible debt instruments
that allow settlement in any combination of cash and shares at the issuer’s
option. The new guidance requires the issuer to separately account for the
liability and equity components of the instrument in a manner that reflects
interest expense equal to the issuer’s non-convertible debt borrowing rate. FSP
APB 14-1 is effective for fiscal years and interim periods beginning after
December 15, 2008, and retrospective application will be required for all
periods presented. The new guidance may have a significant impact on the
Company’s outstanding convertible debt balance of $423.6 million, potentially
resulting in significantly higher non-cash interest expense on its convertible
debt (see Note 11). The Company is currently evaluating the potential impact of
the new guidance on its results of operations and financial
condition.
In June
2008, the FASB issued FSP EITF 03-6-1 “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF
03-6-1”), which clarified that all outstanding unvested share-based payment
awards that contain rights to nonforteitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic
and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for
fiscal years beginning after December 15, 2008 and the Company is currently
assessing its impact on the Company’s earnings per share.
In
October 2008, the FASB issued FSP SFAS No. 157-3 “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active”
(“FSP 157-3”), which demonstrated how the fair value of a financial asset
is determined when the market for that financial asset is inactive. FSP 157-3 is
applicable to the valuation of auction rate securities held by the Company for
which there was no active market as of December 28, 2008. FSP 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued (see Note 6). The adoption of FSP 157-3 during
the third quarter in fiscal 2008 did not have a material impact on the Company’s
financial condition and results of operations.
In
November 2008, the FASB ratified EITF Issue No. 08-06 “Equity Method
Investment Accounting Considerations” (“EITF 08-06”), which clarifies the
accounting for certain transactions and impairment considerations involving
equity method investments. EITF 08-6 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. The
Company is currently evaluating the potential impact, if any, of the adoption of
EITF 08-06 on its financial position, results of operations and
disclosures.
In
November 2008, the FASB ratified EITF Issue No. 08-07 “Accounting for
Defensive Intangible Assets” (“EITF 08-07”), which clarifies the accounting for
certain separately identifiable intangible assets which an acquirer does not
intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. EITF 08-07 requires an acquirer in a business
combination to account for a defensive intangible asset as a separate unit of
accounting which should be amortized to expense over the period the asset
diminishes in value. EITF 08-07 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. The Company is
currently evaluating the potential impact, if any, of the adoption of
EITF 08-07 on its financial position, results of operations and
disclosures.
In
December 2008, the FASB issued FSP SFAS No. FIN 46(R)-8 “Interests in Variable
Interest Entities” (“FSP 46(R)-8”), which requires public enterprises, including
sponsors that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
FSP 46(R)-8 is intended to provide greater transparency to financial statement
users about an enterprise’s involvement with variable interest entities and is
effective for fiscal years and interim periods beginning after December 15,
2008. The adoption of FSP 46(R)-8 during the fourth quarter in fiscal 2008 did
not have a material impact on the Company’s financial position, results of
operations and disclosures (see Note 10).
Note
2. TRANSACTIONS WITH
CYPRESS
Purchases
of Imaging and Infrared Detector Products from Cypress
The
Company historically purchased fabricated semiconductor wafers from Cypress at
intercompany prices consistent with Cypress’s internal transfer pricing
methodology. In December 2007, Cypress announced the planned closure of its
Texas wafer fabrication facility that manufactured the Company’s imaging and
infrared detector products. The planned closure is expected to be completed
in the first quarter of fiscal 2009. The Company evaluated its alternatives
relating to the future plans for this business and decided to wind-down its
activities related to the imaging detector product line in the first quarter of
fiscal 2008. Accordingly, in the first quarter of fiscal 2008, cost of
components revenue included a $2.2 million impairment charge to long-lived
assets primarily related to manufacturing equipment located in the Texas wafer
fabrication facility. The Company did not purchase wafers from Cypress in the
second, third and fourth quarters of fiscal 2008. Wafer purchases totaled $0.6
million, $4.7 million and $7.2 million in fiscal 2008, 2007 and 2006,
respectively.
Administrative
Services Provided by Cypress
Cypress
seconded employees and consultants to the Company for different time periods for
which the Company paid their fully-burdened compensation. In addition, Cypress
personnel rendered services to the Company to assist with administrative
functions such as employee benefits and other Cypress corporate services and
infrastructure. Cypress billed the Company for a portion of the Cypress
employees’ fully-burdened compensation. In the case of the Philippines
subsidiary, which entered into a services agreement for such secondments and
other consulting services in January 2005, the Company paid the fully burdened
compensation plus 10%. The amounts that the Company has recorded as general and
administrative expenses in the accompanying statements of operations for these
services was approximately $3.5 million, $1.8 million and $1.5 million in fiscal
2008, 2007 and 2006, respectively.
Leased
Facility in the Philippines
In 2003,
the Company and Cypress reached an understanding that the Company would build
out and occupy a building owned by Cypress for its first solar cell
manufacturing facility in the Philippines. The Company entered into a lease
agreement for this facility and a sublease for the land under which the Company
paid Cypress at a rate equal to the cost to Cypress for that facility (including
taxes, insurance, repairs and improvements). Under the lease agreement, the
Company had the right to purchase the facility and assume the lease for the land
from Cypress at any time at Cypress’s original purchase price of approximately
$8.0 million, plus interest computed on a variable index starting on the date of
purchase by Cypress until the sale to the Company, unless such purchase option
was exercised after a change of control of the Company, in which case the
purchase price would be at a market rate, as reasonably determined by Cypress.
In May 2008, the Company exercised its right to purchase the facility from
Cypress and assumed the lease for the land from an unaffiliated third-party for
a total purchase price of $9.5 million. The lease for the land expires in May
2048 and is renewable for an additional 25 years. Rent expense paid to Cypress
for this building was $0.1 million for fiscal 2008 and $0.3 million in each of
fiscal 2007 and 2006.
Leased
Headquarters Facility in San Jose, California
In
May 2006, the Company entered into a lease agreement for its approximately
44,000 square foot headquarters, which is located in a building owned by Cypress
in San Jose, California, for $6.0 million over the five-year term of the
lease. In October 2008, the Company amended the lease agreement, increasing
the rentable square footage and the total lease obligations to approximately
60,000 and $7.6 million, respectively, over the five-year term of the lease. In
the event Cypress decides to sell the building, the Company has the right of
first refusal to purchase the building at a fair market price which will be
based on comparable sales in the area. Rent expense paid to Cypress for this
facility was $1.5 million, $1.3 million and $0.6 million in fiscal 2008, 2007
and 2006, respectively.
Employee
Matters Agreement
In
October 2005, the Company entered into an employee matters agreement with
Cypress to allocate assets, liabilities and responsibilities relating to its
current and former U.S. and international employees and its participation in the
employee benefits plans that Cypress sponsored and maintained. In July
2008, the Company transferred all accounts in the Cypress 401(k) Plan held by
the Company’s employees to its recently established SunPower 401(k) Savings
Plan. In September 2008, all of the Company’s eligible employees began
participating in SunPower’s own health and welfare plans and no longer
participate in the Cypress health and welfare plans. In connection with Cypress’
spin-off of its shares of the Company’s class B common stock, the Company and
Cypress agreed to terminate the employee matters agreement.
Indemnification
and Insurance Matters Agreement
The
Company will indemnify Cypress and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions: existing on,
under, about or in the vicinity of any of the Company’s facilities, or arising
out of operations occurring at any of the Company’s facilities, including its
California facilities, whether prior to or after Cypress’s spin-off of the
Company’s class B common stock held by Cypress; existing on, under, about or in
the vicinity of the Philippines facility which the Company occupies, or arising
out of operations occurring at such facility, whether prior to or after the
separation, to the extent that those liabilities were caused by the Company;
arising out of hazardous materials found on, under or about any landfill, waste,
storage, transfer or recycling site and resulting from hazardous materials
stored, treated, recycled, disposed or otherwise handled by any of the Company’s
operations or the Company’s California and Philippines facilities prior to the
separation; and arising out of the construction activity conducted by or on
behalf of the Company at Cypress’s Texas facility.
The
indemnification and insurance matters agreement also contains provisions
governing the Company’s insurance coverage, which was under the Cypress
insurance policies. As of September 29, 2008, the Company has obtained its own
separate policies for the coverage previously provided under the indemnification
and insurance matters agreement.
Tax
Sharing Agreement
The
Company has entered into a tax sharing agreement with Cypress providing for each
of the party’s obligations concerning various tax liabilities. The tax sharing
agreement is structured such that Cypress will pay all federal, state, local and
foreign taxes that are calculated on a consolidated or combined basis (while
being a member of Cypress’s consolidated or combined group pursuant to federal,
state, local and foreign tax law). The Company’s portion of such tax liability
or benefit will be determined based upon its separate return tax liability as
defined under the tax sharing agreement. Such liability or benefit will be based
on a pro forma calculation as if the Company were filing a separate income tax
return in each jurisdiction, rather than on a combined or consolidated basis
with Cypress subject to adjustments as set forth in the tax sharing
agreement.
On June
6, 2006, the Company ceased to be a member of Cypress’s consolidated group for
federal income tax purposes and certain state income tax purposes. On September
29, 2008, the Company ceased to be a member of Cypress’s combined group for all
state income tax purposes. To the extent that the Company becomes entitled to
utilize on the Company’s separate tax returns portions of those credit or loss
carryforwards existing as of such date, the Company will distribute to Cypress
the tax effect, estimated to be 40% for federal and state income tax purposes,
of the amount of such tax loss carryforwards so utilized, and the amount of any
credit carryforwards so utilized. The Company will distribute these amounts to
Cypress in cash or in the Company’s shares, at Cypress’s option. As of
December 28, 2008, the Company has $44.0 million of federal net operating
loss carryforwards and approximately $73.5 million of California net operating
loss carryforwards meaning that such potential future payments to Cypress, which
would be made over a period of several years, would therefore aggregate
approximately $18.7 million.
The
majority of these net operating loss carryforwards were created by employee
stock transactions. Because there is uncertainty as to the realizability of
these loss carryforwards, the portion created by employee stock transactions are
not reflected on the Company’s Consolidated Balance Sheets.
The
Company will continue to be jointly and severally liable for any tax liability
as governed under federal, state and local law during all periods in which it is
deemed to be a member of the Cypress consolidated or combined group.
Accordingly, although the tax sharing agreement allocates tax liabilities
between Cypress and all its consolidated subsidiaries, for any period in which
the Company is included in Cypress’s consolidated group, the Company could be
liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the group.
The
Company will continue to be jointly and severally liable to Cypress until the
statute of limitations run for all years where the Company joined in the filing
of tax returns with Cypress. If Cypress experiences adjustments to their tax
liability pursuant to tax examinations, the Company may incur an incremental
liability.
Subject
to certain caveats, Cypress has obtained a ruling from the Internal Revenue
Service (“IRS”) to the effect that the distribution by Cypress of the Company’s
class B common stock to Cypress stockholders qualified as a tax-free
distribution under Section 355 of the Internal Revenue Code (“Code”).
Despite such ruling, the distribution may nonetheless be taxable to Cypress
under Section 355(e) of the Code if 50% or more of the Company’s voting
power or economic value is acquired as part of a plan or series of related
transactions that includes the distribution of the Company’s stock. The tax
sharing agreement includes the Company’s obligation to indemnify Cypress for any
liability incurred as a result of issuances or dispositions of the Company’s
stock after the distribution, other than liability attributable to certain
dispositions of the Company’s stock by Cypress, that cause Cypress’s
distribution of shares of the Company’s stock to its stockholders to be taxable
to Cypress under Section 355(e) of the Code.
The tax
sharing agreement further provides for cooperation with respect to tax matters,
the exchange of information and the retention of records which may affect the
income tax liability of either party. Disputes arising between Cypress and the
Company relating to matters covered by the tax sharing agreement are subject to
resolution through specific dispute resolution provisions contained in the
agreement.
In
connection with Cypress’ spin-off of its shares of the Company’s class B common
stock, the Company and Cypress, on August 12, 2008, entered into an
Amendment No. 1 to Tax Sharing Agreement (“Amended Tax Sharing Agreement”)
to address certain transactions that may affect the tax treatment of the
spin-off and certain other matters.
Under the
Amended Tax Sharing Agreement, the Company is required to provide notice to
Cypress of certain transactions that could give rise to the Company’s
indemnification obligation relating to taxes resulting from the application of
Section 355(e) of the Code or similar provision of other applicable law to the
spin-off as a result of one or more acquisitions (within the meaning of
Section 355(e)) of the Company’s stock after the spin-off. An acquisition
for these purposes includes any such acquisition attributable to a conversion of
any or all of the Company’s class B common stock to class A common
stock or any similar recapitalization transaction or series of related
transactions (a “Recapitalization”). The Company is not required to indemnify
Cypress for any taxes which would result solely from (A) issuances and
dispositions of the Company’s stock prior to the spin-off and (B) any
acquisition of the Company’s stock by Cypress after the spin-off.
Under the
Amended Tax Sharing Agreement, the Company also agreed that, for a period of
25 months following the spin-off, it will not (i) effect a
Recapitalization or (ii) enter into or facilitate any other transaction
resulting in an acquisition (within the meaning of Section 355(e) of the Code)
of the Company’s stock without first obtaining the written consent of Cypress;
provided, the Company is not required to obtain Cypress’s consent unless such
transaction (either alone or when taken together with one or more other
transactions entered into or facilitated by the Company consummated after
August 4, 2008 and during the 25-month period following the spin-off) would
involve the acquisition for purposes of Section 355(e) of the Code after
August 4, 2008 of more than 25% of the Company’s outstanding shares of
common stock. In addition, the requirement to obtain Cypress’s consent does not
apply to (A) any acquisition of the Company’s stock that will qualify under
Treasury Regulation Section 1.355-7(d)(8) in connection with the
performance of services, (B) any acquisition of the Company’s stock for
which it furnishes to Cypress prior to such acquisition an opinion of counsel
and supporting documentation, in form and substance reasonably satisfactory to
Cypress (a “Tax Opinion”), that such acquisition will qualify under Treasury
Regulation Section 1.355-7(d)(9), (C) an acquisition of the
Company’s stock (other than involving a public offering) for which the Company
furnishes to Cypress prior to such acquisition a Tax Opinion to the effect that
such acquisition will qualify under the so-called “super safe harbor” contained
in Treasury Regulation Section 1.355-7(b)(2) or (D) the adoption
by the Company of a standard stockholder rights plan. The Company further agreed
that it will not (i) effect a Recapitalization during the 36 month
period following the spin-off without first obtaining a Tax Opinion to the
effect that such Recapitalization (either alone or when taken together with any
other transaction or transactions) will not cause the spin-off to become taxable
under Section 355(e), or (ii) seek any private ruling, including any
supplemental private ruling, from the IRS with regard to the spin-off, or any
transaction having any bearing on the tax treatment of the spin-off, without the
prior written consent of Cypress.
Note
3. BUSINESS
COMBINATIONS
Solar
Sales Pty. Ltd. (“Solar Sales”)
On July
23, 2008, the Company completed the acquisition of Solar Sales, a solar systems
integration and product distribution company based in Australia. Solar Sales
distributes components such as solar panels and inverters via a national network
of dealers throughout Australia, and designs, builds and commissions large-scale
commercial systems. Prior to the acquisition, Solar Sales had been a
customer of the Company since fiscal 2005. As a result of the acquisition,
Solar Sales became a wholly-owned subsidiary of the Company. In connection with
the acquisition, the Company changed Solar Sales’ name to SunPower Corporation
Australia Pty. Ltd. (“SunPower Australia”). The acquisition of SunPower
Australia was not material to the Company’s financial position or results of
operations.
Solar
Solutions
On
January 8, 2008, the Company completed the acquisition of Solar Solutions, a
solar systems integration and product distribution company based in Italy. Solar
Solutions was a division of Combigas S.r.l., a petroleum products trading firm.
Active since 2002, Solar Solutions distributes components such as solar panels
and inverters, and offers turnkey solar power systems and standard system kits
via a network of dealers throughout Italy. Prior to the acquisition, Solar
Solutions had been a customer of the Company since fiscal 2006. As a result
of the acquisition, Solar Solutions became a wholly-owned subsidiary of the
Company. In connection with the acquisition, the Company changed Solar
Solutions’ name to SunPower Italia S.r.l. (“SunPower Italia”). The acquisition
of SunPower Italia was not material to the Company’s financial position or
results of operations.
PowerLight
On
January 10, 2007, the Company completed its acquisition of PowerLight. The
results of PowerLight have been included in the consolidated results of the
Company since January 10, 2007. As a result of the PowerLight acquisition,
all of the outstanding shares of PowerLight, and a portion of each vested option
to purchase shares of PowerLight, were cancelled, and all of the outstanding
options to purchase shares of PowerLight (other than the portion of each vested
option that was cancelled) were assumed by the Company in exchange for aggregate
consideration of (i) approximately $120.7 million in cash plus
(ii) approximately 5.7 million shares of the Company’s class A common
stock, inclusive of (a) approximately 1.6 million shares of the Company’s
class A common stock which may be issued upon the exercise of assumed vested and
unvested PowerLight stock options, which options vest on the same schedule as
the assumed PowerLight stock options, and (b) approximately 1.1 million
shares of the Company’s class A common stock issued to employees of PowerLight
in connection with the acquisition which, along with approximately 0.5 million
of the shares issuable upon exercise of assumed PowerLight stock options, are
subject to certain transfer restrictions and a repurchase option by the Company,
both of which lapse over a two-year period following the acquisition under the
terms of certain equity restriction agreements. The Company under the terms of
the acquisition agreement also issued an additional 0.2 million shares of
restricted class A common stock to certain employees of PowerLight, which shares
are subject to certain transfer restrictions which will lapse over 4 years
following the acquisition. In June 2007, the Company changed PowerLight’s name
to SunPower Corporation, Systems (SP Systems), to capitalize on SunPower’s name
recognition.
The total
consideration related to the acquisition is as follows:
|
(In thousands)
|
Shares
|
Fair Value at
January 10, 2007
|
|||
|
Purchase
consideration:
|
|||||
|
Cash
|
—
|
$
|
120,694
|
||
|
Common
stock
|
2,961
|
111,266
|
|||
|
Stock
options assumed that are fully vested
|
618
|
21,280
|
|||
|
Direct
transaction costs
|
—
|
2,958
|
|||
|
Total
purchase consideration
|
3,579
|
256,198
|
|||
|
Future
stock compensation:
|
|||||
|
Shares
subject to re-vesting restrictions
|
1,146
|
43,046
|
|||
|
Stock
options assumed that are unvested
|
984
|
35,126
|
|||
|
Total
future stock compensation
|
2,130
|
78,172
|
|||
|
Total
purchase consideration and future stock compensation
|
5,709
|
$
|
334,370
|
||
Of the
total consideration issued for the acquisition, approximately $23.7 million
in cash and approximately 0.7 million shares of its class A common stock,
with a total aggregate value of $118.1 million as of December 30,
2007, were held in escrow as security for the indemnification obligations of
certain former PowerLight stockholders.
