form10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
 
FORM 10-Q
_____________________
 
x
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 28, 2008
 
 
 
OR
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission file number 001-34166

SunPower Corporation
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
94-3008969
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

3939 North First Street, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)

(408) 240-5500
(Registrant’s Telephone Number, Including Area Code)
_____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x
Accelerated Filer  ¨
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The total number of outstanding shares of the registrant’s class A common stock as of October 31, 2008 was 43,751,699.
The total number of outstanding shares of the registrant’s class B common stock as of October 31, 2008 was 42,033,287.
 
 
1
 
 
SunPower Corporation

INDEX TO FORM 10-Q

 
 
Page
3
 
 
 
Item 1.
3
 
 
 
 
3
 
  
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
Item 2.
33
 
 
 
Item 3.
51
 
 
 
Item 4.
53
 
 
 
54
 
    
 
Item 1.
54
 
    
 
Item 1A.
54
 
    
 
Item 2.
88
 
    
 
Item 4.
88
 
    
 
Item 6.
89
 
    
 
90
 
  
 
92

2

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

SunPower Corporation
 
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)

 
 
September 28,
2008
 
 
December 30,
2007
 
Assets
 
  
 
 
  
 
Current assets:
 
  
 
 
  
 
Cash and cash equivalents
 
$
256,616
 
 
$
285,214
 
Restricted cash, current portion
 
 
47,983
 
 
 
—
 
Short-term investments
 
 
38,982
 
 
 
105,453
 
Accounts receivable, net
 
 
193,822
 
 
 
138,250
 
Costs and estimated earnings in excess of billings
 
 
56,717
 
 
 
39,136
 
Inventories
 
 
190,487
 
 
 
140,504
 
Deferred project costs
 
 
12,031
 
 
 
8,316
 
Advances to suppliers, current portion
 
 
60,082
 
 
 
52,277
 
Prepaid expenses and other current assets
 
 
62,604
 
 
 
33,110
 
Total current assets
 
 
919,324
 
 
 
802,260
 
Restricted cash, net of current portion
 
 
62,057
 
 
 
67,887
 
Long-term investments
 
 
25,017
 
 
 
29,050
 
Property, plant and equipment, net
 
 
535,945
 
 
 
377,994
 
Goodwill
 
 
196,378
 
 
 
184,684
 
Intangible assets, net
 
 
44,263
 
 
 
50,946
 
Advances to suppliers, net of current portion
 
 
84,759
 
 
 
108,943
 
Other long-term assets
 
 
59,333
 
 
 
31,974
 
Total assets
 
$
1,927,076
 
 
$
1,653,738
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
237,880
 
 
$
119,869
 
Accounts payable to Cypress
 
 
17,839
 
 
 
4,854
 
Accrued liabilities
 
 
92,845
 
 
 
79,434
 
Billings in excess of costs and estimated earnings
 
 
9,640
 
 
 
69,900
 
Customer advances, current portion
 
 
19,941
 
 
 
9,250
 
Convertible debt
 
 
200,000
 
 
 
425,000
 
Total current liabilities
 
 
578,145
 
 
 
708,307
 
Convertible debt
 
 
225,000
 
 
 
—
 
Deferred tax liability
 
 
9,285
 
 
 
6,213
 
Customer advances, net of current portion
 
 
96,631
 
 
 
60,153
 
Other long-term liabilities                                                                                     
 
 
20,956
 
 
 
14,975
 
Total liabilities
 
 
930,017
 
 
 
789,648
 
Commitments and Contingencies (Note 8)
 
 
  
 
 
 
 
 
Stockholders’ Equity:
 
 
  
 
 
 
 
 
Preferred stock, $0.001 par value, 10,042,490 shares authorized; none issued and outstanding
 
 
—
 
 
 
—
 
Common stock, $0.001 par value, 375,000,000 shares authorized: 43,916,940 and 40,269,719 shares of class A common stock issued; 43,734,532 and 40,176,957 shares of class A common stock outstanding; 42,033,287 and 44,533,287 shares of class B common stock issued and outstanding, at September 28, 2008 and December 30, 2007, respectively
 
 
86
 
 
 
85
 
Additional paid-in capital
 
 
960,461
 
 
 
883,033
 
Accumulated other comprehensive income
 
 
4,411
 
 
 
5,762
 
Accumulated earnings (deficit)
 
 
39,929
 
 
 
(22,815
)
 
 
 
1,004,887
 
 
 
866,065
 
Less: shares of class A common stock held in treasury, at cost; 182,408 and 112,762 shares at September 28, 2008 and December 30, 2007, respectively
 
 
(7,828
)
 
 
(1,975
)
Total stockholders’ equity
 
 
997,059
 
 
 
864,090
 
Total liabilities and stockholders’ equity
 
$
1,927,076
 
 
$
1,653,738
  

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SunPower Corporation
 
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)

   
Three Months Ended
    
Nine Months Ended
  
   
September 28,
2008
    
September 30,
2007
    
September 28,
2008
    
September 30,
2007
  
Revenue:
                        
Systems
  
$
193,330
    
$
157,734
    
$
642,774
    
$
340,266
  
Components
    
184,170
      
76,600
      
391,178
      
210,181
  
Total revenue
    
377,500
      
234,334
      
1,033,952
      
550,447
  
Costs and expenses:
                                
Cost of systems revenue
    
158,730
      
135,111
      
511,080
      
289,095
  
Cost of components revenue
    
113,149
      
60,818
      
270,901
      
160,730
  
Research and development
    
6,049
      
3,902
      
15,504
      
9,659
  
Sales, general and administrative
    
46,075
      
27,708
      
123,141
      
76,188
  
Purchased in-process research and development
    
—
      
—
      
—
      
9,575
  
Impairment of acquisition-related intangibles
    
—
      
—
      
—
      
14,068
  
Total costs and expenses
    
324,003
      
227,539
      
920,626
      
559,315
  
Operating income (loss)
    
53,497
      
6,795
      
113,326
      
(8,868
)
Other income (expense):
                                
Interest income
    
2,650
      
4,609
      
9,086
      
8,789
  
Interest expense
    
(1,411
)
    
(1,372
)
    
(4,286
)
    
(3,576
)
Other, net
    
(3,560
)
    
(205
)
    
(5,513
)
    
(448
)
Other income (expense), net
    
(2,321
)
    
3,032
      
(713
)
    
4,765
  
Income (loss) before income taxes
    
51,176
      
9,827
      
112,613
      
(4,103
)
Income tax provision (benefit)
    
29,797
      
1,396
      
49,869
      
(8,429
)
Net income
  
$
21,379
    
$
8,431
    
$
62,744
    
$
4,326
  
Net income per share:
                                
Basic
  
$
0.27
    
$
0.11
    
$
0.79
    
$
0.06
  
Diluted
  
$
0.25
    
$
0.10
    
$
0.75
    
$
0.05
  
Weighted-average shares:
                                
Basic
    
80,465
      
77,693
      
79,614
      
75,516
  
Diluted
    
84,488
      
82,610
      
84,061
      
80,526
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4
 
SunPower Corporation
 
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

   
Nine Months Ended
  
   
September 28,
2008
    
September 30,
2007
Note 1
  
Cash flows from operating activities:
              
Net income
  
$
62,744
    
$
4,326
  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Stock-based compensation
    
52,026
      
37,197
  
Depreciation
    
35,595
      
17,727
  
Amortization of intangible assets
    
12,552
      
21,408
  
Impairment of acquisition-related intangibles
    
—
      
14,068
  
Purchased in-process research and development
    
—
      
9,575
  
Impairment of long-lived assets
    
2,203
      
—
  
Impairment of investments
    
933
      
—
  
Amortization of debt issuance costs
    
972
      
999
  
Share in loss (earnings) of joint venture
    
(4,006
)
    
214
  
Excess tax benefits from stock-based award activity
    
(33,899
)
    
—
  
Deferred income taxes and other tax liabilities
    
48,333
      
(10,532
)
Changes in operating assets and liabilities, net of effect of acquisitions:
                
Accounts receivable
    
(55,324
)
    
10,347
  
Costs and estimated earnings in excess of billings
    
(17,700
)
    
(69,766
)
Inventories
    
(44,568
)
    
(48,028
)
Prepaid expenses and other assets
    
(29,636
)
    
(8,276
)
Deferred project costs
    
(3,733
)
    
14,637
  
Advances to suppliers
    
19,102
      
(33,560
)
Accounts payable and other accrued liabilities
    
63,528
      
1,933
  
Accounts payable to Cypress
    
12,985
      
(1,029
)
Billings in excess of costs and estimated earnings
    
(60,064
)
    
(17,490
)
Customer advances
    
45,884
      
29,803
  
Net cash provided by (used in) operating activities
    
107,927
      
(26,447
)
Cash flows from investing activities:
                
Increase in restricted cash
    
(42,153
)
    
(24,492
)
Purchases of property, plant and equipment
    
(150,302
)
    
(154,590
)
Purchases of available-for-sale securities
    
(65,748
)
    
(58,570
)
Proceeds from sales or maturities of available-for-sale securities
    
133,948
      
16,496
  
Cash paid for acquisitions, net of cash acquired
    
(18,311
)
    
(98,645
)
Cash paid for investments in joint ventures and other private companies
    
(24,625
)
    
—
  
Net cash used in investing activities
    
(167,191
)
    
(319,801
)
Cash flows from financing activities:
                
Proceeds from exercises of stock options
    
3,786
      
6,868
  
Excess tax benefits from stock-based award activity
    
33,899
      
—
  
Purchases of stock for tax withholding obligations on vested restricted stock
    
(5,853
)
    
—
  
Proceeds from issuance of common stock, net
    
—
      
167,379
  
Proceeds from issuance of convertible debt
    
—
      
425,000
  
Convertible debt issuance costs
    
—
      
(10,942
)
Principal payments on line of credit and notes payable
    
—
      
(3,563
)
Net cash provided by financing activities
    
31,832
      
584,742
  
Effect of exchange rate changes on cash and cash equivalents
    
(1,166
)
    
3,087
  
Net increase (decrease) in cash and cash equivalents
    
(28,598
)
    
241,581
  
Cash and cash equivalents at beginning of period
    
285,214
      
165,596
  
Cash and cash equivalents at end of period
  
$
256,616
    
$
407,177
  
 
 
 
 
 
 
 
 
 
Non-cash transactions:
                
Additions to property, plant and equipment acquired under accounts payable and other accrued liabilities
  
$
46,780
    
$
7,890
  
Change in goodwill relating to adjustments to acquired net assets
    
231
      
1,798
  
Issuance of common stock for purchase acquisition
    
3,054
      
111,266
  
Stock options assumed in relation to acquisition
    
—
      
21,280
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5
 
SunPower Corporation
 
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The Company
 
SunPower Corporation (together with its subsidiaries, the “Company” or “SunPower”) was originally incorporated in the State of California on April 24, 1985. In October 1988, the Company organized as a business venture to commercialize high-efficiency solar cell technologies. The Company designs, manufactures and markets high-performance solar electric power technologies. The Company’s solar cells and solar panels are manufactured using proprietary processes and technologies based on more than 15 years of research and development. The Company’s solar power products are sold through its components and systems business segments.