In
January 2008, following the first anniversary of the acquisition date, the
Company authorized the release of approximately one-half of the original
escrow amount, leaving in escrow approximately $11.9 million in cash and
approximately 0.4 million shares of its class A common stock, with a
total aggregate value of $25.3 million as of December 28, 2008. The
Company’s rights to recover damages under several provisions of the acquisition
agreement also expired on the first anniversary of the acquisition date. As
a result, the Company is now entitled to recover only limited types of losses,
and any recovery will be limited to the amount available in the escrow fund at
the time of a claim. The remaining amount in the escrow fund will be
progressively reduced to zero on each anniversary of the acquisition date over a
period of four years (see Note 18).
Purchase
Price Allocation
Under the
purchase method of accounting, the total purchase price as shown in the table
above was allocated to PowerLight’s (now known as SP Systems) net tangible and
intangible assets based on their estimated fair values as of January 10, 2007.
The purchase price has been allocated based on management’s best estimates. The
fair value of the Company’s class A common stock issued was determined based on
the average closing prices for a range of trading days around the announcement
date (November 15, 2006) of the transaction. The fair value of stock options
assumed was estimated using the Black-Scholes valuation model ("Black-Scholes
model") with the following assumptions: volatility of 90%, expected life ranging
from 2.7 years to 6.3 years, and risk-free interest rate of 4.6%.
The
allocation of the purchase price associated with certain assets on January 10,
2007 was as follows:
|
(In thousands)
|
Amount
|
|||
|
Net
tangible assets
|
$
|
13,925
|
||
|
Patents
and purchased technology
|
29,448
|
|||
|
Tradenames
|
15,535
|
|||
|
Backlog
|
11,787
|
|||
|
Customer
relationships
|
22,730
|
|||
|
In-process
research and development
|
9,575
|
|||
|
Unearned
stock compensation
|
78,172
|
|||
|
Deferred
tax liability
|
(21,964
|
)
|
||
|
Goodwill
|
175,162
|
|||
|
Total
purchase consideration and future stock compensation
|
$
|
334,370
|
||
Net
tangible assets acquired on January 10, 2007 consisted of the
following:
|
(In thousands)
|
Amount
|
|||
|
Cash
and cash equivalents
|
$
|
22,049
|
||
|
Restricted
cash
|
4,711
|
|||
|
Accounts
receivable, net
|
40,080
|
|||
|
Costs
and estimated earnings in excess of billings
|
9,136
|
|||
|
Inventories
|
28,146
|
|||
|
Deferred
project costs
|
24,932
|
|||
|
Prepaid
expenses and other assets
|
23,740
|
|||
|
Total
assets acquired
|
152,794
|
|||
|
Accounts
payable
|
(60,707
|
)
|
||
|
Billings
in excess of costs and estimated earnings
|
(35,887
|
)
|
||
|
Other
accrued expenses and liabilities
|
(42,275
|
)
|
||
|
Total
liabilities assumed
|
(138,869
|
)
|
||
|
Net
assets acquired
|
$
|
13,925
|
||
The
Company accounted for its acquisition of PowerLight in accordance with SFAS No.
141. Accordingly, all intercompany receivables and payables related to
PowerLight at the acquisition date were eliminated in purchase accounting
effective January 10, 2007.
Acquired
Identifiable Intangible Assets
The
following table presents certain information on the acquired identifiable
intangible assets:
|
Intangible
Assets
|
Method
of Valuation
|
Discount
Rate
Used
|
Royalty
Rate
Used
|
Estimated
Useful Life
|
|
Patents
and purchased technology
|
Relief
from royalty method
|
25%
|
3%
|
4 years
|
|
Tradenames
|
Relief
from royalty method
|
25%
|
1%
|
5
years
|
|
Backlog
|
Income
approach
|
20%
|
—%
|
1
year
|
|
Customer
relationships
|
Income
approach
|
22%
|
—%
|
6
years
|
The
determination of the fair value and useful life of the tradename was based on
the Company’s strategy of continuing to market its systems products and services
under the PowerLight brand. Based on the Company’s change in branding strategy
and changing PowerLight’s name to SunPower Corporation, Systems, during the
quarter ended July 1, 2007, the Company recognized an impairment charge of $14.1
million, which represented the net book value of the PowerLight
tradename.
Amortization
expense for fiscal 2008 and 2007 was as follows:
|
(In
thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Cost
of systems revenue
|
$
|
7,691
|
$
|
20,085
|
||||
|
Sales,
general and administrative
|
3,787
|
3,688
|
||||||
|
Total
amortization expense
|
$
|
11,478
|
$
|
23,773
|
||||
In-Process
Research and Development (“IPR&D”) Charge
In
connection with the acquisition of PowerLight (now known as SP Systems), the
Company recorded an IPR&D charge of $9.6 million in the first quarter of
fiscal 2007, as technological feasibility associated with the IPR&D projects
had not been established and no alternative future use existed.
These
IPR&D projects consisted of two components: design automation tool and
tracking systems and other. In assessing the projects, the Company considered
key characteristics of the technology as well as its future prospects, the rate
technology changes in the industry, product life cycles, and the various
projects’ stage of development.
The value
of IPR&D was determined using the income approach method, which calculated
the sum of the discounted future cash flows attributable to the projects once
commercially viable using a 40% discount rate, which were derived from a
weighted-average cost of capital analysis and adjusted to reflect the stage of
completion and the level of risks associated with the projects. The percentage
of completion for each project was determined by identifying the research and
development expenses invested in the project as a ratio of the total estimated
development costs required to bring the project to technical and commercial
feasibility. The following table summarizes certain information related to
each project:
|
Stage
of
Completion
|
Total Cost
Incurred to Date
|
Total
Remaining Costs
|
|||||||||||||||
|
Design Automation Tool
|
|||||||||||||||||
|
As
of January 10, 2007 (acquisition date)
|
8
|
%
|
$
|
0.2 million
|
$
|
2.4 million
|
|||||||||||
|
As
of December 28, 2008
|
100
|
%
|
$
|
1.4 million
|
$
|
—
|
|||||||||||
|
Tracking System and Other
|
|||||||||||||||||
|
As
of January 10, 2007 (acquisition date)
|
25
|
%
|
$
|
0.2 million
|
$
|
0.6 million
|
|||||||||||
|
As
of December 28, 2008
|
100
|
%
|
$
|
0.8
million
|
$
|
—
|
|||||||||||
Status
of IPR&D:
At the
close of the first quarter in fiscal 2008, the first release of the design
automation tool software was deployed to production. As of December 28, 2008,
the Company has incurred total project costs of $1.4 million, of which $1.2
million was incurred after the acquisition, and total costs to complete the
project was $1.2 million less than the original estimate of $2.6 million. The
Company completed the design automation tool project approximately two years and
three quarters earlier than the original estimated completion date of December
2010.
The
Company completed the tracking systems project in June 2007 and incurred total
project costs of $0.8 million, of which $0.6 million was incurred after the
acquisition. Both the actual completion date and the total projects costs
were in line with the original estimates.
Pro
Forma Financial Information (Unaudited)
Supplemental
information on an unaudited pro forma basis, as if the acquisition of PowerLight
was completed at the beginning of fiscal years 2007 and 2006, is as
follows:
|
Year Ended
|
||||||||
|
(In thousands, except per share amounts)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Revenue
|
$
|
777,104
|
$
|
442,115
|
||||
|
Net
income (loss)
|
$
|
7,094
|
$
|
(57,635
|
)
|
|||
|
Basic
net income (loss) per share
|
$
|
0.09
|
$
|
(0.84
|
)
|
|||
|
Diluted
net income (loss) per share
|
$
|
0.09
|
$
|
(0.84
|
)
|
|||
The
unaudited pro forma supplemental information is based on estimates and
assumptions, which the Company believes are reasonable. The unaudited pro forma
supplemental information includes non-recurring in-process research and
development charge of $9.6 million recorded in the first quarter ended April 1,
2007 and April 2, 2006. The unaudited pro forma supplemental information
prepared by management is not necessarily indicative of the consolidated
financial position or results of operations in future periods or the results
that actually would have been realized had the Company and PowerLight been a
combined company during the specified periods.
Note
4. GOODWILL AND INTANGIBLE
ASSETS
On
November 9, 2004, Cypress completed the acquisition of SunPower. As a result,
the Company became a wholly-owned subsidiary of Cypress. Under the purchase
method of accounting, the total purchase price was allocated to the Company’s
net tangible and intangible assets based on Cypress’s estimated fair values as
of November 9, 2004. This transaction resulted in the “push down” of the effect
of the acquisition of SunPower by Cypress and created a new basis of accounting.
The amounts pushed down to the Company’s financial statements at
November 9, 2004, derived from the net carrying balance previously reported
by Cypress on November 9, 2004, consisted of intangible assets valued at
$24.0 million and goodwill valued at $2.9 million. After the close of trading on
September 29, 2008, Cypress completed a spin-off of all of its shares of the
Company’s class B common stock, in the form of a pro rata dividend to the
holders of record as of September 17, 2008 of Cypress common stock.
Goodwill
The
following table presents the changes in the carrying amount of goodwill under
the Company's reportable business segments:
|
(In
thousands)
|
Components
Business
Segment
|
Systems
Business
Segment
|
Total
|
|||||||||
|
As
of December 31, 2006
|
$
|
2,883
|
$
|
—
|
$
|
2,883
|
||||||
|
Goodwill
acquired
|
—
|
175,162
|
175,162
|
|||||||||
|
Adjustments
|
—
|
6,639
|
6,639
|
|||||||||
|
As
of December 30, 2007
|
2,883
|
181,801
|
184,684
|
|||||||||
|
Goodwill
acquired
|
11,688
|
—
|
11,688
|
|||||||||
|
Adjustments
|
1,176
|
—
|
1,176
|
|||||||||
|
Cumulative
translation adjustment, net of tax
|
(828
|
)
|
—
|
(828
|
)
|
|||||||
|
As
of December 28, 2008
|
$
|
14,919
|
$
|
181,801
|
$
|
196,720
|
||||||
Changes
to goodwill during fiscal 2008 resulted from the acquisitions of SunPower Italia
and SunPower Australia. Approximately $11.7 million had been allocated to
goodwill within the Components Segment, which represents the excess of the
purchase price over the fair value of the underlying net tangible and intangible
assets of SunPower Italia and SunPower Australia. SunPower Italia is a Euro
functional currency subsidiary and SunPower Australia is an Australian dollar
functional currency subsidiary. Therefore, the Company records a translation
adjustment for the revaluation of the subsidiary’s goodwill and intangible
assets into U.S. dollar. As of December 28, 2008, the cumulative translation
adjustment decreased the balance of goodwill by $0.8 million. Also during fiscal
2008, the Company recorded an adjustment to increase goodwill by $1.1 million to
adjust the value of acquired investments and deferred tax
liability.
During
fiscal 2007, approximately $175.2 million had been allocated to goodwill within
the Systems Segment, which represents the excess of the purchase price over the
fair value of the underlying net tangible and intangible assets of PowerLight
(now known as SP Systems). During fiscal 2007, the Company recorded adjustments
aggregating $6.6 million to increase goodwill related to the purchase of
PowerLight (now known as SP Systems) on January 10, 2007 to $181.8
million. The adjustments included a change in the estimated receivable for
an existing project as of the acquisition date which was subsequently determined
to be unearned and, thus, the receivable will not be paid, an additional loss
provision on a construction project contracted as of the acquisition date and
was subsequently determined to have a larger loss than originally estimated, as
well as adjustments to the value of certain acquired assets and
liabilities.
In
accordance with SFAS No. 142, goodwill will not be amortized but instead will be
tested for impairment at least annually, or more frequently if certain
indicators are present. The Company conducts its annual impairment test of
goodwill as of the Sunday closest to the end of the third 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 review process uses the market approach. In performing its
analysis, the Company uses the best information available under the
circumstances, including reasonable and supportable assumptions and projections.
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. In the
event that management determines that the value of goodwill has become impaired,
the Company will incur an accounting charge for the amount of the impairment
during the fiscal quarter in which the determination is made.
Intangible
Assets
The
following tables present details of the Company's acquired identifiable
intangible assets:
|
(In
thousands)
|
Gross
|
Accumulated
Amortization
|
Net
|
|||||||||
|
As
of December 28, 2008
|
||||||||||||
|
Patents
and purchased technology
|
$
|
51,398
|
$
|
(31,322
|
)
|
$
|
20,076
|
|||||
|
Tradenames
|
2,501
|
(1,685
|
)
|
816
|
||||||||
|
Backlog
|
11,787
|
(11,787
|
)
|
—
|
||||||||
|
Customer
relationships and other
|
27,456
|
(8,858
|
)
|
18,598
|
||||||||
|
$
|
93,142
|
$
|
(53,652
|
)
|
$
|
39,490
|
||||||
|
As
of December 30, 2007
|
||||||||||||
|
Patents
and purchased technology
|
$
|
51,398
|
$
|
(20,630
|
)
|
$
|
30,768
|
|||||
|
Tradenames
|
1,603
|
(808
|
)
|
795
|
||||||||
|
Backlog
|
11,787
|
(11,460
|
)
|
327
|
||||||||
|
Customer
relationships and other
|
23,193
|
(4,137
|
)
|
19,056
|
||||||||
|
$
|
87,981
|
$
|
(37,035
|
)
|
$
|
50,946
|
||||||
In
connection with the acquisitions of SunPower Italia and SunPower Australia, the
Company recorded $6.2 million of intangible assets less $1.0 million of
cumulative translation adjustment for acquired intangible assets in the year
ended December 28, 2008. In connection with the acquisition of PowerLight (now
known as SP Systems), the Company recorded $79.5 million of intangible
assets in the first quarter of fiscal 2007, of which $15.5 million was
related to the PowerLight tradename. The determination of the fair value and
useful life of the tradename was based on the Company’s strategy of continuing
to market its systems products and services under the PowerLight brand. Based on
the Company’s change in branding strategy and changing PowerLight’s name to
SunPower Corporation, Systems, during the quarter ended July 1, 2007, the
Company recognized an impairment charge of $14.1 million, which represented the
net book value of the PowerLight tradename.
All of
the Company’s acquired identifiable intangible assets are subject to
amortization. Aggregate amortization expense for intangible assets totaled $16.8
million, $28.5 million and $4.7 million in fiscal 2008, 2007 and 2006,
respectively. As of December 28, 2008, the estimated future amortization expense
related to intangible assets is as follows (in thousands):
|
2009
|
$
|
16,262
|
||
|
2010
|
14,675
|
|||
|
2011
|
4,546
|
|||
|
2012
|
3,902
|
|||
|
Thereafter
|
105
|
|||
|
$
|
39,490
|
|||
Note
5. BALANCE SHEET
COMPONENTS
|
(In
thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Accounts
receivable, net:
|
||||||||
|
Accounts
receivable, gross
|
$
|
196,316
|
$
|
139,991
|
||||
|
Less:
Allowance for doubtful accounts
|
(1,863
|
)
|
(1,373
|
)
|
||||
|
Less:
Allowance for sales returns
|
(231
|
)
|
(368
|
)
|
||||
|
$
|
194,222
|
$
|
138,250
|
|||||
|
Costs
and estimated earnings in excess of billings on contracts in progress and
billings in excess of costs and estimated earnings on contracts in
progress consists of the following:
|
||||||||
|
Costs
and estimated earnings in excess of billings on contracts in
progress
|
$
|
30,326
|
$
|
39,136
|
||||
|
Billings
in excess of costs and estimated earnings on contracts in
progress
|
(11,806
|
)
|
(69,900
|
)
|
||||
|
$
|
18,520
|
$
|
(30,764
|
)
|
||||
|
Contracts
in progress at year end:
|
||||||||
|
Costs
incurred to date
|
$
|
552,211
|
$
|
481,340
|
||||
|
Estimated
earnings to date
|
166,901
|
145,643
|
||||||
|
Contract
revenue earned to date
|
719,112
|
626,983
|
||||||
|
Less:
Billings to date, including earned incentive rebates
|
(700,592
|
)
|
(657,747
|
)
|
||||
|
$
|
(18,520
|
) |
$
|
(30,764
|
)
|
|||
|
(In
thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Inventories:
|
||||||||
|
Raw
materials(1)
|
$
|
130,082
|
$
|
89,604
|
||||
|
Work-in-process
|
15,505
|
2,027
|
||||||
|
Finished
goods
|
105,801
|
57,189
|
||||||
|
$
|
251,388
|
$
|
148,820
|
|||||
|
(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.
|
||||||||
|
Prepaid
expenses and other current assets:
|
||||||||
|
VAT
receivables, current portion
|
$
|
26,489
|
$
|
7,266
|
||||
|
Deferred
tax assets, current portion
|
5,658
|
8,437
|
||||||
|
Foreign
currency forward exchange contracts
|
11,443
|
—
|
||||||
|
Other
receivables(2)
|
36,749
|
9,946
|
||||||
|
Other
prepaid expenses
|
15,765
|
7,461
|
||||||
|
$
|
96,104
|
$
|
33,110
|
|||||
|
(2) Includes
tolling agreements with suppliers in which the Company provides
polysilicon required for silicon ingot manufacturing and procures the
manufactured silicon ingots from the supplier (see Note
9).
|
||||||||
|
Property,
plant and equipment, net:
|
||||||||
|
Land
and buildings
|
$
|
13,912
|
$
|
7,482
|
||||
|
Manufacturing
equipment(3)
|
374,948
|
194,963
|
||||||
|
Computer
equipment
|
26,957
|
12,399
|
||||||
|
Furniture
and fixtures
|
4,327
|
2,648
|
||||||
|
Leasehold
improvements
|
146,101
|
113,801
|
||||||
|
Construction-in-process(4)
|
146,890
|
99,945
|
||||||
|
713,135
|
431,238
|
|||||||
|
Less:
Accumulated depreciation(3, 5)
|
(100,448
|
) |
(53,244
|
)
|
||||
|
$
|
612,687
|
$
|
377,994
|
|||||
|
(3)
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 $43.1 million as of December 28, 2008
(see Note 8).
|
||||||||
|
(4)
Balance primarily relates to the manufacturing facilities in the
Philippines. Balance includes capitalized interest of $1.4 million as of
December 28, 2008.
|
||||||||
|
(5)
Total depreciation expense was $53.7 million, $27.3 million and $16.3
million in fiscal 2008, 2007 and 2006, respectively.
|
||||||||
|
Other
long-term assets:
|
||||||||
|
VAT
receivable, net of current portion
|
$
|
6,692
|
$
|
24,269
|
||||
|
Investments
in joint ventures
|
29,007
|
5,304
|
||||||
|
Note
receivable(6)
|
10,000
|
—
|
||||||
|
Other
|
28,525
|
2,401
|
||||||
|
$
|
74,224
|
$
|
31,974
|
|||||
|
(6) In
June 2008, the Company loaned $10.0 million to a third-party private
company pursuant to a three-year interest-bearing note receivable that is
convertible into equity at the Company’s option.
|
||||||||
|
Accrued
liabilities:
|
||||||||
|
VAT
payables
|
$
|
18,934
|
$
|
18,138
|
||||
|
Income
taxes payable
|
13,402
|
11,106
|
||||||
|
Deferred
tax liability
|
5,658
|
—
|
||||||
|
Foreign
currency forward exchange contracts
|
45,791
|
8,920
|
||||||
|
Warranty
reserves
|
23,872
|
10,502
|
||||||
|
Employee
compensation and employee benefits
|
19,018
|
15,338
|
||||||
|
Deferred
revenue
|
5,159
|
307
|
||||||
|
Other
|
25,215
|
15,123
|
||||||
|
$
|
157,049
|
$
|
79,434
|
|||||
Note
6. INVESTMENTS
On
December 31, 2007, the Company adopted SFAS No. 157, which refines the
definition of fair value, provides a framework for measuring fair value and
expands disclosures about fair value measurements. The Company’s adoption of
SFAS No. 157 was limited to its financial assets and financial liabilities, as
permitted by FSP 157-2. The Company does not have any nonfinancial assets or
nonfinancial liabilities that are recognized or disclosed at fair value in its
consolidated financial statements on a recurring basis.