On November 10, 2005, the Company reincorporated in Delaware and filed an amendment to its certificate of incorporation to effect a 1-for-2 reverse stock split of the Company’s outstanding and authorized shares of common stock. All share and per share figures presented herein have been adjusted to reflect the reverse stock split.

In November 2005, the Company raised net proceeds of $145.6 million in an initial public offering (the “IPO”) of 8.8 million shares of class A common stock at a price of $18.00 per share. In June 2006, the Company completed a follow-on public offering of 7.0 million shares of its class A common stock, at a per share price of $29.50, and received net proceeds of $197.4 million. In July 2007, the Company completed a follow-on public offering of 2.7 million shares of its class A common stock, at a discounted per share price of $64.50, and received net proceeds of $167.4 million.
 
In February 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures to Lehman Brothers Inc. (“Lehman Brothers”) and lent approximately 2.9 million shares of its class A common stock to Lehman Brothers International (Europe) Limited (“LBIE”). Net proceeds from the issuance of senior convertible debentures in February 2007 were $194.0 million. The Company did not receive any proceeds from the approximately 2.9 million loaned shares of its class A common stock, but received a nominal lending fee. On September 15, 2008, Lehman Brothers Holding Inc. (“Lehman”), filed a petition for protection under Chapter 11 of the U.S. bankruptcy code, and LBIE commenced administration proceedings (analogous to bankruptcy) in the United Kingdom (see Note 10). In July 2007, the Company issued $225.0 million in principal amount of its 0.75% senior convertible debentures to Credit Suisse Securities (USA) LLC (“Credit Suisse”) and lent approximately 1.8 million shares of its class A common stock to Credit Suisse International (“CSI”). Net proceeds from the issuance of senior convertible debentures in July 2007 were $220.1 million. The Company did not receive any proceeds from the approximately 1.8 million loaned shares of class A common stock, but received a nominal lending fee (see Note 10).
 
In January 2007, the Company completed the acquisition of PowerLight Corporation (“PowerLight”), a privately-held company which developed, engineered, manufactured and delivered large-scale solar power systems for residential, commercial, government and utility customers worldwide. These activities are now performed by the Company’s systems business segment. As a result of the acquisition, PowerLight became an indirect wholly-owned subsidiary of the Company. In June 2007, the Company changed PowerLight’s name to SunPower Corporation, Systems (“SP Systems”), to capitalize on SunPower’s name recognition.
 
Cypress Semiconductor Corporation (“Cypress”) made a significant investment in the Company in 2002. On November 9, 2004, Cypress completed a reverse triangular merger with the Company in which all of the outstanding minority equity interest of SunPower was retired, effectively giving Cypress 100% ownership of all of the Company’s then outstanding shares of capital stock but leaving its unexercised warrants and options outstanding. After completion of the Company’s IPO in November 2005, Cypress held, in the aggregate, approximately 52.0 million shares of class B common stock. On May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5 million shares and 2.5 million shares, respectively, of the Company’s class B common stock in offerings pursuant to Rule 144 of the Securities Act. Such shares converted to 10.0 million shares of class A common stock upon the sale. The Company was a majority-owned subsidiary of Cypress through the third quarter ended September 28, 2008. As of September 28, 2008, Cypress owned approximately 42.0 million shares of the Company’s class B common stock, which represented approximately 50.1% of the total outstanding shares of the Company’s common stock, or approximately 47.4% of such shares on a fully diluted basis after taking into account outstanding stock options (or 46.5% of such shares on a fully diluted basis after taking into account outstanding stock options and approximately 1.8 million shares lent to an affiliate of Credit Suisse), and 88.5% of the voting power of the Company’s total outstanding common stock. After the close of trading on the New York Stock Exchange on September 29, 2008, Cypress completed a spin-off of all of its shares of the Company’s class B common stock, in the form of a pro rata dividend to the holders of record as of September 17, 2008 of Cypress common stock. As a result, the Company’s class B common stock now trades publicly and is listed on the Nasdaq Global Select Market, along with the Company’s class A common stock.

6

The condensed consolidated financial statements include purchases of goods and services from Cypress, including wafers, employee benefits and other Cypress corporate services and infrastructure costs. The expenses allocations have been determined based on a method that Cypress and the Company considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Company. See Note 2 for additional information on the transactions with Cypress.

The Company is subject to a number of risks and uncertainties including, but not limited to, an industry-wide shortage of polysilicon, potential downward pressure on product pricing as new polysilicon manufacturers begin operating and the worldwide supply of solar cells and panels increases, the possible reduction or elimination of government and economic incentives that encourage industry growth, the challenges of achieving its goal to reduce costs of installed solar systems by 50% by 2012 to maintain competitiveness, the continued availability of third-party financing for the Company’s customers, difficulties in maintaining or increasing the Company’s growth rate and managing such growth, and accurately predicting warranty claims.
 
Summary of Significant Accounting Policies
 
Fiscal Years
 
The Company reports on a fiscal-year basis and ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Both fiscal 2008 and 2007 consist of 52 weeks. The third quarter of fiscal 2008 ended on September 28, 2008 and the third quarter of fiscal 2007 ended on September 30, 2007.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end Condensed Consolidated Balance Sheets data was derived from audited financial statements. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2007.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these financial statements include the “percentage-of-completion” revenue recognition method for construction projects, allowances for doubtful accounts receivable and sales returns, inventory write-downs, estimates for future cash flows and economic useful lives of property, plant and equipment, asset impairments, valuation of auction rate securities, certain money market funds, certain accrued liabilities including accrued warranty reserves and income taxes and tax valuation allowances. Actual results could differ from those estimates.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of September 28, 2008 and its results of operations for the three and nine months ended September 28, 2008 and September 30, 2007 and its cash flows for the nine months ended September 28, 2008 and September 30, 2007. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.
 
Recent Accounting Pronouncements
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141(R) will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and will be adopted by the Company for any purchase business combinations consummated subsequent to December 28, 2008.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its financial position and results of operations.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 deferred the effective date of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. With the exception of investments and foreign currency derivatives held, this deferral makes SFAS No. 157 effective for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 157 on measurement of fair value of its nonfinancial assets, including goodwill, and nonfinancial liabilities.

7

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS No. 161”), which expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on its financial position, results of operations and disclosures.

In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FSP 142-3 on its financial position, results of operations and disclosures.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which identifies the sources of accounting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. This Statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company currently adheres to the hierarchy of U.S. GAAP as presented in SFAS No. 162 and the adoption of SFAS No. 162 during the three months ended September 28, 2008 did not have a material impact on its financial position, results of operations and disclosures.

In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 significantly impacts the accounting for instruments commonly referred to as Instruments B, Instruments C and Instruments X from Emerging Issue Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion” (“EITF 90-19”), and any other convertible debt instruments that allow settlement in any combination of cash and shares at the issuer’s option. The new guidance requires the issuer to separately account for the liability and equity components of the instrument in a manner that reflects interest expense equal to the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years and interim periods beginning after December 15, 2008, and retrospective application will be required for all periods presented. The new guidance may have a significant impact on the Company’s outstanding convertible debt balance of $425.0 million, potentially resulting in significantly higher non-cash interest expense on its convertible debt (see Note 10). The Company is currently evaluating the potential impact of the new guidance on its results of operations and financial condition.

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”), which demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 is applicable to the valuation of auction rate securities held by the Company for which there was no active market as of September 28, 2008. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued (see Note 5). The adoption of FSP 157-3 during the three months ended September 28, 2008 did not have a material impact on the Company’s consolidated results of operations or financial condition.

Revision of Statement of Cash Flow Presentation Related to Purchases of Property, Plant and Equipment
 
The Company has changed its Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 to exclude the impact of purchases of property, plant and equipment that remain unpaid and as such are included in “accounts payable and other accrued liabilities” at the end of the reporting period. Historically, changes in “accounts payable and other accrued liabilities” related to such purchases were included in cash flows from operations, while the investing activity caption "Purchase of property, plant and equipment" included these purchases. As these unpaid purchases do not reflect cash transactions, the Company has revised its cash flow presentations to exclude them. The correction resulted in an increase to the previously reported amount of cash used for operating activities of $7.9 million in the nine months ended September 30, 2007, resulting from a reduction in the amount of cash provided from the change in accounts payable and other accrued liabilities in that period. The corresponding correction in the investing section was to decrease cash used for investing activities by $7.9 million in the nine months ended September 30, 2007, as a result of the reduction in the amount of cash used for purchases of property, plant and equipment in that period. These corrections had no impact on previously reported results of operations, working capital or stockholders’ equity of the Company. The Company concluded that these corrections were not material to any of its previously issued condensed consolidated financial statements, based on SEC Staff Accounting Bulletin No. 99-Materiality.

8

Note 2. TRANSACTIONS WITH CYPRESS
 
Purchases of Imaging and Infrared Detector Products from Cypress
 
The Company purchased fabricated semiconductor wafers from Cypress at intercompany prices consistent with Cypress’s internal transfer pricing methodology. In December 2007, Cypress announced the planned closure of its Texas wafer fabrication facility that manufactured the Company’s imaging and infrared detector products. The planned closure is expected to be completed in the fourth quarter of fiscal 2008. The Company evaluated its alternatives relating to the future plans for this business and decided to wind-down its activities related to the imaging detector product line in the first quarter of fiscal 2008. Accordingly, in the three months ended March 30, 2008, cost of revenue included a $2.2 million impairment charge to long-lived assets primarily related to manufacturing equipment located in the Texas wafer fabrication facility. The Company did not purchase wafers from Cypress in the second and third quarters of fiscal 2008. Wafer purchases totaled $0.6 million for the nine months ended September 28, 2008 and $0.7 million and $3.8 million for the three and nine months ended September 30, 2007, respectively.

Administrative Services Provided by Cypress
 
Cypress seconded employees and consultants to the Company for different time periods for which the Company paid their fully-burdened compensation. In addition, Cypress personnel rendered services to the Company to assist with administrative functions such as employee benefits and other Cypress corporate services and infrastructure. Cypress billed the Company for a portion of the Cypress employees’ fully-burdened compensation. In the case of the Philippines subsidiary, which entered into a services agreement for such secondments and other consulting services in January 2005, the Company paid the fully burdened compensation plus 10%. The amounts that the Company has recorded as general and administrative expenses in the accompanying statements of operations for these services was approximately $0.7 million and $2.8 million for the three and nine months ended September 28, 2008, respectively, and $0.5 million and $1.2 million for the three and nine months ended September 30, 2007, respectively.