Assets
Measured at Fair Value on a Recurring Basis
SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy assigns the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level
3"). Level 2 measurements are inputs that are observable for assets or
liabilities, either directly or indirectly, other than quoted prices included
within Level 1. The following table presents information about the Company’s
available-for-sale securities accounted for under SFAS No. 115 that are measured
at fair value on a recurring basis as of December 28, 2008 and indicates the
fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value in accordance with the provisions of SFAS
No. 157:
|
(In thousands)
|
Quoted
Prices in Active
Markets
for Identical
Instruments
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Balance
as of
December
28, 2008
|
||||||||||||
|
Asset
|
||||||||||||||||
|
Money
market funds
|
$
|
227,190
|
$
|
—
|
$
|
7,185
|
$
|
234,375
|
||||||||
|
Bank
notes
|
49,610
|
—
|
—
|
49,610
|
||||||||||||
|
Corporate
securities
|
—
|
9,994
|
23,577
|
33,571
|
||||||||||||
|
Total
available-for-sale securities
|
$
|
276,800
|
$
|
9,994
|
$
|
30,762
|
$
|
317,556
|
||||||||
Available-for-sale
securities utilizing Level 3 inputs to determine fair value are comprised of
investments in money market funds totaling $7.2 million and auction rate
securities held totaling $23.6 million at December 28, 2008.
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, which filed for bankruptcy on September 15, 2008. As a result of this
event, the Reserve Funds wrote down their investments in Lehman to zero. The
Company has estimated the loss on the Reserve Funds to be approximately $1.0
million based on an evaluation of the fair value of the securities held by the
Reserve Funds and the net asset value that was last published by the Reserve
Funds before the funds suspended redemptions. The Company recorded an
impairment charge of $1.0 million in “Other, net” in its Consolidated
Statements of Operations, thereby establishing a new cost basis for each
fund.
The
Company’s money market fund instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted prices for identical
instruments in active markets. However, the Company conducted its fair value
assessment of the Reserve Funds using Level 2 and Level 3
inputs. Management has reviewed the Reserve Funds' underlying securities
portfolios which are substantially comprised of discount notes, certificates of
deposit and commercial paper issued by highly-rated institutions. The Company
has used a pricing service to assist in its review of fair value of the
underlying portfolios, which estimates fair value of some instruments using
proprietary models based on assumptions as to term, maturity dates, rates,
credit risk, etc. Normally, the Company would classify such an investment within
Level 2 of the fair value hierarchy. However, management also evaluated the
fair value of its unit interest in the Reserve Funds itself, considering risk of
collection, timing and other factors. These assumptions are inherently
subjective and involve significant management judgment. As a result, the
Company has classified its holdings in the Reserve Funds within Level 3 of the
fair value hierarchy.
The
Company expects that the remaining distribution from the Reserve Funds will
occur over the remaining nine months as the investments held in the funds
mature. Therefore, the Company has changed the designation of its $7.2 million
investment in the Reserve Funds from cash and cash equivalents to short-term
investments at the new cost basis on the Consolidated Balance Sheets. This
re-designation is included in "purchases of available-for-sale securities" in
investing activities in the Company’s accompanying Consolidated Statements of
Cash Flows. While the Company expects to receive substantially all of its
current holdings in the Reserve Funds within the next nine months, it is
possible the Company may encounter difficulties in receiving distributions given
the current credit market conditions. If market conditions were to deteriorate
even further such that the current fair value were not achievable, the Company
could realize additional losses in its holdings with the Reserve Funds and
distributions could be further delayed.
Auction
Rate Securities
Auction
rate securities held are typically over-collateralized and secured by pools of
student loans originated under the Federal Family Education Loan Program
(“FFELP”) that are guaranteed and insured by the U.S. Department of Education.
In addition, all auction rate securities held are rated by one or more of the
Nationally Recognized Statistical Rating Organizations (“NRSRO”) as triple-A.
Historically, these securities have provided liquidity through a Dutch auction
at pre-determined intervals every 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 invested in at December 28, 2008 and $29.1 million of
$50.8 million invested in auction rate securities at December 30, 2007 have
failed to clear at auctions in subsequent periods. For failed auctions, the
Company continues to earn interest on these investments at the maximum
contractual rate as the issuer is obligated under contractual terms to pay
penalty rates should auctions fail. Historically, failed auctions have rarely
occurred, however, such failures could continue to occur in the future. In the
event the Company needs to access these funds, the Company will not be able to
do so until a future auction is successful, the issuer redeems the securities, a
buyer is found outside of the auction process or the securities mature.
Accordingly, auction rate securities at December 28, 2008 and December 30, 2007
totaling $23.6 million and $29.1 million, respectively, are classified as
long-term investments on the 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 December 28, 2008. The exit price was derived
as the weighted average present value of expected cash flows over various
periods of illiquidity, using a risk-adjusted discount rate that was based on
the credit risk and liquidity risk of the securities. While the valuation model
was based on both Level 2 (credit quality and interest rates) and Level 3
inputs, the Company determined that the Level 3 inputs were the most significant
to the overall fair value measurement, particularly the estimates of risk
adjusted discount rates and ranges of expected periods of illiquidity. The
valuation model also reflected the Company's intention to hold its auction rate
securities until they can be liquidated in a market that facilitates orderly
transactions. The following key assumptions were used in the valuation
model:
|
•
|
5
years to liquidity;
|
|
•
|
continued
receipt of contractual interest which provides a premium spread for failed
auctions; and
|
|
•
|
discount
rates ranging from 4.5% to 6.0%, which incorporates a spread for both
credit and liquidity risk.
|
Based on
these assumptions, 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. The Company currently has the ability and
intent to hold these securities until they can be liquidated in a market that
facilitates orderly transactions. However, 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. The Company recorded the other-than-temporary impairment
loss of $2.5 million in the fourth quarter of fiscal 2008 in “Other, net” in its
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 as of December 28, 2008:
|
(In thousands)
|
Money
Market
Funds
|
Auction
Rate Securities
|
||||||
|
Balance
at December 31, 2007
|
$
|
—
|
$
|
—
|
||||
|
Transfers
from Level 1 to Level 3
|
26,677
|
—
|
||||||
|
Transfers
from Level 2 to Level 3
|
—
|
29,050
|
||||||
|
Purchases
|
—
|
10,000
|
||||||
|
Sales
(1)
|
(18,498
|
)
|
(13,000
|
)
|
||||
|
Impairment
loss recorded in “Other, net”
|
(994
|
)
|
(2,473
|
)
|
||||
|
Balance
at December 28, 2008 (2)
|
$
|
7,185
|
$
|
23,577
|
||||
|
(1)
|
In
the second quarter of fiscal 2008, the Company sold auction rate
securities with a carrying value of $12.5 million for their stated par
value of $13.0 million to the issuer of the securities outside
of the auction process. In the fourth quarter of fiscal 2008, the Company
received a distribution of $18.5 million from the Reserve
Funds.
|
|
(2)
|
On
February 4, 2009, the Company sold an auction rate security with a
carrying value of $4.5 million on December 28, 2008 for $4.6 million
to a third-party outside of the auction process. In addition, the
Company received a distribution of $2.1 million and $1.6 million from the
Reserve Funds on January 30, 2009 and February 20, 2009,
respectively.
|
The
following table summarizes unrealized gains and losses by major security type
designated as available-for-sale:
|
December 28, 2008
|
December 30, 2007
|
|||||||||||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gross
Gains
|
Gross
Losses
|
Fair
Value
|
Cost
|
Gross
Gains
|
Gross
Losses
|
Fair
Value
|
||||||||||||||||||||||||
|
Money
market funds
|
$
|
234,375
|
$
|
—
|
$
|
—
|
$
|
234,375
|
$
|
281,458
|
$
|
—
|
$
|
—
|
$
|
281,458
|
||||||||||||||||
|
Bank
notes
|
49,610
|
—
|
—
|
49,610
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Corporate
securities
|
33,579
|
2
|
(10
|
)
|
33,571
|
92,395
|
6
|
(50
|
)
|
92,351
|
||||||||||||||||||||||
|
Commercial
paper
|
—
|
—
|
—
|
—
|
78,163
|
2
|
(2
|
)
|
78,163
|
|||||||||||||||||||||||
|
Total
available-for-sale securities
|
$
|
317,564
|
$
|
2
|
$
|
(10
|
)
|
$
|
317,556
|
$
|
452,016
|
$
|
8
|
$
|
(52
|
)
|
$
|
451,972
|
||||||||||||||
The
following table summarizes the fair value and gross unrealized losses of the
Company’s available-for-sale securities, aggregated by type of investment
instrument and length of time that individual securities have been in a
continuous unrealized loss position:
|
As
of December 28, 2008
|
||||||||||||||||||||||||
|
Less
than 12 Months
|
12
Months or Greater
|
Total
|
||||||||||||||||||||||
|
(In thousands)
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized Losses
|
||||||||||||||||||
|
Corporate
securities
|
$
|
4,992
|
$
|
(10
|
)
|
$
|
—
|
$
|
—
|
$
|
4,992
|
$
|
(10
|
)
|
||||||||||
As of
December 28, 2008, the Company did not have any investments in
available-for-sale securities that were in an unrealized loss position for 12
months or greater. The decline in fair value of these corporate securities was
primarily related to changes in interest rates. The Company has concluded
that no other-than-temporary impairment losses occurred in fiscal 2008 in
regards to these corporate securities because changes in interest rates are
considered temporary in nature for which the Company has recorded an unrealized
loss within comprehensive income (loss), a component of stockholders' equity.
The Company has the ability and intent to hold these corporate securities until
a recovery of fair value. In addition, the Company evaluated the near-term
prospects of the corporate securities in relation to the severity and duration
of the impairment. Based on that evaluation and the Company’s ability and intent
to hold these corporate securities for a reasonable period of time, the Company
did not consider these investments to be other-than-temporarily
impaired. If it is determined that the fair value of these corporate
securities is other-than-temporarily impaired, the Company would record a loss
in its Consolidated Statements of Operations in the future, which could be
material.
The
classification and contractual maturities of available-for-sale securities is as
follows:
|
(In thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Included
in:
|
||||||||
|
Cash
equivalents
|
$
|
101,523
|
$
|
249,582
|
||||
|
Short-term
restricted cash(1, 2)
|
13,240
|
—
|
||||||
|
Short-term
investments
|
17,179
|
105,453
|
||||||
|
Long-term
restricted cash(1)
|
162,037
|
67,887
|
||||||
|
Long-term
investments
|
23,577
|
29,050
|
||||||
|
$
|
317,556
|
$
|
451,972
|
|||||
|
Contractual
maturities:
|
||||||||
|
Due
in less than one year
|
$
|
186,540
|
$
|
396,228
|
||||
|
Due
from one to two years (3)
|
3,206
|
4,994
|
||||||
|
Due
from two to 30 years
|
127,810
|
50,750
|
||||||
|
$
|
317,556
|
$
|
451,972
|
|||||
|
(1)
|
The
Company provided security in the form of cash collateralized bank standby
letters of credit for advance payments received from
customers.
|
|
(2)
|
The
Company received proceeds of Malaysian Ringgit 190.0 million
(approximately $54.6 million) from the Malaysian Government under its
facility agreement to finance the construction of its planned third solar
cell manufacturing facility in
Malaysia.
|
|
(3)
|
The
Company classifies all available-for-sale securities that are intended to
be available for use in current operations as short term
investments.
|
Investments
in Non-Public Companies
The
Company holds minority investments in certain non-public companies. The Company
regularly monitors these minority investments for impairment and records
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. The Company has $3.1 million in investments accounted
for under the cost method and $29.0 million in investments accounted under the
equity method on December 28, 2008 (see Note 10). As of December 30, 2007,
non-publicly traded investments of $5.3 million are accounted for under the
equity method. During fiscal 2008, the Company recorded an other-than-temporary
impairment charge of $1.9 million on its non-publicly traded
investment accounted for using the cost method, due to the recent
deterioration of the credit market and economic environment.
Note
7. ADVANCES TO
SUPPLIERS
The
Company has entered into agreements with various polysilicon, ingot, wafer,
solar cells 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 11 years. Certain agreements also provide for penalties or
forfeiture of advanced deposits in the event the Company terminates the
arrangements (see Note 9). Under certain of these agreements, the Company is
required to make prepayments to the vendors over the terms of the arrangements.
In fiscal 2008, the Company paid advances totaling $52.9 million in accordance
with the terms of existing supply agreements. As of December 28, 2008 and
December 30, 2007, advances to suppliers totaled $162.6 million and $161.2
million, respectively, the current portion of which is $43.2 million and $52.3
million, respectively.
The
Company’s future prepayment obligations related to these agreements as of
December 28, 2008 are as follows (in thousands):
|
2009
|
$
|
83,556
|
||
|
2010
|
59,642
|
|||
|
2011
|
19,792
|
|||
|
$
|
162,990
|
|||
In
January 2009, the Company paid an additional advance of $5.6 million in
accordance with the terms of an existing supply agreement.
Note
8. CUSTOMER
ADVANCES
From time
to time, the Company enters into agreements where customers make advances for
future purchases of solar power products. In general, the Company pays no
interest on the advances and applies the advances as shipments of product
occur.
In August
2007, the Company entered into an agreement with one of its customers to supply
polysilicon. Under the polysilicon agreement, the customer has agreed to
make material aggregate cash advance payments to the Company in fiscal 2007 and
2008. Commencing in fiscal 2010 and continuing through 2019, these advance
payments are to be applied as a credit against the customer’s polysilicon
purchases from the Company. Such polysilicon is expected to be used by the
customer to manufacture ingots, and potentially wafers, which are to be sold to
the Company under an ingot supply agreement. The Company received advances of
$40.0 million in each year ended December 28, 2008 and December 30, 2007 from
this customer, all of which is classified as long-term customer advances in the
accompanying Consolidated Balance Sheets. The Company provided security for
advances of $40.0 million received in fiscal 2008 in the form of collateralized
manufacturing equipment with a net book value of $43.1 million as of December
28, 2008 (see Note 5).
In April
2005, the Company entered into an agreement with one of its customers to supply
solar cells. As part of this agreement, the customer agreed to fund 30 million
Euros (approximately $35.5 million) for the expansion of the Company’s
manufacturing capacity to support this customer’s solar cell product demand.
Beginning on January 1, 2006, the Company was obligated to pay interest at
a rate of 5.7% per annum on the remaining unpaid balance. The Company’s
settlement of principal on the advances is to be recognized over product
deliveries at a specified rate on a per-unit-of-product-delivered basis through
December 31, 2010. The Company paid interest on the remaining unpaid
balance of 1.0 million Euros (approximately $1.4 million) and 1.4 million Euros
(approximately $1.9 million) in fiscal 2008 and 2007, respectively. As of
December 28, 2008, the remaining outstanding advance was 12.5 million
Euros (approximately $17.5 million) of which $8.4 million had been classified in
current portion of customer advances and $9.1 million in long-term customer
advances in the accompanying Consolidated Balance Sheets, based on projected
product shipment dates. As of December 30, 2007, the remaining
outstanding advance was 19.7 million Euros (approximately $29.0 million) of
which $8.8 million and $20.2 million has been classified in current portion of
customer advances and in long-term customer advances, respectively. The
Company has utilized all funds advanced by this customer towards expansion of
the Company’s manufacturing capacity.
The
Company has also entered into other agreements with customers who have made
advance payments for solar products. These advances will be applied as shipments
of product occur. As of December 28, 2008 and December 30, 2007, such customers
had made advances of $12.9 million and $0.4 million, respectively.
The
estimated utilization of advances from customers and the related interest of
$1.0 million thereto are (in thousands):
|
2009
|
$
|
19,800
|
||
|
2010
|
19,317
|
|||
|
2011
|
8,323
|
|||
|
2012
|
8,000
|
|||
|
2013
|
8,000
|
|||
|
Thereafter
|
48,000
|
|||
|
$
|
111,440
|
Note
9. COMMITMENTS AND
CONTINGENCIES
Operating
Lease Commitments
The
Company leases its San Jose, California facility under a non-cancelable
operating lease from Cypress, which expires in April 2011 (see Note 2). The
lease requires the Company to pay property taxes, insurance and certain other
costs. In addition, the Company leases its Richmond, California facility under a
non-cancelable operating lease from an unaffiliated third-party, which expires
in September 2018. 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 December 28, 2008
are as follows (in thousands):
|
2009
|
$
|
5,502
|
||
|
2010
|
5,078
|
|||
|
2011
|
3,857
|
|||
|
2012
|
3,032
|
|||
|
2013
|
2,965
|
|||
|
Thereafter
|
21,536
|
|||
|
$
|
41,970
|
Rent
expense, including the rent paid to Cypress for the San Jose, California
facility and the first solar cell manufacturing facility in the Philippines (see
Note 2), was $6.9 million, $3.3 million and $1.3 million in fiscal 2008,
2007 and 2006, respectively.
Purchase
Commitments
The
Company purchases raw materials for inventory, services and manufacturing
equipment from a variety of vendors. During the normal course of business, in
order to manage manufacturing lead times and help assure adequate supply, the
Company enters into agreements with contract manufacturers and suppliers that
either allow them to procure goods and services based upon specifications
defined by the Company, or that establish parameters defining the Company’s
requirements. In certain instances, these agreements allow the Company the
option to cancel, reschedule or adjust the Company’s requirements based on its
business needs prior to firm orders being placed. Consequently, only a portion
of the Company’s 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 11 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
7).
At
December 28, 2008, total obligations related to non-cancelable purchase orders
totaled approximately $113.1 million and long-term supplier agreements totaled
approximately $3,253.8 million. Future purchase obligations under non-cancelable
purchase orders and long-term supplier agreements as of December 28, 2008 are as
follows (in thousands):
|
2009
|
$
|
456,486
|
||
|
2010
|
521,329
|
|||
|
2011
|
530,534
|
|||
|
2012
|
334,621
|
|||
|
2013
|
233,597
|
|||
|
Thereafter
|
1,290,383
|
|||
|
$
|
3,366,950
|
Total
future purchase commitments of $3,366.9 million as of December 28, 2008 include
tolling agreements with suppliers in which the Company provides polysilicon
required for silicon ingot manufacturing and procures the manufactured silicon
ingots from the supplier. Annual future purchase commitments in the table above
are calculated using the gross price paid by the Company for silicon ingots and
are not reduced by the price paid by suppliers for polysilicon. Total future
purchase commitments as of December 28, 2008 would be reduced by $628.7 million
to $2,738.2 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 20 years. It also warrants that the solar cells will be free from
defects for at least ten years. In addition, it passes through to customers
long-term warranties from the OEMs of certain system components. Warranties of
20 years from solar panel suppliers are standard, while inverters typically
carry two-, five- or ten-year warranties. The Company maintains warranty
reserves to cover potential liabilities that could result from these guarantees.
The Company’s potential liability is generally in the form of product
replacement or repair. Warranty reserves are based on the Company’s best
estimate of such liabilities and are recognized as a cost of revenue. The
Company continuously monitors product returns for warranty failures and
maintains a reserve for the related warranty expenses based on historical
experience of similar products as well as various other assumptions that are
considered reasonable under the circumstances.
The
Company generally warrants or guarantees systems installed for a period of five
to ten years. The Company’s estimated warranty cost for each project is accrued
and the related costs are charged against the warranty accrual when incurred. It
is not possible to predict the maximum potential amount of future
warranty-related expenses under these or similar contracts due to the
conditional nature of the Company’s obligations and the unique facts and
circumstances involved in each particular contract. Historically, warranty costs
related to contracts have been within the range of management’s
expectations.
Provisions
for warranty reserves charged to cost of revenue were $14.2
million, $10.8 million and $3.2 million during fiscal 2008, 2007 and 2006,
respectively. Activity within accrued warranty for fiscal 2008, 2007 and 2006 is
summarized as follows:
|
(In
thousands)
|
December 28,
2008
|
December 30,
2007
|
December 31,
2006
|
|||||||||
|
Balance
at the beginning of the period
|
$
|
17,194
|
$
|
3,446
|
$
|
574
|
||||||
|
PowerLight accrued
balance at date of acquisition
|
—
|
6,542
|
—
|
|||||||||
|
Accruals for
warranties issued during the period
|
14,207
|
10,771
|
3,226
|
|||||||||
|
Settlements made
during the period
|
(3,339
|
)
|
(3,565
|
)
|
(354
|
)
|
||||||
|
Balance
at the end of the period
|
$
|
28,062
|
$
|
17,194
|
$
|
3,446
|
||||||
The
accrued warranty balance at December 28, 2008 and December 30, 2007 includes
$4.2 million and $6.7 million, respectively, of accrued costs primarily related
to servicing the Company’s obligations under long-term maintenance contracts
entered into under the Systems Segment and the balance is included in “Other
long-term liabilities” in the Consolidated Balance Sheets.
FIN
48 Uncertain Tax Positions
As of
December 28, 2008 and December 30, 2007, total liabilities associated with
FIN 48, uncertain tax positions were $12.8 million and $4.1 million,
respectively, and are included in "Other long-term liabilities" on its
Consolidated Balance Sheets at December 28, 2008 and December 30, 2007,
respectively, as they are not expected to be paid within the next twelve months.
Due to the complexity and uncertainty associated with its tax positions, the
Company cannot make a reasonably reliable estimate of the period in which cash
settlement will be made for its liabilities associated with uncertain tax
positions in "Other long-term liabilities."
Royalty
Obligations
As of
January 10, 2007, the Company assumed certain royalty obligations related to
existing agreements entered into by PowerLight before the date of acquisition.
In September 2002, PowerLight entered into a Technology Assignment and Services
Agreement and other ancillary agreements, subsequently amended in December
2005, with Jefferson Shingleton and MaxTracker Services, LLC, a New York limited
liability company controlled by Mr. Shingleton. Under the agreements, the
PowerTracker®, now referred to as SunPower® Tracker, was acquired through an
assignment and acquisition of the patents associated with the product from Mr.
Shingleton and the Company is obligated to pay Mr. Shingleton royalties on the
tracker systems that it sells. In addition, several of the Systems Segment’s
government awards require the Company to pay royalties based on specified
formulas related to sales of products developed or enhanced from such government
awards. The Company incurred royalty expense totaling $1.5 million and $2.6
million in fiscal 2008 and 2007, respectively, which were charged to cost of
systems revenue. As of December 28, 2008 and December 30, 2007, the
Company’s royalty liabilities totaled $0.6 million and $0.3 million,
respectively.
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
10. JOINT
VENTURES
Woongjin
Energy Co., Ltd (“Woongjin Energy”)
In the
third quarter of fiscal 2006, the Company entered into an agreement with
Woongjin Coway Co., Ltd. (“Woongjin”), a provider of environmental products
located in Korea, to form Woongjin Energy, a joint venture to manufacture
monocrystalline silicon ingots. Under the joint venture, the Company and
Woongjin have funded the joint venture through capital investments. In addition,
Woongjin Energy obtained a $33.0 million loan originally guaranteed by Woongjin.
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 200.0%. The Company supplies polysilicon, services and technical
support required for the silicon ingot manufacturing to the joint venture, and
the Company procures the manufactured silicon ingots from the joint venture
under a five-year agreement. Woongjin Energy began manufacturing in the third
quarter of fiscal 2007. In fiscal 2008 and 2007, the Company paid $52.7
million and $2.3 million, respectively, to Woongjin Energy for manufacturing
silicon ingots. As of December 28, 2008 and December 30, 2007, $22.5
million and $2.4 million, respectively, remained due and payable to Woongjin
Energy.
In
October 2007, the Company entered into an agreement with Woongjin and Woongjin
Holdings Co., Ltd. (“Woongjin Holdings”), whereby Woongjin transferred its
equity investment held in Woongjin Energy to Woongjin Holdings and Woongjin
Holdings assumed all rights and obligations formerly owned by Woongjin under the
joint venture agreement described above, including the $33.0 million loan
guarantee. In January 2008, the Company and Woongjin Holdings provided Woongjin
Energy with additional funding through capital investments in which the Company
invested an additional $5.4 million in the joint venture.
As of
December 28, 2008, the Company had a $24.0 million investment in the joint
venture on its Consolidated Balance Sheets which consisted of a 40.0% equity
investment. As of December 30, 2007, the Company had a $4.4 million investment
in the joint venture on its Consolidated Balance Sheets which consisted of a
19.9% equity investment valued at $1.1 million and a $3.3 million convertible
note that was convertible at the Company’s option into an additional 20.1%
equity ownership in the joint venture. The Company exercised the option and
converted the note into equity in September 2008. 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 agreements are shorter
than the estimated economic life of the joint venture. In addition, the Company
believes that Woongjin Holdings is the primary beneficiary of the joint venture
because Woongjin Holdings 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 using the equity method
of accounting, in which the entire investment is classified as “Other long-term
assets” in the Consolidated Balance Sheets and the Company’s share of Woongjin
Energy’s income totaling $14.2 million in fiscal 2008, and share of Woongjin
Energy’s losses totaling $0.3 million in fiscal 2007, is included in “Equity in
earnings of unconsolidated investees” in the Consolidated Statements of
Operations. The Company’s amount of Woongjin Energy’s income increased
year-over-year due to 1) increases in production since Woongjin Energy began
manufacturing in the third quarter of fiscal 2007; 2) the Company’s equity
investment increased from 19.9% as of December 30, 2007 to 40.0% as of December
28, 2008; and 3) a $6.3 million foreign currency transaction gain resulted from
the strengthening of the U.S. dollar versus the Korean Won. 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 investment of $24.0 million as of December 28,
2008.
In fiscal
2008 and 2007, the Company conducted other related-party transactions with
Woongjin Energy. For fiscal 2008 and 2007, the Company recognized $5.6 million
and $5.8 million, respectively, in components revenue related to the sale of
solar panels to Woongjin Energy. As of December 28, 2008 and December 30,
2007, $0.8 million and $3.2 million, respectively, remained due and receivable
from Woongjin Energy related to the sale of solar panels.
Summarized
financial information adjusted to conform to U.S. GAAP for Woongjin Energy, as
it qualifies as a “significant investee” of the Company as defined in SEC
Regulation S-X Rule 4-08(g), as of and for the year ended December 28, 2008 is
as follows (in thousands):
|
Balance
Sheet
|
||||
|
Assets
|
||||
|
Current
assets
|
$
|
47,338
|
||
|
Noncurrent
assets
|
106,671
|
|||
|
Total
Assets
|
$
|
154,009
|
||
|
Liabilities
|
||||
|
Current
liabilities
|
$
|
31,067
|
||
|
Noncurrent
liabilities
|
61,527
|
|||
|
Total
Liabilities
|
$
|
92,594
|
||
|
Statement
of Operations
|
||||
|
Revenues
|
$
|
60,624
|
||
|
Cost
of Sales
|
23,568
|
|||
|
Gross
profit
|
37,056
|
|||
|
Operating
income
|
32,887
|
|||
|
Net
income
|
$
|
44,919
|
||
Summarized
financial information for Woongjin Energy during prior periods was not material
to the Company’s financial condition and results of operations.
First
Philec Solar Corporation (“First Philec Solar”)
In
October 2007, the Company entered into an agreement with First Philippine
Electric Corporation (“First Philec”) to form First Philec Solar, a joint
venture to provide wafer slicing services of silicon ingots to the Company. The
Company and First Philec have funded the joint venture through capital
investments. The Company supplies to the joint venture silicon ingots and
technology required for the slicing of silicon, and the Company procures the
silicon wafers from the joint venture under a five-year wafering supply and
sales agreement. This joint venture is located in the Philippines and became
operational in the second quarter of fiscal 2008. In fiscal 2008, the
Company paid $8.5 million to First Philec Solar for wafer slicing services of
silicon ingots. As of December 28, 2008, $1.9 million remained due and
payable to First Philec Solar.
As of
December 28, 2008, the Company had a $5.0 million investment in the joint
venture on its Consolidated Balance Sheets which consisted of a 19.0% equity
investment. As of December 30, 2007, the Company had a $0.9 million investment
in the joint venture on its Consolidated Balance Sheets which consisted of a
16.9% 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,
in which the entire investment is classified as “Other long-term assets” in the
Consolidated Balance Sheets and the Company’s share of First Philec Solar’s
losses totaling $0.1 million in fiscal 2008 is included in “Equity in
earnings of unconsolidated investees” in the Consolidated Statements of
Operations. The Company’s maximum exposure to loss as a result of its
involvement with First Philec Solar is limited to its investment of $5.0 million
as of December 28, 2008.
NorSun
In
January 2008, the Company entered into an Option Agreement with NorSun pursuant
to which the Company will deliver cash advance payments to NorSun for the
purchase of polysilicon under a long-term polysilicon supply agreement with
NorSun, which NorSun will use to partly fund its portion of the equity
investment in the joint venture with Swicorp Joussour Company and Chemical
Development Company for the construction of a new polysilicon manufacturing
facility in Saudi Arabia. The Company deposited $16.0 million in an escrow
account to secure NorSun’s right to such advance payments. NorSun will initially
hold a fifty percent equity interest in the joint venture. Under the terms of
the Option Agreement, the Company may exercise a call option and apply the
advance payments to purchase half, subject to certain adjustments, of NorSun’s
fifty percent equity interest in the joint venture. The Company may
exercise its option at any time until six months following the commercial
operation of the Saudi Arabian
- 84
-
polysilicon
manufacturing facility. The Option Agreement also provides NorSun an option
to put half, subject to certain adjustments, of its fifty percent equity
interest in the joint venture to the Company. NorSun’s option is
exercisable commencing July 1, 2009 through six months following commercial
operation of the polysilicon manufacturing facility. The Company accounts
for the put and call options as one instrument, which are measured at fair
value at each reporting period. The changes in the fair value of the combined
option are recorded in “Other, net” in the Consolidated Statements of
Operations. The fair value of the combined option at December 28, 2008 was not
material.
Note
11. DEBT AND CREDIT
SOURCES
Line of Credit
On July
13, 2007, the Company entered into a credit agreement with Wells Fargo and has
entered into amendments to the credit agreement from time to time. As of
December 28, 2008, 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. 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 July 31, 2012. 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 1.0% and 0.2% 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. In February 2009, the Company amended the credit agreement to
extend the expiration date for the uncollateralized revolving credit
line and uncollateralized letter of credit subfeature from April 4, 2009 to
July 3, 2009. In addition, the Company is negotiating another amendment to
revise the existing credit agreement with Wells Fargo to further extend the
expiration date for the uncollateralized revolving credit line and
uncollateralized letter of credit subfeature. All letters of credit issued under
the collateralized letter of credit facility expire no later than July 31, 2012.
If the Company and Wells Fargo do not agree to amend the credit agreement to
futher extend the deadline, all borrowings under the uncollateralized revolving
credit line must be repaid by July 3, 2009, and all letters of credit issued
under the uncollateralized letter of credit subfeature expire on or before July
3, 2009 unless the Company provides by such date collateral in the form of cash
or cash equivalents in the aggregate amount available to be drawn under letters
of credit outstanding at such time.
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,
Inc., SP Systems and SunPower Systems SA, all wholly-owned subsidiaries of the
Company, also entered into an associated continuing guaranty with Wells Fargo.
The terms of the credit agreement include certain conditions to borrowings,
representations and covenants, and events of default customary for financing
transactions of this type. 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
December 28, 2008 and December 30, 2007, letters of credit totaling $29.9
million and $32.0 million, respectively, were issued by Wells Fargo under the
uncollateralized letter of credit subfeature. In addition, letters of credit
totaling $76.5 million and $47.9 million were issued by Wells Fargo under
the collateralized letter of credit facility as of December 28, 2008 and
December 30, 2007, respectively. On December 28, 2008 and December 30, 2007,
cash available to be borrowed under the uncollateralized revolving credit line
was $20.1 million and $18.0 million, respectively, and includes letter of credit
capacities available to be issued by Wells Fargo under the uncollateralized
letter of credit subfeature of $20.1 million and $8.0 million, respectively.
Letters of credit available under the collateralized letter of credit facility
at December 28, 2008 and December 30, 2007 totaled $73.5 million and $2.1
million, respectively.
Debt
Issuance 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. (“SunPower Malaysia”), 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 $287.4 million) to finance the construction of its
planned third solar cell manufacturing facility 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. As of December 28,
2008, the Company had borrowed Malaysian Ringgit 190.0 million (approximately
$54.6 million) under the facility agreement. In January 2009, the Company
borrowed an additional Malaysian Ringgit 185.0 million (approximately $51.0
million) under the facility agreement. 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.
1.25%
and 0.75% Convertible Debt Issuance
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, commencing
August 15, 2007. The 1.25% debentures will 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 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% to the closing price of the Company's
common stock on the date of issuance. The applicable conversion rate will be
subject to customary adjustments in certain circumstances.
In July
2007, the Company issued $225.0 million in principal amount of its 0.75% senior
convertible debentures. Interest on the 0.75% debentures is payable on
February 1 and August 1 of each year, commencing February 1,
2008. The 0.75% debentures will 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. Therefore, the 0.75% debentures will be
classified as short-term debt in the Company’s Consolidated Balance Sheets
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, common stock or
a combination of cash and common stock, at the Company’s election. The initial
effective conversion price of the 1.25% debentures is approximately $82.24
per share, which represented a premium of 27.5% to the closing price of
the Company's common stock on the date of issuance. The applicable
conversion rate will be subject to customary adjustments in certain
circumstances.
The
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
year ended December 30, 2007, the closing price of the Company’s class A common
stock equaled or exceeded 125% of the $56.75 per share initial effective
conversion price governing the 1.25% debentures and the closing price of
the Company’s class A common stock equaled or exceeded 125% of the $82.24 per
share initial effective conversion price governing the 0.75% debentures, for 20
out of 30 consecutive trading days ending on December 30, 2007. As a result, the
market price conversion trigger pursuant to the terms of both debentures was
satisfied. As of the first trading day of the first quarter in fiscal 2008,
holders of the 1.25% debentures and 0.75% debentures were able to exercise
their right to convert the debentures any day in that fiscal quarter. Therefore,
since holders of the 1.25% debentures and 0.75% debentures were able to
exercise their right to convert the debentures in the first quarter of fiscal
2008, the Company classified the $425.0 million in aggregate convertible debt as
short-term debt in its Consolidated Balance Sheets as of December 30, 2007. In
addition, the Company wrote off $8.2 million and $1.0 million of unamortized
debt issuance costs in the fourth quarter of fiscal 2007 and first quarter of
fiscal 2008, respectively. No holders of the 1.25% debentures and
0.75% debentures exercised their right to convert the debentures in the first
quarter of fiscal 2008.
For the
quarter ended September 28, 2008, the closing price of the Company’s class A
common stock equaled or exceeded 125% of the $56.75 per share initial effective
conversion price governing the 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 has 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 quarter ending 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 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 quarter of fiscal
2009, which began on December 29, 2008. Accordingly, the Company classified the
$423.6 million in aggregate convertible debt as long-term debt in its
Consolidated Balance Sheets as of 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
following table summarizes the Company’s outstanding convertible
debt:
|
As
of
|
||||||||||||||||
|
December
28, 2008
|
December
30, 2007
|
|||||||||||||||
|
(In
thousands)
|
Carrying
Value
|
Fair
Value*
|
Carrying
Value
|
Fair
Value*
|
||||||||||||
|
1.25%
debentures
|
$
|
198,608
|
$
|
143,991
|
$
|
200,000
|
$
|
465,576
|
||||||||
|
0.75%
debentures
|
225,000
|
166,747
|
225,000
|
366,316
|
||||||||||||
|
Total convertible
debt
|
$
|
423,608
|
$
|
310,738
|
$
|
425,000
|
$
|
831,892
|
||||||||
|
*
|
The
fair value of the convertible debt was determined based on quoted
market prices as reported by
Bloomberg.
|
February
2007 Amended and Restated Share Lending Arrangement and July 2007 Share Lending
Arrangement
Concurrent
with the offering of the 1.25% debentures, the Company lent approximately
2.9 million shares of its class A common stock to LBIE, an affiliate of
Lehman Brothers, one of the underwriters of the 1.25% debentures.
Concurrent with the offering of the 0.75% debentures, the Company also lent
approximately 1.8 million shares of its class A common stock to CSI, an
affiliate of Credit Suisse, one of the underwriters of the 0.75% debentures. The
loaned shares are to be used to facilitate the establishment by investors in the
1.25% debentures and 0.75% debentures of hedged positions in the Company’s
class A common stock. Under the share lending agreement, LBIE had the ability to
offer the shares that remain in LBIE’s possession to facilitate hedging
arrangements for subsequent purchasers of both the 1.25% debentures and
0.75% debentures and, with the Company’s consent, purchasers of securities the
Company may issue in the future. The Company did not receive any proceeds from
these offerings of class A common stock, but received a nominal lending fee
of $0.001 per share for each share of common stock that is loaned pursuant to
the share lending agreements described below.