Leased Facility in the Philippines
 
In 2003, the Company and Cypress reached an understanding that the Company would build out and occupy a building owned by Cypress for its solar cell manufacturing facility in the Philippines. The Company entered into a lease agreement for this facility and a sublease for the land under which the Company paid Cypress at a rate equal to the cost to Cypress for that facility (including taxes, insurance, repairs and improvements). Under the lease agreement, the Company had the right to purchase the facility and assume the lease for the land from Cypress at any time at Cypress’s original purchase price of approximately $8.0 million, plus interest computed on a variable index starting on the date of purchase by Cypress until the sale to the Company, unless such purchase option was exercised after a change of control of the Company, in which case the purchase price would be at a market rate, as reasonably determined by Cypress. In May 2008, the Company exercised its right to purchase the facility from Cypress and assumed the lease for the land from an unaffiliated third party for a total purchase price of $9.5 million. The lease for the land expires in May 2048 and is renewable for an additional 25 years. Rent expense paid to Cypress for this building and land was approximately zero and $0.1 million for the three and nine months ended September 28, 2008, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2007, respectively.

Leased Headquarters Facility in San Jose, California
 
In May 2006, the Company entered into a lease agreement for its 43,732 square foot headquarters, which is located in a building owned by Cypress in San Jose, California, for $6.0 million over the five-year term of the lease. In August 2008, the Company amended the lease agreement, increasing the rentable square footage and the total lease obligations to 55,594 and $7.2 million, respectively, over the five-year term of the lease. In the event Cypress decides to sell the building, the Company has the right of first refusal to purchase the building at a fair market price which will be based on comparable sales in the area. Rent expense paid to Cypress for this facility was approximately $0.4 million and $1.1 million for the three and nine months ended September 28, 2008, respectively, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2007, respectively.
   
Employee Matters Agreement
 
In October 2005, the Company entered into an employee matters agreement with Cypress to allocate assets, liabilities and responsibilities relating to its current and former U.S. and international employees and its participation in the employee benefits plans that Cypress sponsored and maintained. In July 2008, the Company transferred all accounts in the Cypress 401(k) Plan held by the Company’s employees to its recently established SunPower 401(k) Savings Plan. In September 2008, all of the Company’s eligible employees began participating in SunPower’s own health and welfare plans and no longer participate in the Cypress health and welfare plans. In connection with Cypress’ spin-off of its shares of the Company’s class B common stock, the Company and Cypress agreed to terminate the employee matters agreement.
 
9
 
Indemnification and Insurance Matters Agreement
 
The Company will indemnify Cypress and its affiliates, agents, successors and assigns from all liabilities arising from environmental conditions: existing on, under, about or in the vicinity of any of the Company’s facilities, or arising out of operations occurring at any of the Company’s facilities, including its California facilities, whether prior to or after Cypress’s spin-off of the Company’s class B common stock held by Cypress; existing on, under, about or in the vicinity of the Philippines facility which the Company occupies, or arising out of operations occurring at such facility, whether prior to or after the separation, to the extent that those liabilities were caused by the Company; arising out of hazardous materials found on, under or about any landfill, waste, storage, transfer or recycling site and resulting from hazardous materials stored, treated, recycled, disposed or otherwise handled by any of the Company’s operations or the Company’s California and Philippines facilities prior to the separation; and arising out of the construction activity conducted by or on behalf of us at Cypress’s Texas facility.
 
The indemnification and insurance matters agreement also contains provisions governing the Company’s insurance coverage, which was under the Cypress insurance policies. As of September 29, 2008, the Company has obtained its own separate policies for the coverage previously provided under the indemnification and insurance matters agreement.
 
Tax Sharing Agreement
 
The Company has entered into a tax sharing agreement with Cypress providing for each of the party’s obligations concerning various tax liabilities. The tax sharing agreement is structured such that Cypress will pay all federal, state, local and foreign taxes that are calculated on a consolidated or combined basis (while being a member of Cypress’s consolidated or combined group pursuant to federal, state, local and foreign tax law). The Company’s portion of such tax liability or benefit will be determined based upon its separate return tax liability as defined under the tax sharing agreement. Such liability or benefit will be based on a pro forma calculation as if the Company were filing a separate income tax return in each jurisdiction, rather than on a combined or consolidated basis with Cypress subject to adjustments as set forth in the tax sharing agreement.
 
On June 6, 2006, the Company ceased to be a member of Cypress’s consolidated group for federal income tax purposes and certain state income tax purposes. On September 29, 2008, the Company ceased to be a member of Cypress’s combined group for all state income tax purposes. To the extent that the Company becomes entitled to utilize on the Company’s separate tax returns portions of those credit or loss carryforwards existing as of such date, the Company will distribute to Cypress the tax effect, estimated to be 40% for federal income tax purposes, of the amount of such tax loss carryforwards so utilized, and the amount of any credit carryforwards so utilized. The Company will distribute these amounts to Cypress in cash or in the Company’s shares, at the Company’s option. As of December 30, 2007, the Company has $44.0 million of federal net operating loss carryforwards and approximately $73.5 million of California net operating loss carryforwards meaning that such potential future payments to Cypress, which would be made over a period of several years, would therefore aggregate approximately $19.1 million.
 
The majority of these net operating loss carryforwards were created by employee stock transactions. Because there is uncertainty as to the realizability of these loss carryforwards, the portion created by employee stock transactions are not reflected on the Company’s Condensed Consolidated Balance Sheets.

Upon completion of its follow-on public offering of common stock in June 2006, the Company was no longer considered to be a member of Cypress’s consolidated group for federal income tax purposes. Upon completion of the spin-off on September 29, 2008, the Company is no longer considered to be a member of Cypress’s combined group for state income tax purposes. Accordingly, the Company will be subject to the obligations payable to Cypress for any federal income tax credit or loss carryforwards utilized in its federal tax returns in subsequent periods, as explained in the preceding paragraph.
 
The Company will continue to be jointly and severally liable for any tax liability as governed under federal, state and local law during all periods in which it is deemed to be a member of the Cypress consolidated or combined group. Accordingly, although the tax sharing agreement allocates tax liabilities between Cypress and all its consolidated subsidiaries, for any period in which the Company is included in Cypress’s consolidated group, the Company could be liable in the event that any federal tax liability was incurred, but not discharged, by any other member of the group.
 