Share
loans under the share lending agreement terminate and the borrowed shares must
be returned to the Company under the following circumstances: (i) LBIE and
CSI may terminate all or any portion of a loan at any time; (ii) the
Company may terminate any or all of the outstanding loans upon a default by LBIE
and CSI under the share lending agreement, including a breach by LBIE and CSI of
any of its representations and warranties, covenants or agreements under the
share lending agreement, or the bankruptcy or administrative proceeding of LBIE
and CSI; or (iii) if the Company enters into a merger or similar business
combination transaction with an unaffiliated third-party (as defined in the
agreement). In addition, CSI has agreed to return to the Company any borrowed
shares in its possession on the date anticipated to be five business days before
the closing of certain merger or similar business combinations described in the
share lending agreement. Except in limited circumstances, any such shares
returned to the Company cannot be re-borrowed.
Any
shares loaned to LBIE and CSI are considered issued and outstanding for
corporate law purposes and, accordingly, the holders of the borrowed shares have
all of the rights of a holder of the Company’s outstanding shares, including the
right to vote the shares on all matters submitted to a vote of the Company’s
stockholders and the right to receive any dividends or other distributions that
the Company may pay or make on its outstanding shares of class A common
stock. The shares are listed for trading on The Nasdaq Global Select
Market.
While the
share lending agreement does not require cash payment upon return of the shares,
physical settlement is required (i.e., the loaned shares must be returned at the
end of the arrangement). In view of this share return provision and other
contractual undertakings of LBIE and CSI in the share lending agreement, which
have the effect of substantially eliminating the economic dilution that
otherwise would result from the issuance of the borrowed shares, historically
the loaned shares were not considered issued and outstanding for the purpose of
computing and reporting the Company’s basic and diluted weighted average shares
or earnings per share. However, on September 15, 2008, Lehman filed a petition
for protection under Chapter 11 of the U.S. bankruptcy code, and LBIE commenced
administration proceedings (analogous to bankruptcy) in the United Kingdom.
After reviewing the circumstances of the Lehman bankruptcy and LBIE
administration proceedings, the Company records the shares lent to LBIE as
issued and outstanding starting on September 15, 2008, the date on which LBIE
commenced administration proceedings, for the purpose of computing and reporting
the Company’s basic and diluted weighted average shares and earnings per
share.
The
shares lent to CSI will continue to be excluded for the purpose of computing and
reporting the Company’s basic and diluted weighted average shares or earnings
per share. If Credit Suisse or its affiliates, including CSI, were to file
bankruptcy or commence similar administrative, liquidating, restructuring or
other proceedings, the Company may have to consider approximately 1.8 million
shares lent to CSI as issued and outstanding for purposes of calculating
earnings per share.
Note
12. FOREIGN CURRENCY
DERIVATIVES
The
Company has non-U.S. subsidiaries that operate and sell the Company’s products
in various global markets, primarily in Europe. As a result, the Company is
exposed to risks associated with changes in foreign currency exchange rates. It
is the Company’s policy to use various hedge instruments to manage the exposures
associated with purchases of foreign sourced equipment, net asset or liability
positions of its subsidiaries and forecasted revenues and expenses. The
counterparties to these hedging transactions are creditworthy multinational
banks and the risk of counterparty nonperformance associated with these
contracts is not expected to be material. In connection with its global tax
planning, the Company recently changed the flow of transactions to European
subsidiaries that have Euro functional currency, resulting in greater exposure
to changes in the value of the Euro. Implementation of this tax strategy had,
and will continue to have, the ancillary effect of limiting the Company’s
ability to fully hedge certain Euro-denominated revenue. The Company currently
does not enter into foreign currency derivative financial instruments for
speculative or trading purposes.
Under
SFAS No. 133, the Company is required to recognize all derivative instruments as
either assets or liabilities at fair value in the 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 December 28, 2008
and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine such fair value in accordance with the provisions of
SFAS No. 157 (in thousands):
|
(In thousands)
|
Balance
Sheet Location
|
Significant
Other
Observable
Inputs
(Level
2)
|
|||
|
Asset
|
|||||
|
Foreign currency
forward exchange contracts
|
Prepaid
expenses and other current assets
|
$
|
2,592
|
||
|
Foreign currency
option contracts
|
Prepaid
expenses and other current assets
|
8,851
|
|||
|
$
|
11,443
|
||||
|
Liability
|
|||||
|
Foreign currency
forward exchange contracts
|
Accrued
liabilities
|
$
|
29,816
|
||
|
Foreign currency
option contracts
|
Accrued
liabilities
|
15,975
|
|||
|
$
|
45,791
|
||||
Cash
Flow Hedges
In
accordance with SFAS No. 133, the Company accounts for its hedges of
forecasted foreign currency revenue and cost of revenue as cash flow hedges.
Changes in fair value of the effective portion of hedge contracts are recorded
in accumulated other comprehensive income (loss) in stockholders’ equity in the
Consolidated Balance Sheets. The effective portion of unrealized losses recorded
in accumulated other comprehensive income (loss) were $26.1 million, $3.9
million and $2.1 million as of December 28, 2008, December 30, 2007 and
December 31, 2006, respectively. Amounts deferred in accumulated other
comprehensive income (loss) are reclassified to other, net in the Consolidated
Statements of Operations in the periods in which the hedged exposure impacts
earnings. 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. As of December 30, 2007,
the Company had outstanding cash flow hedge forward contracts with an aggregate
notional value of $140.1 million. The maturity dates of the outstanding
contracts at December 28, 2008 ranged from January 2009 to December 2009. In the
second quarter of fiscal 2008, the Company discontinued a portion of an existing
cash flow hedge of foreign currency revenue when it determined it was probable
that the original forecasted transaction would not occur by the end of the
originally specified time period. The amount of derivative loss totaling $0.8
million was reclassified from accumulated other comprehensive income (loss) to
other, net in fiscal 2008 as a result of the discontinuance of the cash flow
hedge.
Cash flow
hedges are tested for effectiveness each period on a average to average rate
basis using regression analysis. The ineffective portion of the Company’s cash
flow hedges was immaterial during fiscal 2008, 2007 and 2006. Further, the
change in the time value of the options is 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 Consolidated Balance Sheets. Thereafter,
any change to this time value is included in other, net in the Consolidated
Statements of Operations. Amount recorded in “Other, net” was a loss of $6.5
million for fiscal 2008 due to loss in time value.
Other
Derivatives
Other
derivatives not designated as hedging instruments under SFAS No. 133
consist of forward contracts used to hedge the net balance sheet effect of
foreign currency denominated assets and liabilities primarily for intercompany
transactions, receivables from customers, prepayments to suppliers and advances
received from customers. The Company records its hedges of foreign currency
denominated monetary assets and liabilities at fair value with the related gains
or losses recorded in other, net. The gains or losses on these contracts are
substantially offset by transaction gains or losses on the underlying balances
being hedged. As of December 28, 2008 and December 30, 2007, the Company held
forward contracts with an aggregate notional value of $66.6 million and $62.7
million, respectively, to hedge the risks associated with foreign currency
denominated assets and liabilities.
Note
13. INCOME
TAXES
The
Company applies SFAS No. 109, which requires the Company to recognize
deferred tax assets and liabilities for expected future tax consequences of
events that have been recognized in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. SFAS No. 109 requires deferred tax
assets and liabilities to be adjusted when the tax rates or other provisions of
the income tax laws change.
The
geographic distribution of income (loss) before income taxes and equity in
earnings of unconsolidated investees and the components of provision for
(benefit from) income taxes are summarized below:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Geographic
distribution of income (loss) before income taxes and equity in earnings
of unconsolidated investees:
|
||||||||||||
|
U.S.
income (loss)
|
$
|
25,145
|
$
|
(93,881
|
)
|
$
|
3,419
|
|||||
|
Non-U.S.
income
|
122,439
|
97,441
|
25,042
|
|||||||||
|
Income
before income taxes and equity in earnings of unconsolidated
investees
|
$
|
147,584
|
$
|
3,560
|
$
|
28,461
|
||||||
|
Provision
for (benefit from) income taxes:
|
||||||||||||
|
Current
tax (benefit) expense
|
||||||||||||
|
Federal
|
$
|
61,699
|
$
|
(67
|
)
|
$
|
241
|
|||||
|
State
|
11,641
|
647
|
100
|
|||||||||
|
Foreign
|
15,253
|
12,319
|
1,604
|
|||||||||
|
Total
current tax expense
|
88,593
|
12,899
|
1,945
|
|||||||||
|
Deferred
tax benefit
|
||||||||||||
|
Federal
|
(17,253
|
)
|
(14,499
|
)
|
—
|
|||||||
|
State
|
(1,972
|
)
|
(4,320
|
)
|
—
|
|||||||
|
Foreign
|
—
|
—
|
—
|
|||||||||
|
Total
deferred tax benefit
|
(19,225
|
)
|
(18,819
|
)
|
—
|
|||||||
|
Provision
for (benefit from) income taxes
|
$
|
69,368
|
$
|
(5,920
|
)
|
$
|
1,945
|
|||||
The
income tax provision (benefit) differs from the amounts obtained by applying the
statutory U.S. federal tax rate to income before taxes as shown
below:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Statutory
rate
|
35
|
%
|
35
|
%
|
35
|
%
|
||||||
|
Tax
at U.S. statutory rate
|
$
|
51,654
|
$
|
1,246
|
$
|
9,961
|
||||||
|
Foreign
rate differential
|
(21,472
|
)
|
(20,731
|
)
|
(7,162
|
)
|
||||||
|
State
income taxes, net of benefit
|
11,064
|
647
|
65
|
|||||||||
|
Recognition
of prior year benefits
|
—
|
—
|
(1,205
|
)
|
||||||||
|
Purchased
in-process research and development
|
—
|
3,351
|
—
|
|||||||||
|
Impairment
of acquisition-related intangible assets
|
—
|
4,924
|
—
|
|||||||||
|
Alternative
minimum tax
|
—
|
67
|
—
|
|||||||||
|
Tax
credits (research and development/investment tax credit)
|
(9,933
|
)
|
—
|
—
|
||||||||
|
Amortization
of intangible assets
|
5,287
|
—
|
—
|
|||||||||
|
Non-deductible
unrealized gain (loss)
|
3,292
|
—
|
—
|
|||||||||
|
Book-to-tax
differences
|
8,197
|
—
|
—
|
|||||||||
|
Benefit
of net operating losses not recognized
|
—
|
1,329
|
—
|
|||||||||
|
Non-deductible
stock option compensation expense
|
19,581
|
3,227
|
241
|
|||||||||
|
Other,
net
|
1,698
|
20
|
45
|
|||||||||
|
Total
|
$
|
69,368
|
$
|
(5,920
|
)
|
$
|
1,945
|
|||||
|
(In
thousands)
|
December 28,
2008
|
December 30,
2007
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$
|
864
|
$
|
709
|
||||
|
Research
and development credit and California manufacturing
credit carryforwards
|
2,466
|
1,491
|
||||||
|
Reserves
and accruals
|
30,103
|
16,456
|
||||||
|
SFAS
No. 133 unrealized losses
|
3,482
|
—
|
||||||
|
SFAS
No. 123(R) stock deductions
|
30,184
|
13,630
|
||||||
|
Total
deferred tax asset
|
67,099
|
32,286
|
||||||
|
Valuation
allowance
|
(45,932
|
)
|
(13,924
|
)
|
||||
|
Total
deferred tax asset, net of valuation allowance
|
21,167
|
18,362
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangible
assets
|
(13,774
|
)
|
(16,138
|
)
|
||||
|
Equity
interest in Woongjin Energy
|
(5,600
|
)
|
—
|
|||||
|
Total
deferred tax liabilities
|
(19,374
|
)
|
(16,138
|
)
|
||||
|
Net
deferred tax asset
|
$
|
1,793
|
$
|
2,224
|
||||
As of
December 28, 2008, the Company had federal net operating loss
carryforwards of approximately $57.6 million for tax purposes, which relate to
stock deductions that when realized will benefit equity. These federal net
operating loss carryforwards will expire in 2027. As of December 28, 2008,
the Company had California state net operating loss carryforwards of
approximately $73.6 million for tax purposes, of which $58.6 million relate to
stock deductions that when realized will benefit equity. These California
net operating loss carryforwards will expire at various dates from 2011 to
2017. The Company also had research and development credit
carryforwards of approximately $4.0 million for federal tax purposes and $4.6
million for state tax purposes. The Company’s ability to utilize a portion of
the net operating loss carryforwards is dependent upon the Company being able to
generate taxable income in future periods and may be limited due to restrictions
imposed on utilization of net operating loss and credit carryforwards under
federal and state laws upon a change in ownership, such as the transaction with
Cypress.
The
Company is subject to tax holidays in the Philippines, where it manufactures its
products. The tax holidays are scheduled to expire within the next several years
beginning in 2010, unless extended. The Company is subject to a tax holiday in
Switzerland, where it sells its products. This tax holiday is scheduled to
expire in 2009, and the Company is currently in discussions with the Swiss
authority regarding an extension.
As of
December 28, 2008, the Company’s foreign subsidiaries have accumulated
undistributed earnings of approximately $154.1 million that are intended to be
indefinitely reinvested outside the U.S. and, accordingly, no provision for U.S.
federal and state tax has been made for the distribution of these earnings. At
December 28, 2008 the amount of the unrecognized deferred tax liability on the
indefinitely reinvested earnings was $61.6 million.
Unrecognized
Tax Benefits
On
January 1, 2007, the Company adopted the provisions for FIN 48, which is an
interpretation of SFAS No. 109. FIN 48 prescribes a recognition threshold that a
tax position is required to meet before being recognized in the financial
statements and provides guidance on de-recognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition
issues. FIN 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon ultimate
settlement.
The total
amount of unrecognized tax benefits recorded in the Consolidated Balance Sheets
at the date of adoption was approximately $1.1 million, which, if recognized,
would affect the Company’s effective tax rate. A reconciliation of the beginning
and ending amounts of unrecognized tax benefits for the years ended
December 28, 2008 and December 30, 2007 is as follows:
|
(In
thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Balance
at the beginning of the period
|
$
|
4,172
|
$
|
1,120
|
||||
|
Additions
based on tax positions related to the current period
|
8,593
|
2,726
|
||||||
|
Additions
for tax positions of prior periods
|
—
|
326
|
||||||
|
Balance
at the end of the period
|
$
|
12,765
|
$
|
4,172
|
||||
Management
believes that events that could occur in the next 12 months and cause a change
in unrecognized tax benefits include, but are not limited to, the
following:
|
|
•
|
commencement,
continuation or completion of examinations of the Company’s tax returns by
the U.S. or foreign taxing authorities;
and
|
|
|
•
|
expiration
of statutes of limitation on the Company’s tax
returns.
|
The
calculation of unrecognized tax benefits involves dealing with uncertainties in
the application of complex global tax regulations. Uncertainties include, but
are not limited to, the impact of legislative, regulatory and judicial
developments, transfer pricing and the application of withholding taxes.
Management regularly assesses the Company’s tax positions in light of
legislative, bilateral tax treaty, regulatory and judicial developments in the
countries in which the Company does business. Management determined that an
estimate of the range of reasonably possible change in the amounts of
unrecognized tax benefits within the next 12 months cannot be made.
The
Company’s valuation allowance is primarily for its deferred tax assets in the
U.S., and was determined in accordance with the provisions of SFAS No. 109,
which requires an assessment of both positive and negative evidence. When
determining whether it is more likely than not that deferred assets are
recoverable, with such assessment being required on a jurisdiction by
jurisdiction basis, management believes that sufficient uncertainty exists with
regard to the realizability of these assets such that a valuation allowance is
necessary. Factors considered in providing a valuation allowance include the
lack of a significant history of consistent profits, the lack of consistent
profitability in the solar industry, and the lack of carryback capacity to
realize these assets. Based on the absence of sufficient positive objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize these remaining
net deferred tax assets. The amount of the deferred tax assets valuation
allowance, however, could be reduced in future periods to the extent that future
taxable income is realized. A portion of the valuation allowance would be
released to income tax expense as it offsets deferred tax assets acquired in the
acquisition of PowerLight (now known as SP Systems).
The
Company adopted SFAS No. 141(R) on December 29, 2008. SFAS No. 141(R)
amends the guidance in SFAS No. 109 and FIN 48 on the accounting for changes in
assumed liabilities for acquired income tax uncertainties. As a result of the
amendments, the manner in which changes in liabilities for income tax
uncertainties are recognized is consistent with the general requirements of
SFAS No. 141(R) for adjustments during the measurement period, which adjust
the accounting for the business combination, and adjustments outside of the
measurement period, which do not result in adjustments to the accounting for the
business combination. Accordingly, changes in a liability for an assumed income
tax uncertainty will be recognized as an element of the business combination if
the change occurs during the measurement period, or as an adjustment to income
tax expense and not as an adjustment to the accounting for the business
combination. This represents a significant change from the requirements under
SFAS No. 141 and SFAS No. 109, before the effective date of SFAS No.
141(R). Under that literature, changes in liabilities for acquired income tax
uncertainties were accounted for as an element of the business combination,
generally as a reduction to goodwill.
Classification
of Interest and Penalties
The
Company accrues interest and penalties on tax contingencies as required by FIN
48 and SFAS No. 109. This interest and penalty accrual is classified as
income tax provision (benefit) in the Consolidated Statements of Operations and
was not material for any periods presented.
Tax
Years and Examination
The
Company files tax returns in each jurisdiction in which they are registered to
do business. In the U.S. and many of the state jurisdictions, and in many
foreign countries in which the Company files tax returns, a statute of
limitations period exists. After a statute of limitations period expires, the
respective tax authorities may no longer assess additional income tax for the
expired period. Similarly, the Company is no longer eligible to file claims for
refund for any tax that it may have overpaid. The following table summarizes the
Company’s major tax jurisdictions and the tax years that remain subject to
examination by these jurisdictions as of December 28,
2008:
|
Tax Jurisdictions
|
Tax Years
|
|
United
States
|
2004
and onward
|
|
California
|
2003
and onward
|
|
Switzerland
|
2004
and onward
|
|
Philippines
|
2004
and onward
|
Additionally,
while years prior to 2003 for the U.S. corporate tax return are not open for
assessment, the IRS can adjust net operating loss and research and development
carryovers that were generated in prior years and carried forward to
2003.
The IRS
is currently conducting an audit of PowerLight’s federal income tax returns for
fiscal 2005 and 2004. As of December 28, 2008, no material adjustments have been
proposed by the IRS. If material tax adjustments are proposed by the IRS after
the adoption of SFAS No. 141(R) and acceded to by the Company, an adjustment to
income tax expense and income taxes payable may result.
Note 14. PREFERRED STOCK
AND COMMON STOCK
Preferred
Stock
At
December 28, 2008, the Company was authorized to issue up to 10.0 million
shares of $0.001 par value preferred stock. As of December 28, 2008 and
December 30, 2007, the Company had no preferred stock issued and
outstanding.
Common
Stock
The
Company has two classes of common stock, including class A and class B. The
classes of common stock have substantially similar rights except as to voting
rights.
In
November 2005, the Company raised net proceeds of $145.6 million in an IPO of
8.8 million shares of class A common stock at a price of $18.00 per share.
In June 2006, the Company completed a follow-on public offering of
7.0 million shares of its class A common stock, at a per share price of
$29.50, and received net proceeds of $197.4 million. In July 2007, the Company
completed a follow-on public offering of 2.7 million shares of its class A
common stock, at a discounted per share price of $64.50, and received net
proceeds of $167.4 million.
On
May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5 million
shares and 2.5 million shares, respectively, of the Company’s class B common
stock in offerings pursuant to Rule 144 of the Securities Act. Such shares
converted to 10.0 million shares of class A common stock upon the
sale.
In
anticipation of Cypress’s plan to pursue the spin-off of all of its shares of
the Company’s class B common stock to Cypress’s stockholders, the Company
amended and restated its certificate of incorporation on September 25,
2008. Under the amended and restated certificate of incorporation, the
Company is authorized to issue up to 217.5 million shares of $0.001 par
value class A common stock and 150.0 million shares of $0.001 par value
class B common stock.
After the
close of trading on the NYSE on September 29, 2008, Cypress completed a
spin-off of all of its shares of the Company’s class B common stock, in the form
of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock. As a result, the Company’s class B common stock now trades
publicly and is listed on the Nasdaq Global Select Market, along with the
Company’s class A common stock.
Common
stock consisted of the following:
|
(In
thousands, except share data)
|
December 28,
2008
|
December 30,
2007
|
||||||
|
Class A
common stock, $0.001 par value; 217,500,000 shares authorized; 44,055,644*
and 40,289,719* shares issued; 43,849,566* and 40,176,957* shares
outstanding, at December 28, 2008 and December 30, 2007,
respectively
|
$
|
44
|
$
|
40
|
||||
|
Class
B common stock, $0.001 par value; 150,000,000 shares and 157,500,000
shares authorized; 42,033,287 and 44,533,287 shares issued and
outstanding, at December 28, 2008 and December 30, 2007,
respectively
|
42
|
45
|
||||||
|
Total
common stock
|
$
|
86
|
$
|
85
|
||||
|
*
|
Includes
approximately 0.7 million shares of restricted stock and a total of
4.7 million shares of class A common stock lent to LBIE and
CSI.
|
Shares
Reserved for Future Issuance
The
Company had shares of class A common stock reserved for future issuance as
follows:
|
(In
thousands)
|
December 28,
2008
|
December 30,
2007
|
||||||
|
Stock
option plans
|
3,813
|
3,982
|
||||||
As of
December 28, 2008, the voting and dividend rights of the common stock were
as follows:
Voting
Rights—Common Stock
The class
A common stock is entitled to one vote per share while the class B common stock
is entitled to eight votes per share on all matters to be voted on by the
Company’s stockholders. The class B common stock was initially held by Cypress
and was convertible at any time into class A common stock by its holder on a
share for share basis. After the close of trading on the NYSE on
September 29, 2008, Cypress completed a spin-off of all of its shares of
the Company’s class B common stock to Cypress’s stockholders. Following the
spin-off, holders of the Company’s class B common stock cannot convert the
class B common stock into shares of the Company’s class A common
stock.
Pursuant
to the amended and restated certificate of incorporation, effective as of the
date the IRS issued a supplemental ruling on December 1, 2008, the voting power
of a holder of more than 15% of the Company’s outstanding shares of class B
common stock with respect to the election or removal of directors is restricted
to 15% of the outstanding shares of class B common stock, unless such holder of
class B common stock has an equivalent percentage of the Company’s outstanding
class A common stock. Because the restriction on the voting power of a
holder of more than 15% of the Company’s class B common stock was not
contemplated by the ruling Cypress received from the IRS regarding the spin-off,
the amended and restated certificate of incorporation provided that this
voting restriction would not become effective until such date (but would
automatically be effective as of such date), if any, that the IRS issued a
supplemental ruling that the effectiveness of the restriction will not prevent
the favorable rulings received by Cypress with respect to certain tax issues
arising under Section 355 of the Code in connection with the spin-off from
having full force and effect. On December 1, 2008, the IRS issued such
supplemental ruling, therefore, the voting restriction provision of
the amended and restated certificate of incorporation is
effective.
In
addition, on August 12, 2008, the Company entered into a rights agreement
with Computershare Trust Company, N.A., as rights agents. The rights agreement
became effective upon completion of Cypress’ spin-off of the Company’s shares of
class B common stock to the holders of Cypress common stock. The rights
agreement contains specific features designed to address the potential for an
acquirer or significant investor to take advantage of the Company’s capital
structure and unfairly discriminate between classes of the Company’s common
stock. Specifically, the rights agreement is designed to address the inequities
that could result if an investor, by acquiring 20% or more of the outstanding
shares of class B common stock, were able to gain significant voting
influence over the Company without making a correspondingly significant economic
investment. The rights agreement, commonly referred to as a “poison pill,” could
delay or discourage takeover attempts that stockholders may consider
favorable.
Dividends—Common
Stock
When and
if declared by the board of directors, and subject to the preferences applicable
to any preferred stock outstanding, the holders of class A and class B common
stock are entitled to receive equal per share dividends. In the case of a
dividend or distribution payable in the form of common stock, each holder of
class A and class B is only entitled to receive the class of stock that they
hold. The Company's credit facilities place restrictions on the Company and
its subsidiaries’ ability to pay cash dividends. Additionally, the debentures
issued in February 2007 and July 2007 allow the holders to convert their bonds
into the Company's class A common stock if the Company declares a dividend that
on a per share basis exceeds 10% of its class A common stock’s market
price.
Note
15. NET INCOME PER SHARE OF
CLASS A AND CLASS B COMMON STOCK
Basic net
income per share is computed using the weighted-average of the combined class A
and class B common shares outstanding. Diluted net income per share is computed
using the weighted-average common shares outstanding plus any potentially
dilutive securities outstanding during the period using the treasury stock
method, except when their effect is anti-dilutive. Potentially dilutive
securities include stock options, restricted stock and the senior convertible
debentures.
Holders
of the Company’s senior convertible debentures may, under certain circumstances
at their option, convert the senior convertible debentures into cash and, if
applicable, shares of the Company’s class A common stock at the applicable
conversion rate, at any time on or prior to maturity (see Note 11). Pursuant to
EITF 90-19, the senior convertible debentures are included in the calculation of
diluted net income per share if their inclusion is dilutive under the treasury
stock method.
The
following is a summary of all outstanding anti-dilutive potential common
shares:
|
As
of
|
|||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||||
|
Stock
options
|
279
|
—
|
44
|
||||||
|
Restricted
stock awards and units
|
659
|
—
|
—
|
||||||
Net
income per share amounts are the same for class A and class B common stock
because the holders of each class are legally entitled to equal per share
distributions whether through dividends or in liquidation. The following table
sets forth the computation of basic and diluted weighted-average common
shares:
|
Year
Ended
|
|||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||||
|
Basic
weighted-average common shares
|
80,522
|
75,413
|
65,864
|
||||||
|
Effect
of dilutive securities:
|
|||||||||
|
Stock
options
|
2,555
|
4,203
|
5,147
|
||||||
|
Restricted
stock awards and units
|
309
|
357
|
76
|
||||||
|
Shares
subject to re-vesting restrictions
|
262
|
439
|
—
|
||||||
|
1.25%
debentures
|
783
|
620
|
—
|
||||||
|
0.75%
debentures
|
15
|
195
|
—
|
||||||
|
Diluted
weighted-average common shares
|
84,446
|
81,227
|
71,087
|
||||||
Beginning
on September 15, 2008, the date on which LBIE commenced administrative
proceedings regarding the Lehman bankruptcy, approximately 2.9 million shares of
class A common stock lent to LBIE in connection with the 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
CSI in connection with the 0.75% debentures. If Credit Suisse or its affiliates,
including CSI, were to file bankruptcy or commence similar administrative,
liquidating, restructuring or other proceedings, the Company may have to include
approximately 1.8 million shares lent to CSI in basic weighted-average
common shares (see Note 11).
For the
year ended December 28, 2008, dilutive potential common shares includes
approximately 0.8 million shares for the impact of the
1.25% debentures, and approximately 15,000 shares for the impact of the
0.75% debentures, as the Company had experienced a substantial increase in
its common stock price during the first three quarters of fiscal 2008 as
compared to the market price conversion trigger pursuant to the terms of the
1.25% and 0.75% debentures (see Note 11). Similarly, for the year ended
December 30, 2007, dilutive potential common shares includes approximately 0.6
million shares for the impact of the 1.25% debentures, and
approximately 0.2 million shares for the impact of the 0.75% debentures, as
the Company had experienced a substantial increase in its common stock price
during the second half of fiscal 2007. Under the treasury stock method,
such senior convertible debentures will generally have a dilutive impact on net
income per share if the Company’s average stock price for the period exceeds the
conversion price for the senior convertible debentures.
Note
16. STOCK-BASED COMPENSATION
AND OTHER EMPLOYEE BENEFIT PLANS
During
the preparation of its consolidated financial statements for the year ended
December 28, 2008, the Company identified errors in its financial statements
related to the year ended December 30, 2007, which resulted in a $1.3 million
overstatement of stock-based compensation expense. The Company corrected these
errors in its consolidated financial statements for the year ended December 28,
2008, which resulted in a $1.3 million credit to income before income taxes and
equity in earnings of unconsolidated investees and net income. The out-of-period
effect is not material to the Company’s full-year 2008 results, and, is not
material to any financial statements of prior periods.
The
following table summarizes the consolidated stock-based compensation expense by
line item in the Consolidated Statements of Operations:
|
(In
thousands)
|
December 28,
2008
|
December 30,
2007
|
December 31,
2006
|
|||||||||
|
Cost
of systems revenue
|
$
|
10,745
|
$
|
8,187
|
$
|
—
|
||||||
|
Cost
of components revenue
|
8,144
|
4,213
|
846
|
|||||||||
|
Research
and development
|
3,988
|
1,817
|
1,197
|
|||||||||
|
Sales,
general and administrative
|
47,343
|
36,995
|
2,821
|
|||||||||
|
Total
stock-based compensation expense
|
$
|
70,220
|
$
|
51,212
|
$
|
4,864
|
||||||
Consolidated
net cash proceeds from the issuance of shares in connection with exercises of
stock options under the Company’s employee stock plans were $5.1 million, $8.7
million and $3.9 million for fiscal 2008, 2007 and 2006, respectively. The
Company recognized an income tax benefit from stock option exercises of $41.5
million for fiscal 2008. No income tax benefit was realized from stock option
exercises during fiscal 2007 and 2006. As required, the Company presents excess
tax benefits from stock-based award activity, if any, as financing cash flows
rather than operating cash flows.
The
following table summarizes the consolidated stock-based compensation expense, by
type of awards:
|
(In
thousands)
|
December 28,
2008
|
December 30,
2007
|
December 31,
2006
|
|||||||||
|
Employee
stock options
|
$
|
4,256
|
$
|
7,165
|
$
|
3,930
|
||||||
|
Non-employee
stock options
|
—
|
—
|
304
|
|||||||||
|
Restricted
stock awards and units
|
38,032
|
13,121
|
677
|
|||||||||
|
Shares
and options released from re-vesting restrictions
|
28,888
|
31,292
|
—
|
|||||||||
|
Change
in stock-based compensation capitalized in inventory
|
(956
|
)
|
(366
|
)
|
(47
|
)
|
||||||
|
Total
stock-based compensation expense
|
$
|
70,220
|
$
|
51,212
|
$
|
4,864
|
||||||
In
connection with the acquisition of PowerLight (now known as SP Systems) on
January 10, 2007, 1.1 million shares of the Company’s class A common stock and
0.5 million stock options issued to employees of SP Systems, which were valued
at $60.4 million, are subject to certain transfer restrictions and a repurchase
option held by the Company. The Company is recognizing expense as the re-vesting
restrictions of these shares lapse over the two-year period beginning on
the date of acquisition. The value of shares released from such re-vesting
restrictions is included in stock-based compensation expense in the table
above.
The
following table summarizes the unrecognized stock-based compensation cost by
type of awards:
|
(In
thousands, except years)
|
As
of
December
28,
2008
|
Weighted-Average
Amortization Period
(in
years)
|
||||||
|
Stock
options
|
$
|
11,731
|
2.8
|
|||||
|
Restricted
stock awards and units
|
92,756
|
2.6
|
||||||
|
Shares
subject to re-vesting restrictions
|
168
|
—
|
||||||
|
Total
unrecognized stock-based compensation cost
|
$
|
104,655
|
2.6
|
|||||
For stock
options issued prior to the adoption of SFAS No. 123(revised 2004)
“Share-Based Payment” (“SFAS No. 123(R)”) and for certain performance based
awards, the Company recognizes its stock-based compensation cost using the
graded amortization method. For all other awards, stock-based compensation cost
is recognized on a straight-line basis. Additionally, the Company issues new
shares upon exercises of options by employees.
Valuation
Assumptions
The
determination of fair value of each stock option award on the date of grant
using the Black-Scholes valuation model is affected by the stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors. The following weighted average assumptions were used for
fiscal 2008, 2007 and 2006:
|
Year Ended
|
||||||||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||||||||
|
Expected
term
|
6.5 years
|
6.5 years
|
6.5 years
|
|||||||||
|
Risk-free
interest rate
|
2.69
- 3.46%
|
4.58
- 4.68%
|
4.80
- 5.11%
|
|||||||||
|
Volatility
|
60%
|
90%
|
92%
|
|||||||||
|
Dividend
yield
|
0%
|
0%
|
0%
|
|||||||||
Expected
Term:
The
Company continues to utilize the simplified method under the provisions of SAB
No. 110, an amendment to SAB No. 107, for estimating expected term,
instead of its historical exercise data. The Company elected not to base the
expected term on historical data because of the significant difference in its
status before and after the effective date of SFAS No. 123(R). The Company was a
privately-held company until its IPO, and the only available liquidation event
for option holders was Cypress’s buyout of minority interests in November 2004.
At all other times, optionees could not cash out on their vested options. From
the time of the Company’s IPO in November 2005 through May 2006 when lock-up
restrictions expired, a majority of the optionees were unable to exercise and
sell vested options.
Volatility:
In fiscal
2008, the Company computed the expected volatility for its equity awards based
on its historical volatility from traded options with a term of 6.5 years and
class A common stock. Prior to fiscal 2008, the Company computed the
expected volatility for its equity awards based on historical volatility rates
for a publicly-traded U.S.-based direct competitor. Because of the limited
history of its stock trading publicly, the Company did not believe that its
historical volatility would be representative of the expected volatility for its
equity awards.
Risk-Free
Interest Rate and Dividend Yield:
The
interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. Since the Company does not pay and does not expect to pay dividends, the
expected dividend yield is zero.
Equity
Incentive Programs
Stock
Option Plans:
The
Company has three stock option plans: the 1996 Stock Plan (“1996 Plan”), the
Second Amended and Restated 2005 SunPower Corporation Stock Incentive Plan
(“2005 Plan”) and the PowerLight Corporation Common Stock Option and Common
Stock Purchase Plan (“PowerLight Plan”). The PowerLight Plan was assumed by
the Company by way of the acquisition of PowerLight on January 10, 2007.
Under the terms of all three plans, the Company may issue incentive or
non-statutory stock options or stock purchase rights to directors, employees and
consultants to purchase common stock. The 2005 Plan was adopted by the Company’s
board of directors in August 2005, and was approved by shareholders in November
2005. The 2005 Plan replaced the 1996 Plan and allows not only for the grant of
options, but also for the grant of stock appreciation rights, restricted stock
grants, restricted stock units and other equity rights. The 2005 Plan also
allows for tax withholding obligations related to stock option exercises or
restricted stock awards to be satisfied through the retention of shares
otherwise released upon vesting. The PowerLight Plan was adopted by
PowerLight’s board of directors in October 2000.
In May
2008, the Company’s stockholders approved an increase of 1.7 million shares
and, beginning in fiscal 2009 through 2015, an automatic annual increase in the
number of shares available for grant under the 2005 Plan. The automatic annual
increase is equal to the lower of three percent of the outstanding shares of all
classes of the Company’s common stock measured on the last day of the
immediately preceding fiscal quarter, 6.0 million shares, or such other number
of shares as determined by the Company’s board of directors. As of
December 28, 2008, approximately 1.3 million shares were available for
grant under the 2005 Plan. No new awards are being granted under the 1996 Plan
or the PowerLight Plan.
Incentive
stock options may be granted at no less than the fair value of the common stock
on the date of grant. Non-statutory stock options and stock purchase rights may
be granted at no less than 85% of the fair value of the common stock at the date
of grant. The options and rights become exercisable when and as determined by
the Company’s board of directors, although these terms generally do not exceed
ten years for stock options. Under the 1996 and 2005 Plans, the options
typically vest over five years with a one-year cliff and monthly vesting
thereafter. Under the PowerLight Plan, the options typically vest over five
years with yearly cliff vesting.
The
majority of shares issued are net of the minimum statutory withholding
requirements that the Company pays on behalf of its employees. During fiscal
2008 and 2007, the Company withheld approximately 93,000 shares and 113,000
shares, respectively, to satisfy $6.7 million and $2.0 million,
respectively, of employees’ tax obligations. The Company paid this amount in
cash to the appropriate taxing authorities. Shares withheld are treated as
common stock repurchases for accounting and disclosure purposes and reduce the
number of shares outstanding upon vesting.
The
following table summarizes the Company’s stock option activities:
|
Shares
(in thousands)
|
Weighted-
Average
Exercise
Price Per Share
|
|||||||
|
Outstanding
as of January 1, 2006
|
6,572
|
3.41
|
||||||
|
Granted
|
44
|
39.05
|
||||||
|
Exercised
|
(1,529
|
)
|
2.54
|
|||||
|
Forfeited
|
(107
|
)
|
4.14
|
|||||
|
Outstanding
as of December 31, 2006
|
4,980
|
3.97
|
||||||
|
Options
exchanged/assumed in connection with PowerLight
acquisition
|
1,602
|
5.54
|
||||||
|
Granted
|
18
|
56.20
|
||||||
|
Exercised
|
(2,817
|
)
|
3.01
|
|||||
|
Forfeited
|
(82
|
)
|
13.36
|
|||||
|
Outstanding
as of December 30, 2007
|
3,701
|
5.44
|
||||||
|
Granted
|
170
|
48.10
|
||||||
|
Exercised
|
(1,129
|
)
|
3.60
|
|||||
|
Forfeited
|
(197
|
)
|
7.28
|
|||||
|
Outstanding
as of December 28, 2008
|
2,545
|
8.96
|
||||||
|
Exercisable
as of December 28, 2008
|
1,432
|
4.41
|
||||||
The
Company’s weighted average grant date fair value of options granted in fiscal
2008, 2007 and 2006 were $29.00, $44.09 and $31.02, respectively. The intrinsic
value of options exercised in fiscal 2008, 2007 and 2006 were $83.7 million,
$168.4 million and $47.7 million, respectively. The total fair value of
options vested in fiscal 2008, 2007 and 2006 were $4.4 million, $7.2 million and
$3.8 million, respectively.