Subject to certain caveats, Cypress has obtained a ruling from the Internal Revenue Service (“IRS”) to the effect that the distribution by Cypress of the Company’s class B common stock to Cypress stockholders qualified as a tax-free distribution under Section 355 of the Internal Revenue Code (the “Code”). Despite such ruling, the distribution may nonetheless be taxable to Cypress under Section 355(e) of the Code if 50% or more of the Company’s voting power or economic value is acquired as part of a plan or series of related transactions that includes the distribution of the Company’s stock. The tax sharing agreement includes the Company’s obligation to indemnify Cypress for any liability incurred as a result of issuances or dispositions of the Company’s stock after the distribution, other than liability attributable to certain dispositions of the Company’s stock by Cypress, that cause Cypress’s distribution of shares of the Company’s stock to its stockholders to be taxable to Cypress under Section 355(e) of the Code.
 
The tax sharing agreement further provides for cooperation with respect to tax matters, the exchange of information and the retention of records which may affect the income tax liability of either party. Disputes arising between Cypress and the Company relating to matters covered by the tax sharing agreement are subject to resolution through specific dispute resolution provisions contained in the agreement.

10

In connection with Cypress’ spin-off of its shares of the Company’s class B common stock, the Company and Cypress, on August 12, 2008, entered into an Amendment No. 1 to Tax Sharing Agreement (the “Amended Tax Sharing Agreement”) to address certain transactions that may affect the tax treatment of the spin-off and certain other matters.

Under the Amended Tax Sharing Agreement, the Company is required to provide notice to Cypress of certain transactions that could give rise to the Company’s indemnification obligation relating to taxes resulting from the application of Section 355(e) of the Code or similar provision of other applicable law to the spin-off as a result of one or more acquisitions (within the meaning of Section 355(e)) of the Company’s stock after the spin-off. An acquisition for these purposes includes any such acquisition attributable to a conversion of any or all of the Company’s class B common stock to class A common stock or any similar recapitalization transaction or series of related transactions (a “Recapitalization”). The Company is not required to indemnify Cypress for any taxes which would result solely from (A) issuances and dispositions of the Company’s stock prior to the spin-off and (B) any acquisition of the Company’s stock by Cypress after the spin-off.

Under the Amended Tax Sharing Agreement, the Company also agreed that, for a period of 25 months following the spin-off, it will not (i) effect a Recapitalization or (ii) enter into or facilitate any other transaction resulting in an acquisition (within the meaning of Section 355(e) of the Code) of the Company’s stock without first obtaining the written consent of Cypress; provided, the Company is not required to obtain Cypress’s consent unless such transaction (either alone or when taken together with one or more other transactions entered into or facilitated by the Company consummated after August 4, 2008 and during the 25-month period following the spin-off) would involve the acquisition for purposes of Section 355(e) of the Code after August 4, 2008 of more than 25% of the Company’s outstanding shares of common stock. In addition, the requirement to obtain Cypress’s consent does not apply to (A) any acquisition of the Company’s stock that will qualify under Treasury Regulation Section 1.355-7(d)(8) in connection with the performance of services, (B) any acquisition of the Company’s stock for which it furnishes to Cypress prior to such acquisition an opinion of counsel and supporting documentation, in form and substance reasonably satisfactory to Cypress (a “Tax Opinion”), that such acquisition will qualify under Treasury Regulation Section 1.355-7(d)(9), (C) an acquisition of the Company’s stock (other than involving a public offering) for which the Company furnishes to Cypress prior to such acquisition a Tax Opinion to the effect that such acquisition will qualify under the so-called “super safe harbor” contained in Treasury Regulation Section 1.355-7(b)(2) or (D) the adoption by the Company of a standard stockholder rights plan. The Company further agreed that it will not (i) effect a Recapitalization during the 36 month period following the spin-off without first obtaining a Tax Opinion to the effect that such Recapitalization (either alone or when taken together with any other transaction or transactions) will not cause the spin-off to become taxable under Section 355(e), or (ii) seek any private ruling, including any supplemental private ruling, from the IRS with regard to the spin-off, or any transaction having any bearing on the tax treatment of the spin-off, without the prior written consent of Cypress.
 
Note 3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS

Business Combinations

PowerLight

In January 2007, the Company completed the acquisition of PowerLight (subsequently renamed SunPower Corporation, Systems). Of the total consideration issued for the acquisition, approximately $23.7 million in cash and approximately 0.7 million shares of its class A common stock, with a total aggregate value of $118.1 million as of December 30, 2007, were held in escrow as security for the indemnification obligations of certain former PowerLight stockholders.

In January 2008, following the first anniversary of the acquisition date, the Company authorized the release of approximately one-half of the original escrow amount, leaving in escrow approximately $12.9 million in cash and approximately 0.4 million shares of its class A common stock, with a total aggregate value of $38.6 million as of September 28, 2008. The Company’s rights to recover damages under several provisions of the acquisition agreement also expired on the first anniversary of the acquisition date. As a result, the Company is now entitled to recover only limited types of losses, and any recovery will be limited to the amount available in the escrow fund at the time of a claim. The remaining amount in the escrow fund will be progressively reduced to zero on each anniversary of the acquisition date over a period of four years.