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 January 1, 2006
|
4,789
|
$
|
3.82
|
15
|
$
|
30.04
|
||||||||||
|
Granted
|
44
|
39.05
|
230
|
35.43
|
||||||||||||
|
Forfeited
|
(1,692
|
)
|
3.56
|
(16
|
)
|
30.92
|
||||||||||
|
Outstanding
as of December 31, 2006
|
3,141
|
4.45
|
229
|
35.40
|
||||||||||||
|
Granted
|
1,620
|
6.10
|
1,141
|
71.64
|
||||||||||||
|
Vested(1)
|
(2,225
|
)
|
3.28
|
(105
|
)
|
43.18
|
||||||||||
|
Forfeited
|
(82
|
)
|
12.94
|
(91
|
)
|
51.00
|
||||||||||
|
Outstanding
as of December 30, 2007
|
2,454
|
6.29
|
1,174
|
68.74
|
||||||||||||
|
Granted
|
170
|
48.10
|
911
|
70.02
|
||||||||||||
|
Vested(1)
|
(1,314
|
)
|
4.32
|
(357
|
)
|
84.73
|
||||||||||
|
Forfeited
|
(197
|
)
|
7.28
|
(124
|
)
|
73.18
|
||||||||||
|
Outstanding
as of December 28, 2008
|
1,113
|
14.82
|
1,604
|
69.71
|
||||||||||||
|
(1)
|
Restricted
stock awards and units vested include shares withheld on behalf of
employees to satisfy the minimum statutory tax withholding
requirements.
|
Information
regarding the Company’s outstanding stock options as of December 28, 2008 was as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||||||||||
|
Range of Exercise Price
|
Shares
(in
thousands)
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
Weighted-
Average
Exercise
Price per
Share
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Shares
(in
thousands)
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
Weighted-
Average
Exercise
Price per
Share
|
Aggregate
Intrinsic
Value
(in thousands)
|
||||||||||||||||||||||||||
|
$
|
0.04—1.77
|
464
|
3.47
|
$
|
0.51
|
$
|
16,184
|
334
|
3.78
|
$
|
0.53
|
$
|
11,632
|
|||||||||||||||||||||
|
2.00—7.00
|
1,505
|
5.97
|
3.68
|
47,696
|
965
|
5.93
|
3.54
|
30,729
|
||||||||||||||||||||||||||
|
9.50—17.00
|
145
|
6.81
|
10.19
|
3,651
|
66
|
6.81
|
10.21
|
1,656
|
||||||||||||||||||||||||||
|
17.46—43.01
|
315
|
8.03
|
26.46
|
2,956
|
63
|
7.45
|
28.91
|
457
|
||||||||||||||||||||||||||
|
44.50—67.93
|
116
|
9.35
|
61.89
|
—
|
4
|
8.36
|
56.20
|
—
|
||||||||||||||||||||||||||
|
2,545
|
5.97
|
8.96
|
$
|
70,487
|
1,432
|
5.55
|
4.41
|
$
|
44,474
|
|||||||||||||||||||||||||
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $35.38 at
December 26, 2008, which would have been received by the option holders had all
option holders exercised their options as of that date.
As of
December 28, 2008, stock options vested and expected to vest totaled
approximately 2.5 million shares, with a weighted-average remaining
contractual life of 6.0 years and a weighted-average exercise price of $8.96 per
share and an aggregate intrinsic value of approximately $70.5 million. The total
number of in-the-money options exercisable was 1.4 million shares as of
December 28, 2008.
Options
Issued to Non-Employees:
There
were no options issued to non-employees in fiscal 2008, 2007 and
2006.
Stock
Unit Plan:
In
September 2005, the Company adopted the 2005 Stock Unit Plan in which all of the
Company’s employees except its executive officers and directors are eligible to
participate, although the Company currently intends to limit participation to
its non-U.S. employees who are not senior managers. Under the 2005 Stock Unit
Plan, the Company’s board of directors awards participants the right to receive
cash payments from the Company in an amount equal to the appreciation in the
Company’s common stock between the award date and the date the employee redeems
the award. The right to redeem the award typically vests in the same manner as
options vest under the 2005 Stock Unit Plan. In July 2006, the board of
directors amended the terms of the plan to increase the maximum number of stock
units that may be subject to stock unit awards granted under the 2005 Stock Unit
Plan from 100,000 to 300,000 stock units.
As of
December 28, 2008, the Company has granted approximately 236,000 stock units to
2,200 employees in the Philippines at an average unit price of $39.80. Pursuant
to a voluntary exchange offer that concluded in November 2007, approximately
53,000 stock units were exchanged for approximately 32,000 restricted stock
units issued under the Company’s 2005 Plan. The Company conducted a second
voluntary exchange offer that concluded in May 2008, in which approximately
109,000 stock units were exchanged for approximately 50,000 restricted stock
units issued under the Company’s 2005 Plan. During fiscal 2008, 2007 and
2006, the Company recognized $0.1 million, $2.4 million and $0.6 million,
respectively, of total compensation expense associated with the 2005 Stock Unit
Plan.
Other
Employee Benefit Plans:
The
Company has a statutory pension plan covering its employees in the Philippines.
Consistent with the requirements of local law, the Company accrues for the
unfunded portion of the obligation and plans to appoint a third-party trustee of
the retirement funds by the end of fiscal 2009. The outstanding liability of
this pension plan was $0.6 million on both December 28, 2008 and December
30, 2007.
Historically,
all of the Company’s eligible employees were allowed to participate in Cypress’
health plans, life insurance and other benefit plans (other than the stock plans
and stock purchase plans). In July 2008, the Company transferred all accounts in
the Cypress 401(k) Plan held by the Company’s employees to its recently
established SunPower 401(k) Savings Plan. In September 2008, all of the
Company’s eligible employees were entitled to participate in SunPower’s own
health and welfare plans and no longer participate in the Cypress health and
welfare plans.
Note
17. SEGMENT AND GEOGRAPHICAL
INFORMATION
Prior to
fiscal year 2007, the Company operated in one business segment comprising the
design, manufacture and sale of solar electric power products based on its
proprietary processes and technologies. Following the acquisition of PowerLight,
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 our global dealer network,. The Chief Operating Decision Maker
(“CODM”), as defined by SFAS No. 131 “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”), is the Company’s Chief
Executive Officer. The CODM assesses the performance of both operating segments
using information about their revenue and gross margin.
The
following tables present revenue by geography and segment, gross margin by
segment, revenue by significant customer and property, plant and equipment
information based on geographic region. Revenue is based on the destination of
the shipments. Property, plant and equipment are based on the physical location
of the assets:
|
Year
Ended
|
||||||||||||
|
December 28,
2008
|
December 30,
2007
|
December 31,
2006
|
||||||||||
|
Revenue
by geography:
|
||||||||||||
|
United
States
|
36
|
%
|
45
|
%
|
32
|
%
|
||||||
|
Europe:
|
||||||||||||
|
Spain
|
35
|
%
|
29
|
%
|
—
|
%
|
||||||
|
Germany
|
10
|
%
|
10
|
%
|
49
|
%
|
||||||
|
Other
|
12
|
%
|
11
|
%
|
9
|
%
|
||||||
|
Rest
of world
|
7
|
%
|
5
|
%
|
10
|
%
|
||||||
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||||
|
Revenue
by segment:
|
||||||||||||
|
Systems
|
57
|
%
|
60
|
%
|
—
|
%
|
||||||
|
Components
|
43
|
%
|
40
|
%
|
100
|
%
|
||||||
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||||
|
Gross
margin by segment:
|
||||||||||||
|
Systems
|
20
|
%
|
17
|
%
|
—
|
%
|
||||||
|
Components
|
32
|
%
|
23
|
%
|
21
|
%
|
||||||
|
Year Ended
|
|||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||
|
Significant
customers:
|
Business
Segment
|
||||||
|
Naturener
Group
|
Systems
|
18%
|
*
|
—%
|
|||
|
Sedwick
Corporate, S.L.
|
Systems
|
11%
|
*
|
—%
|
|||
|
SolarPack
|
Systems
|
*
|
18%
|
—%
|
|||
|
MMA
Renewable Ventures
|
Systems
|
*
|
16%
|
—%
|
|||
|
Conergy
AG
|
Components
|
*
|
*
|
25%
|
|||
|
Solon
AG
|
Components
|
*
|
*
|
24%
|
|||
|
PowerLight**
|
Components
|
n.a.
|
n.a.
|
16%
|
|||
|
General
Electric Company***
|
Components
|
*
|
*
|
10%
|
|||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
|
(In thousands)
|
December
28,
2008
|
December 30,
2007
|
||||||
|
Property,
plant and equipment by geography:
|
||||||||
|
Philippines
|
$
|
572,977
|
$
|
359,968
|
||||
|
United
States
|
38,259
|
18,026
|
||||||
|
Europe
|
815
|
—
|
||||||
|
Malaysia
|
518
|
—
|
||||||
|
Australia
|
118
|
—
|
||||||
|
$
|
612,687
|
$
|
377,994
|
|||||
Note
18. SUBSEQUENT
EVENTS
Escrow
from the Acquisition of PowerLight
Of
the consideration issued for the acquisition of PowerLight,
approximately $11.9 million in cash and approximately 0.4 million shares, with a
total aggregate value of $25.3 million as of December 28, 2008, were held in
escrow as security for the indemnification obligations of certain former
PowerLight shareholders and would be released over a period of five years from
the acquisition date of January 10, 2007, ending on January 10, 2012 (see
Note 3). Following the second anniversary of the acquisition date (January 10,
2009), the Company authorized the release of approximately one-half of the
escrow amount, leaving approximately $7.0 million in cash and approximately 0.2
million shares of its class A common stock.
Polysilicon
Supply Agreement
In
January 2009, the Company entered into a polysilicon supply agreement with
Hemlock Semiconductor Corporation (“Hemlock”). The agreement provides the
general terms and conditions pursuant to which the Company will purchase, on a
firm commitment basis, fixed annual quantities of polysilicon at specified
prices from 2011 through 2020. Under the agreement, the Company is required to
make prepayments to Hemlock of $14.5 million in 2009, $101.8 million in 2010,
$101.8 million in 2011, and $72.7 million in 2012, and such prepayments will be
credited against future deliveries of polysilicon to the Company. The Company
expects to supply the polysilicon to third-parties that will manufacture ingots
and wafers for the Company using such polysilicon. The aggregate quantity of
polysilicon to be purchased over the term of the agreement is expected to
support approximate 3.5 gigawatts of solar cell manufacturing production based
on the Company’s expected silicon utilization during such period.
Election
of Mr. McDaniel to serve as a member of the Board of Directors and on the Audit
Committee
On
February 16, 2009, the Company’s Board of Directors elected Thomas R. McDaniel
to serve as a member of the Board of Directors and on its Audit
Committee. Mr. McDaniel was designated a Class III director under section
3.1 of the Company’s By-Laws, which provides for a classifed Board. Under
the terms of the 2005 Plan, Mr. McDaniel received a grant of 6,600 restricted
Stock Units, of which twenty percent will vest on each anniversary of the date
of grant until entirely vested by the fifth anniversary of the date of
grant.
SELECTED
UNAUDITED QUARTERLY FINANCIAL DATA
During
the preparation of its consolidated financial statements for the year ended
December 28, 2008, the Company identified errors in its financial statements
related to each of the three-month periods ended March 30, 2008, June 29, 2008
and September 28, 2008. These errors resulted in understatements of net income
for the three months ended:
|
·
|
March
30, 2008 by $0.4 million, which includes $0.3 million overstatement of
interest expense and $0.1 million understatement of equity in earnings of
unconsolidated subsidiaries, net of taxes.
|
|
·
|
June
29, 2008 by $1.7 million, which includes $0.3 million overstatement of
interest expense and $1.4 million understatement of equity in earnings of
unconsolidated subsidiaries, net of taxes.
|
|
·
|
September
28, 2008 by $4.8 million, which includes $2.4 million understatement of
gross margin, $0.4 million overstatement of interest expense and $0.2
million understatement of equity in earnings of unconsolidated
subsidiaries, net of taxes.
|
The
Company corrected these errors in the three-month period ended December 28,
2008, which resulted in a $6.9 million credit to net income. The Company has
concluded that the out-of-period effect of these adjustments is not material to
any of its previously issued condensed consolidated financial
statements.
Consolidated
Statements of Operations
|
Three
Months Ended
|
||||||||||||||
|
(In
thousands, except per share data)
|
December 28
|
September 28
|
June
29
|
March
30
|
||||||||||
|
Fiscal
2008:
|
||||||||||||||
|
Revenue
|
$
|
400,967
|
$
|
377,500
|
$
|
382,751
|
$
|
273,701
|
||||||
|
Gross
margin
|
111,710
|
105,621
|
93,030
|
53,320
|
||||||||||
|
Net
income
|
29,549
|
21,379
|
28,608
|
12,757
|
||||||||||
|
Net
income per share of class A and class B common stock,
basic
|
0.35
|
0.27
|
0.36
|
0.16
|
||||||||||
|
Net
income per share of class A and class B common stock,
diluted
|
0.35
|
0.25
|
0.34
|
0.15
|
||||||||||
|
December 30
(a)
|
September 30
|
July 1
(b)
|
April 1
(c)
|
|||||||||||
|
Fiscal
2007:
|
||||||||||||||
|
Revenue
|
$
|
224,343
|
$
|
234,334
|
$
|
173,766
|
$
|
142,347
|
||||||
|
Gross
margin
|
47,182
|
38,405
|
29,792
|
32,425
|
||||||||||
|
Net
income (loss)
|
4,876
|
8,431
|
(5,345
|
)
|
1,240
|
|||||||||
|
Net
income (loss) per share of class A and class B common stock,
basic
|
0.06
|
0.11
|
(0.07
|
)
|
0.02
|
|||||||||
|
Net
income (loss) per share of class A and class B common stock,
diluted
|
0.06
|
0.10
|
(0.07
|
)
|
0.02
|
|||||||||
|
(a)
|
Included
a charge of $8.3 million for the write-off of unamortized debt issuance
costs as a result of the market price conversion trigger on its senior
convertible debentures being met.
|
|
(b)
|
Included
a charge of $14.1 million for the impairment of acquisition-related
intangible assets.
|
|
(c)
|
Included
a charge of $9.6 million for purchased in-process research and
development.
|
None.
ITEM 9A:
CONTROLS AND
PROCEDURES
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 Annual Report on
Form 10-K and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Exchange
Act. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and can only provide
reasonable assurance with respect to financial statement preparation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
We
assessed the effectiveness of our internal control over financial reporting as
of December 28, 2008. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal
Control—Integrated Framework. Based on our assessment using those
criteria, our management (including our Chief Executive Officer and Chief
Financial Officer) concluded that our internal control over financial reporting
was effective as of December 28, 2008.
The
effectiveness of our internal control over financial reporting as of
December 28, 2008 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears on page 55 of this Annual Report on Form 10-K.
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 quarter ended December 28, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
In the
third quarter of fiscal 2008, we implemented a new enterprise resource planning
(“ERP”) system in our subsidiaries around the world, which resulted in a
material update to our system of internal control over financial reporting.
Issues encountered subsequent to implementation caused us to further revise our
internal control process and procedures in order to correct and supplement our
processing capabilities within the new system in that quarter. Throughout the
ERP system stabilization period we will continue to improve and enhance our
system of internal control over financial reporting.
ITEM 9B: OTHER
INFORMATION
Borrowing
under Malaysian Facility Agreement
As we
disclosed in a current report on Form 8-K filed with the Securities and Exchange
Commission on December 24, 2008, SunPower Malaysia Manufacturing Sdn. Bhd., or
SunPower Malaysia, our Malaysian subsidiary, entered into a facility agreement
with the Government of Malaysia. SunPower Malaysia concurrently executed a
debenture and deed of assignment in favor of the Malaysian Government, granting
a security interest in a deposit account and all of SunPower Malaysia’s assets
to secure its obligations under the facility agreement.
We
borrowed Malaysian Ringgit 190.0 million (approximately $54.6 million) under the
facility agreement in December 2008, and we borrowed Malaysian Ringgit 185.0
million (approximately $51.0 million) under the facility agreement in January
2009.
Under the
terms of the facility agreement, SunPower Malaysia may borrow up to Malaysian
Ringgit 1.0 billion (approximately $287.4 million) to finance the construction
of its manufacturing facility in Malaysia. The loans within the facility
agreement are divided into two tranches, and the weighted average interest rate
applicable to the two tranches is competitive with the cost of borrowing under
our existing credit agreement with Wells Fargo. The loans can be drawn upon
through 2010. Principal is to be repaid in six quarterly payments starting
in June 2015. SunPower Malaysia has the ability to prepay outstanding
loans. All borrowings must be repaid by October 30, 2016. The loan
documents include certain conditions to borrowings, representations and
covenants, and events of default customary for financing transactions of this
type.
Wells
Fargo Amendment
On
February 24, 2009, we entered into an amendment to our credit agreement with
Wells Fargo. The amendment extends the expiration date from April 4, 2009
to July 3, 2009 for the uncollateralized revolving credit line and
uncollateralized letter of credit subfeature.
In
connection with the original credit agreement, we entered into a security
agreement with Wells Fargo, granting a security interest in a deposit account to
collateralize certain obligations in connection with any letters of credit that
might be issued under the credit agreement’s collateralized letter of credit
line. In connection with an amendment in 2008, we entered into another
security agreement with Wells Fargo, granting a security interest in a
securities account to collateralize certain obligations. SunPower North
America, Inc., SunPower Corporation, Systems, and SunPower Systems SA have each
agreed to guarantee obligations owed to Wells Fargo under the credit
agreement.
Until July 3,
2009, we may borrow up to $50 million under the credit agreement’s
uncollateralized line of credit and request that Wells Fargo issue up to $50
million in letters of credit under the uncollateralized letter of credit
subfeature, provided that any letters of credit issued and outstanding under the
uncollateralized letter of credit subfeature will reduce our borrowing capacity.
Until July 31, 2012, we may request that Wells Fargo issue up to $150
million in letters of credit under the credit agreement’s collateralized letter
of credit line. As detailed in the credit agreement, we will pay interest on
outstanding borrowings and a fee for issued and outstanding letters of credit.
We have the ability at any time to prepay outstanding loans. All borrowings must
be repaid by July 3, 2009, and all letters of credit issued under the
uncollateralized letter of credit subfeature shall expire on or before July 3,
2009 unless we provide by such date collateral in the form of cash or cash
equivalents in the aggregate amount available to be drawn under letters of
credit outstanding at such time. All letters of credit issued under the
collateralized letter of credit line shall expire no later than July 31,
2012. The loan documents include certain conditions to borrowings,
representations and covenants, and events of default customary for financing
transactions of this type.
Certain
information required by Part III is omitted from this Annual Report on Form
10-K. We intend to file a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, and certain information included therein is incorporated
herein by reference.
The
information required by this Item concerning our directors is incorporated by
reference from the information set forth in the section entitled “Proposal
One–Election of Directors” in our Proxy Statement.
The
information required by this Item concerning our executive officers is
incorporated by reference to the information set forth in the section entitled
“Security Ownership of Management and Certain Beneficial Owners–Executive
Officers of the Registrant” in our Proxy Statement.
The
information required by this Item concerning compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference from the
information set forth in the section entitled “Other Disclosures–Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement.