Solar Solutions

In January 2008, the Company completed the acquisition of Solar Solutions, a solar systems integration and product distribution company based in Italy. Solar Solutions was a division of Combigas S.r.l., a petroleum products trading firm. Active since 2002, Solar Solutions distributes components such as solar panels and inverters, and offers turnkey solar power systems and standard system kits via a network of dealers throughout Italy. Prior to the acquisition, Solar Solutions had been a customer of the Company since fiscal 2006. As a result of the acquisition, Solar Solutions became a wholly-owned subsidiary of the Company. In connection with the acquisition, the Company changed Solar Solutions’ name to SunPower Italia S.r.l. (“SunPower Italia”). The acquisition of SunPower Italia was not material to the Company’s financial position or results of operations.

11

Solar Sales Pty. Ltd. (“Solar Sales”)

In July 2008, the Company completed the acquisition of Solar Sales, a solar systems integration and product distribution company based in Australia. Solar Sales distributes components such as solar panels and inverters via a national network of dealers throughout Australia, and designs, builds and commissions large-scale commercial systems. Prior to the acquisition, Solar Sales had been a customer of the Company since fiscal 2005. As a result of the acquisition, Solar Sales became a wholly-owned subsidiary of the Company. In connection with the acquisition, the Company changed Solar Sales’ name to SunPower Corporation Australia Pty. Ltd. (“SunPower Australia”). The acquisition of SunPower Australia was not material to the Company’s financial position or results of operations.

Goodwill

The following table presents the changes in the carrying amount of goodwill under the Company's reportable business segments:

(In thousands)
  
Components
Business Segment
    
Systems
Business Segment
    
Total
  
As of December 30, 2007
  
$
2,883
    
$
181,801
    
$
184,684
  
Goodwill acquired
    
11,688
      
—
      
11,688
  
Adjustments
    
6
      
—
      
6
  
As of September 28, 2008
  
$
14,577
    
$
181,801
    
$
196,378
  
 
Changes to goodwill during the nine months ended September 28, 2008 resulted from the acquisitions of SunPower Italia and SunPower Australia. Approximately $11.7 million had been allocated to goodwill within the components segment, which represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets of SunPower Italia and SunPower Australia. SunPower Italia is a Euro functional currency subsidiary and SunPower Australia is an Australian dollar functional currency subsidiary. Therefore, the Company records a translation adjustment for the revaluation of the subsidiary’s goodwill and intangible assets into U.S. dollar. As of September 28, 2008, the cumulative translation adjustment decreased the balance of goodwill by $0.2 million. Also during the nine months ended September 28, 2008, the Company recorded an adjustment to increase goodwill by $0.2 million to adjust the value of acquired investments.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), goodwill will not be amortized but instead will be tested for impairment at least annually, or more frequently if certain indicators are present. The Company conducts its annual impairment test of goodwill as of the Sunday closest to the end of the third calendar quarter of each year. Based on its last impairment test as of September 28, 2008, the Company determined there was no impairment. In the event that management determines that the value of goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made.

Intangible Assets

The following tables present details of the Company's acquired identifiable intangible assets:

(In thousands)
  
Gross
    
Accumulated
Amortization
    
Net
  
As of September 28, 2008
                  
Patents and purchased technology
  
$
51,398
    
$
(28,649
)
  
$
22,749
  
Tradenames
    
2,600
      
(1,463
)
    
1,137
  
Backlog
    
11,787
      
(11,787
)
    
—
  
Customer relationships and other
    
27,993
      
(7,616
)
    
20,377
  
   
$
93,778
    
$
(49,515
)
  
$
44,263
  
 
 
 
 
 
 
 
 
 
 
 
 
 
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
  

12

In connection with the acquisitions of SunPower Italia and SunPower Australia, the Company recorded $6.2 million of intangible assets less $0.4 million of cumulative translation adjustment for acquired intangibles in the nine months ended September 28, 2008. In connection with the acquisition of SP Systems, the Company recorded $79.5 million of intangible assets in the first quarter of fiscal 2007, of which $15.5 million was related to the PowerLight tradename. The determination of the fair value and useful life of the tradename was based on the Company’s strategy of continuing to market its systems products and services under the PowerLight brand. Based on the Company’s change in branding strategy and changing PowerLight’s name to SunPower Corporation, Systems, during the quarter ended July 1, 2007, the Company recognized an impairment charge of $14.1 million, which represented the net book value of the PowerLight tradename.

All of the Company’s acquired identifiable intangible assets are subject to amortization. Aggregate amortization expense for intangible assets totaled $4.2 million and $12.6 million for the three and nine months ended September 28, 2008, respectively, and $6.9 million and $21.4 million for the three and nine months ended September 30, 2007, respectively. As of September 28, 2008, the estimated future amortization expense related to intangible assets is as follows (in thousands):

2008 (remaining three months)
  
$
4,263
  
2009
  
16,476
  
2010
  
14,874
  
2011
  
4,638
  
2012
  
3,907
  
Thereafter
  
105
  
   
$
44,263
  

Note 4. BALANCE SHEET COMPONENTS
 
(In thousands)
  
September 28,
2008
    
December 30,
2007
  
Accounts receivable, net:
                
Accounts receivable, gross
  
$
195,347
    
$
139,991
  
Less: Allowance for doubtful accounts
    
(1,357
)
    
(1,373
)
Less: Allowance for sales returns
    
(168
)
    
(368
)
   
$
193,822
    
$
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
  
$
56,717
    
$
39,136
  
Billings in excess of costs and estimated earnings on contracts in progress
    
(9,640
)
    
(69,900
)
   
$
47,077
    
$
(30,764
)
Contracts in progress:
                
Costs incurred to date
  
$
824,632
    
$
481,340
  
Estimated earnings to date
    
269,290
      
145,643
  
Contract revenue earned to date
    
1,093,922
      
626,983
  
Less: Billings to date, including earned incentive rebates
    
(1,046,845
)
    
(657,747
)
   
$
47,077
    
$
(30,764
)
Inventories:
                
Raw materials(1)
  
$
89,130
    
$
89,604
  
Work-in-process
    
23,860
      
2,027
  
Finished goods
    
77,497
      
48,873
  
   
$
190,487
    
$
140,504
  
(1) In addition to polysilicon and other raw materials for solar cell manufacturing, raw materials includes solar panels purchased from third-party vendors and installation materials for systems projects.
                