We have
adopted a code of ethics, entitled Code of Business Conduct and Ethics, that
applies to all of our directors, officers and employees, including our principal
executive officer, principal financial officer, and principal accounting
officer. We have made it available, free of charge, on our website at
www.sunpowercorp.com, and if we amend it or grant any waiver under it that
applies to our principal executive officer, principal financial officer, or
principal accounting officer, we will promptly post that amendment or waiver on
our website as well.
The
information required by this Item concerning our audit committee and audit
committee financial expert is incorporated by reference from the information set
forth in the section entitled “Corporate Governance–Committee Membership–Audit
Committee” in our Proxy Statement.
ITEM 11:
EXECUTIVE
COMPENSATION
The
information required by this Item concerning executive compensation is
incorporated by reference from the information set forth in the sections
entitled “Compensation Discussion and Analysis,” “Executive Compensation,”
“Compensation Committee Report” and “Other Disclosures–Compensation Committee
Interlocks and Insider Participation” in our Proxy Statement.
The
information required by this item concerning compensation of directors is
incorporated by reference from the information set forth in the section entitled
“Director Compensation” in our Proxy Statement.
ITEM 12:
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this Item concerning equity compensation plan
information is incorporated by reference from the information set forth in the
section titled “Equity Compensation Plan Information” in our Proxy
Statement.
The
information required by this Item regarding security ownership of certain
beneficial owners, directors and executive officers is incorporated by reference
from the information set forth in the section entitled “Security Ownership of
Management and Certain Beneficial Owners” in our Proxy Statement.
Information
required by this Item regarding director independence and transactions with
related persons is incorporated by reference from the information set forth in
the sections entitled “Corporate Governance–Board Structure,” “Committee
Membership” and “Other Disclosures” in our Proxy Statement.
The
information required by this Item is incorporated by reference from the
information set forth in the sections entitled “Report of the Audit Committee of
the Board of Directors” and “Proposal Two–Ratification of the Selection of
Independent Registered Public Accountants” in our Proxy Statement.
(a)
The following documents are filed as a part of this Annual Report on Form
10-K:
1. Financial
Statements:
|
Page
|
||||
|
55
|
|
|||
|
56
|
|
|||
|
57
|
|
|||
|
58
|
|
|||
|
59
|
|
|||
|
60
|
|
|||
|
61
|
|
|||
2. Financial
Statement Schedule:
All
other financial statement schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements under Item 8 of
this Annual Report on Form 10-K.
3. Exhibits:
See
(b) below.
(b)
Exhibits:
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
||
|
3.1
|
Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 12, 2008).
|
||
|
3.2
|
Amended
and Restated By-Laws of SunPower Corporation (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 7,
2008).
|
||
|
4.1
|
Specimen
Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on November 14,
2005).
|
||
|
4.2
|
Specimen
Class B Stock Certificate (incorporated by reference to Exhibit 4.6
to the Registrant’s Registration Statement on Form S-3ASR filed with the
Securities and Exchange Commission on September 10,
2008).
|
||
|
4.3
|
Indenture,
dated February 7, 2007, by and between SunPower Corporation and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 8,
2007).
|
||
|
4.4
|
First
Supplemental Indenture, dated February 7, 2007, by and between SunPower
Corporation and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 8,
2007).
|
||
|
4.5
|
Form
of Second Supplemental Indenture, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 26, 2007).
|
||
|
4.6
|
Rights
Agreement, dated as of August 12, 2008, by and between the Registrant
and Computershare Trust Company, N.A., as Rights Agent, including the form
of Certificate of Designation of Series A Junior Participating
Preferred Stock, the form of Certificate of Designation of Series B
Junior Participating Preferred Stock and the forms of Right Certificates,
Assignment and Election to Purchase and the Summary of Rights attached
thereto as Exhibits A, B, C and D, respectively (incorporated by reference
to Exhibit 4.1 to the Registrant’s current report on Form 8-K
filed with the Securities and Exchange Commission on August 12,
2008).
|
||
|
10.1
|
Share
Lending Agreement, dated July 25, 2007, by and among SunPower Corporation,
Credit Suisse International and Credit Suisse Securities (USA) LLC
(incorporated by reference to Exhibit 10.1 of Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on July 26,
2007).
|
|
|
10.2
|
Amended
and Restated Share Lending Agreement, dated July 25, 2007, by and among
SunPower Corporation, Lehman Brothers International (Europe) Limited and
Lehman Brothers Inc. (incorporated by reference to Exhibit 10.2 of
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 26, 2007).
|
|
|
10.3^
|
SunPower
Corporation 1996 Stock Plan and form of agreements thereunder
(incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.4^
|
SunPower
Corporation 2005 Stock Unit Plan (incorporated by reference to Exhibit
10.28 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on October 31,
2005).
|
|
|
10.5^
|
Second
Amended and Restated SunPower Corporation 2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to Exhibit 4.3
to the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on May 9, 2008).
|
|
|
10.6^
|
PowerLight
Corporation Common Stock Option and Common Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
January 25, 2007).
|
|
|
10.7^
|
Form
of PowerLight Corporation Incentive/Non-Qualified Stock Option, Market
Standoff and Stock Restriction Agreement (Employees) (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.8^
|
Form
of PowerLight Corporation Non-Qualified Stock Option, Market Standoff and
Stock Restriction Agreement (Directors and Consultants) (incorporated by
reference to Exhibit 4.5 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.9^
|
Form
of Non-Qualified Stock Option Agreement, by and between PowerLight
Corporation and Dan Shugar (incorporated by reference to Exhibit 4.9 to
the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 25,
2007).
|
|
|
10.10
|
Form
of Indemnification Agreement for Directors and Officers (incorporated by
reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 7,
2008).
|
|
|
10.11^*
|
Form
of Employment Agreement for Executive Officers, including Messrs. Werner,
Arriola, Hernandez, Dinwoodie, Ledesma, Wenger, Shugar, Neese, Richards
and Swanson.
|
|
|
10.12^
|
Amended
and Restated SunPower Corporation Annual Key Employee Bonus Plan
(incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
August 8, 2008).
|
|
|
10.13^
|
SunPower
Corporation Quarterly Key Initiative Bonus Plan (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on May 9,
2008).
|
|
|
10.14^
|
SunPower
Corporation Management Career Transition Plan (incorporated by reference
to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 7,
2008).
|
|
|
10.15
|
Office
Lease Agreement, dated May 15, 2006 between SunPower Corporation and
Cypress Semiconductor Corporation (incorporated by reference to Exhibit
10.36 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 16, 2006).
|
|
|
10.16
|
First
Amendment to Lease, dated December 12, 2006, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 9,
2008).
|
|
|
10.17
|
Second
Amendment to Lease, dated July 1, 2007, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 9,
2008).
|
|
|
10.18
|
Third
Amendment to Lease, dated April 7, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 8,
2008).
|
|
|
10.19
|
Fourth
Amendment to Lease, effective August 12, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 7,
2008).
|
|
|
10.20*
|
Fifth
Amendment to Lease, dated October 1, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
|
|
10.21
|
Standard
Industrial / Commercial Multi-Tenant Lease, dated December 15, 2006, by
and between PowerLight Corporation and FPOC, LLC (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.22
|
First
Amendment to Lease, dated May 24, 2007, by and between PowerLight
Corporation and FPOC, LLC (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 7,
2007).
|
|
10.23
|
Second
Amendment to Lease, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC (incorporated by reference to Exhibit
10.24 to Registrant’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 3, 2008).
|
|
|
10.24
|
Third
Amendment to Lease, dated May 23, 2008, by and between SunPower
Corporation, Systems and FPOC, LLC (incorporated by reference to Exhibit
10.13 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 8, 2008).
|
|
|
10.25
|
PV
Risk Reduction Agreement, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC (incorporated by reference to Exhibit
10.25 to Registrant’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 3, 2008.
|
|
|
10.26†
|
Credit
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.27
|
First
Amendment to Credit Agreement, dated August 20, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.28
|
Second
Amendment to Credit Agreement, dated August 31, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.29
|
Third
Amendment to Credit Agreement, dated February 13, 2008, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant’s Quarterly Report on Form 10-Q/A filed with the Securities and
Exchange Commission on May 9, 2008).
|
|
|
10.30†
|
Fourth
Amendment to Credit Agreement, dated April 4, 2008, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
August 8, 2008).
|
|
|
10.31
|
Fifth
Amendment to Credit Agreement, dated May 19, 2008, by and between SunPower
Corporation and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 8,
2008).
|
|
|
10.32†
|
Security
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.33†
|
First
Amendment to Security Agreement: Deposit Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2008).
|
|
|
10.34
|
Continuing
Guaranty, dated July 13, 2007, by and between SunPower North America,
Inc., SunPower Corporation, Systems and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 9, 2007).
|
|
|
10.35
|
Joinder
to Continuing Guaranty, dated April 4, 2008, by SunPower Systems SA
(incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
August 8, 2008).
|
|
|
10.36†
|
Securities
Account Control Agreement: Securities Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2008).
|
|
|
10.37†
|
Amended
and Restated Addendum to Security Agreement: Securities Account, dated May
19, 2008, between SunPower Corporation and Wells Fargo Bank National
Association (incorporated by reference to Exhibit 10.12 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2008).
|
|
|
10.38†*
|
Facility
Agreement, dated December 18, 2008, by and between SunPower Malaysia
Manufacturing Sdn. Bhd. and the Government of Malaysia.
|
|
|
10.39†*
|
Debenture,
dated December 18, 2008, by and between SunPower Malaysia Manufacturing
Sdn. Bhd. and the Government of Malaysia.
|
|
|
10.40†*
|
Deed
of Assignment, dated December 18, 2008, by and between SunPower Malaysia
Manufacturing Sdn. Bhd. and the Government of Malaysia.
|
|
|
10.41†
|
Supply
Agreement, dated June 30, 2006, by and between SunPower Philippines
Manufacturing, Ltd. and DC Chemical Co., Ltd. (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 16,
2006).
|
|
|
10.42†
|
Long-Term
Supply Agreement II, dated July 16, 2007, by and between SunPower
Corporation and Hemlock Semiconductor Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.43†
|
Form
of Long-Term Polysilicon Supply Agreement, effective January 10, 2008, by
and between SunPower Corporation and a joint venture (JVCo) to be formed
by NorSun AS, Swicorp Joussour Company and Chemical Development Company
(incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
May 9, 2008).
|
|
|
10.44†
|
Long-Term
Polysilicon Supply Agreement, effective January 10, 2008, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 9,
2008).
|
|
10.45†
|
Poly
Silicon Supply Agreement, dated February 8, 2008, by and between SunPower
Corporation and Jupiter Corporation Ltd (incorporated by reference to
Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities Exchange Commission on May 9, 2008).
|
|
|
10.46†
|
Ingot
Supply Agreement, dated December 22, 2006, by and between SunPower
Corporation and Woongjin Energy Co., Ltd. (incorporated by reference to
Exhibit 10.62 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 2,
2007).
|
|
|
10.47†
|
Amendment
No. 1 to Ingot Supply Agreement, dated August 4, 2008, by and between
SunPower Corporation and Woongjin Energy Co., Ltd. (incorporated by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 7,
2008).
|
|
|
10.48†
|
Long-Term
Ingot and Wafer Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.7 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
|
|
10.49†
|
Wafering
Supply and Sales Agreement, dated October 1, 2007, by and between SunPower
Philippines Manufacturing Ltd. and First Philec Solar Corp. (incorporated
by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.50†
|
Ingot/Wafer
Agreement, dated December 3, 2007, by and between SunPower Corporation and
Jiawei SolarChina Co., Ltd (incorporated by reference to Exhibit 10.37 to
the Registrant’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 3, 2008).
|
|
|
10.51†
|
First
Amendment to Ingot and Wafer Agreement, dated May 13, 2008, by and between
SunPower Corporation and Jiawei SolarChina Co., Ltd. (incorporated by
reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 8,
2008).
|
|
|
10.52†
|
Polysilicon
Supply Agreement, dated December 22, 2006, by and between SunPower
Philippines Manufacturing, Ltd. and Woongjin Energy Co., Ltd.
(incorporated by reference to Exhibit 10.61 to the Registrant’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 2, 2007).
|
|
|
10.53†
|
Amendment
to Polysilicon Suppy Agreement, dated January 8, 2008, by and between
SunPower Philippines Manufacturing, Ltd. and Woongjin Energy Co., Ltd.
(incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
May 9, 2008).
|
|
|
10.54†
|
Amendment
No. 2 to Polysilicon Supply Agreement, dated August 4, 2008, by and
between SunPower Philippines Manufacturing, Ltd. and Woognjin Energy Co.,
Ltd. (incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 7, 2008).
|
|
|
10.55†
|
Long-Term
Polysilicon Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.8 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
|
|
10.56†
|
Turnkey
Engineering, Procurement and Construction Agreement, dated July 3, 2008,
by and between SunPower Corporation, Systems and Florida Power & Light
Company (incorporated by reference to Exhibit 10.1 to Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 7, 2008).
|
|
|
10.57*
|
Amendment
to Turnkey, Engineering, Procurement and Construction Agreement, dated
October 7, 2008, by and between SunPower Corporation, Systems and Florida
Power & Light Company.
|
|
|
10.58†*
|
Amendment
Two to Turnkey, Engineering, Procurement and Construction Agreement, dated
November 21, 2008, by and between SunPower Corporation, Systems and
Florida Power & Light Company.
|
|
|
10.59†*
|
Photovoltaic
Equipment Master Supply Agreement, dated November 4, 2008, by and between
SunPower Italia S.r.l. and Ecoware S.p.A.
|
|
|
10.60†*
|
Photovoltaic
Equipment Master Supply Agreement, dated November 21, 2008, by and between
SunPower GmbH and City Solar Kraftwerke AG.
|
|
|
10.61
|
Tax
Sharing Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.16 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on
October 11, 2005).
|
|
|
10.62
|
Amendment
No. 1 to Tax Sharing Agreement, dated August 12, 2008, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on August 12,
2008).
|
|
|
21.1*
|
List
of Subsidiaries.
|
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
24.1*
|
Power
of Attorney.
|
|
|
31.1*
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
31.2*
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
32.1*
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
Exhibits
marked with a carrot (^) are management compensatory
arrangements.
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.
(c)
Financial Statement Schedules:
VALUATION
AND QUALIFYING ACCOUNTS
|
(In
thousands)
|
Balance at
Beginning of
Period
|
Charges
(Releases)
to
Expenses/Revenues
|
Deductions
|
Balance at End
of
Period
|
||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||
|
Year
ended December 28, 2008
|
$
|
1,373
|
$
|
2,182
|
$
|
(1,692
|
)
|
$
|
1,863
|
|||||||
|
Year
ended December 30, 2007
|
557
|
816
|
—
|
1,373
|
||||||||||||
|
Year
ended December 31, 2006
|
317
|
272
|
(32
|
)
|
557
|
|||||||||||
|
Allowance
for sales returns:
|
||||||||||||||||
|
Year
ended December 28, 2008
|
$
|
368
|
$
|
63
|
$
|
(200
|
)
|
$
|
231
|
|||||||
|
Year
ended December 30, 2007
|
445
|
2,172
|
(2,249
|
)
|
368
|
|||||||||||
|
Year
ended December 31, 2006
|
110
|
808
|
(473
|
)
|
445
|
|||||||||||
|
Valuation
allowance for deferred tax asset:
|
||||||||||||||||
|
Year
ended December 28, 2008
|
$
|
13,924
|
$
|
32,008
|
$
|
—
|
$
|
45,932
|
||||||||
|
Year
ended December 30, 2007
|
9,836
|
4,088
|
—
|
13,924
|
||||||||||||
|
Year
ended December 31, 2006
|
9,278
|
558
|
—
|
9,836
|
||||||||||||
SIGNATURES
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.
|
SUNPOWER CORPORATION
|
||||
|
Dated:
February 26, 2008
|
By:
|
/s/ DENNIS
V. ARRIOLA
|
||
|
Dennis
V. Arriola
|
||||
|
Senior
Vice President and
Chief
Financial Officer
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
THOMAS H. WERNER
|
Chief
Executive Officer and Director
|
February
26, 2008
|
||
|
Thomas
H. Werner
|
(Principal
Executive Officer)
|
|||
|
/s/
DENNIS V. ARRIOLA
|
Senior
Vice President and
Chief
Financial Officer
|
February
26, 2008
|
||
|
Dennis
V. Arriola
|
(Principal
Financial and Accounting Officer)
|
|||
|
*
|
Chairman
of the Board of Directors
|
February
26, 2008
|
||
|
T.J.
Rodgers
|
||||
|
*
|
Director
|
February
26, 2008
|
||
|
W.
Steve Albrecht
|
||||
|
*
|
Director
|
February
26, 2008
|
||
|
Betsy
S. Atkins
|
||||
|
*
|
Director
|
February
26, 2008
|
||
|
Uwe-Ernst
Bufe
|
||||
|
*
|
Director
|
February
26, 2008
|
||
|
Thomas
R. McDaniel
|
||||
|
*
|
Director
|
February
26, 2008
|
||
|
Patrick
Wood
|
*By: /s/
DENNIS V. ARRIOLA
Dennis V. Arriola
Power
of Attorney
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
||
|
10.11^*
|
Form
of Employment Agreement for Executive Officers, including Messrs. Werner,
Arriola, Hernandez, Dinwoodie, Ledesma, Wenger, Shugar, Neese, Richards
and Swanson.
|
||
|
10.20*
|
Fifth
Amendment to Lease, dated October 1, 2008, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
||
|
10.38†*
|
Facility
Agreement, dated December 18, 2008, by and between SunPower Malaysia
Manufacturing Sdn. Bhd. and the Government of Malaysia.
|
||
|
10.39†*
|
Debenture,
dated December 18, 2008, by and between SunPower Malaysia Manufacturing
Sdn. Bhd. and the Government of Malaysia.
|
||
|
10.40†*
|
Deed
of Assignment, dated December 18, 2008, by and between SunPower Malaysia
Manufacturing Sdn. Bhd. and the Government of Malaysia.
|
||
|
10.57*
|
Amendment
to Turnkey, Engineering, Procurement and Construction Agreement, dated
October 7, 2008, by and between SunPower Corporation, Systems and Florida
Power & Light Company.
|
||
|
10.58†*
|
Amendment
Two to Turnkey, Engineering, Procurement and Construction Agreement, dated
November 21, 2008, by and between SunPower Corporation, Systems and
Florida Power & Light Company.
|
||
|
10.59†*
|
Photovoltaic
Equipment Master Supply Agreement, dated November 4, 2008, by and between
SunPower Italia S.r.l. and Ecoware S.p.A.
|
||
|
10.60†*
|
Photovoltaic
Equipment Master Supply Agreement, dated November 21, 2008, by and between
SunPower GmbH and City Solar Kraftwerke AG.
|
||
|
21.1*
|
List
of Subsidiaries.
|
||
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
24.1*
|
Power
of Attorney.
|
||
|
31.1*
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
||
|
31.2*
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
||
|
32.1*
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
||
Exhibits
marked with a carrot (^) are management compensatory
arrangements.
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.