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets:
                
VAT receivables, current portion
  
$
17,429
    
$
7,266
  
Deferred tax assets, current portion
    
7,413
      
8,437
  
Other receivables
    
24,794
      
9,946
  
Other prepaid expenses
    
12,968
      
7,461
  
   
$
62,604
    
$
33,110
  

13

(In thousands)
  
September 28,
2008
    
December 30,
2007
  
Property, plant and equipment, net:
                
Land and buildings
  
$
8,923
    
$
7,482
  
Manufacturing equipment
    
301,684
      
194,963
  
Computer equipment
    
22,691
      
12,399
  
Furniture and fixtures
    
4,338
      
2,648
  
Leasehold improvements
    
131,801
      
113,801
  
Construction-in-process (manufacturing facility in the Philippines)
    
150,301
      
99,945
  
     
619,738
      
431,238
  
Less: Accumulated depreciation(2)
    
(83,793
)
    
(53,244
)
   
$
535,945
    
$
377,994
  
(2) Total depreciation expense was $13.6 million and $35.6 million for the three and nine months ended September 28, 2008, respectively, and $6.2 million and $17.7 million for the three and nine months ended September 30, 2007, respectively.
                
 
 
 
 
 
 
 
 
 
Other long-term assets:
                
VAT receivable, net of current portion
  
$
14,274
    
$
24,269
  
Investments in joint ventures
    
18,935
      
5,304
  
Note receivable(3)
    
10,000
      
—
  
Other
    
16,124
      
2,401
  
   
$
59,333
    
$
31,974
  
(3) In June 2008, the Company loaned $10.0 million to a third-party private company pursuant to a three-year interest-bearing note receivable that is convertible into equity at the Company’s option.
                
 
 
 
 
 
 
 
 
 
Accrued liabilities:
                
VAT payables
  
$
15,331
    
$
18,138
  
Employee compensation and employee benefits
    
15,533
      
15,338
  
Income taxes payable
    
20,411
      
11,106
  
Warranty reserves
    
15,359
      
10,502
  
Foreign exchange derivative liability
    
170
      
8,920
  
Other
    
26,041
      
15,430
  
   
$
92,845
    
$
79,434
  

Note 5. INVESTMENTS

On December 31, 2007, the Company adopted SFAS No. 157, which refines the definition of fair value, provides a framework for measuring fair value and expands disclosures about fair value measurements. The Company’s adoption of SFAS No. 157 was limited to its financial assets and financial liabilities, as permitted by FSP 157-2. The Company does not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value in its condensed consolidated financial statements on a recurring basis.

Assets Measured at Fair Value on a Recurring Basis

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The following table presents information about the Company’s available-for-sale securities under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) measured at fair value on a recurring basis as of September 28, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value in accordance with the provisions of SFAS No. 157:

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(In thousands)
  
Quoted Prices in Active
 Markets for Identical
Instruments
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
    
Balance as of
September 28, 2008
  
Asset
                                
Money market funds
  
$
105,304
    
$
—
    
$
25,744
    
$
131,048
  
Corporate securities
    
202,599
      
25,136
      
25,017
      
252,752
  
Total available-for-sale securities
  
$
307,903
    
$
25,136
    
$
50,761
    
$
383,800
  

Available-for-sale securities utilizing Level 3 inputs to determine fair value are comprised of investments in money market funds totaling $25.7 million and auction rate securities held totaling $25.0 million at September 28, 2008. Investments in money market funds consist of the Company’s investments in the Reserve Primary Fund and the Reserve International Liquidity Fund (collectively referred to as the "Reserve Funds"). The net asset value for the Reserve Funds fell below $1.00 because the funds had investments in Lehman, which filed for bankruptcy on September 15, 2008. As a result of this event, the Reserve Funds wrote down their investments in Lehman to zero. The Company has estimated the loss on the Reserve Funds to be approximately $0.9 million based on an evaluation of the fair value of the securities held by the Reserve Funds and the net asset value that was last published by the Reserve Funds before the funds suspended redemptions. The Company recorded an impairment charge of $0.9 million in “Other, net” in its Condensed Consolidated Statements of Operations, thereby establishing a new cost basis for each fund.
 
The Company’s money market fund instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for identical instruments in active markets. However, the Company conducted its fair value assessment of the Reserve Funds using Level 2 and Level 3 inputs. Management has reviewed the Reserve Funds' underlying securities portfolios which are substantially comprised of discount notes, certificates of deposit and commercial paper issued by highly-rated institutions. The Company has used a pricing service to assist in its review of fair value of the underlying portfolios, which estimates fair value of some instruments using proprietary models based on assumptions as to term, maturity dates, rates, credit risk, etc. Normally, the Company would classify such an investment within Level 2 of the fair value hierarchy. However, management also evaluated the fair value of its unit interest in the Reserve Funds itself, considering risk of collection, timing and other factors. These assumptions are inherently subjective and involve significant management judgment. As a result, the Company has classified its holdings in the Reserve Funds within Level 3 of the fair value hierarchy.

    On October 31, 2008, the Company received a distribution of $11.9 million from the Reserve Funds. The Company expects that the remaining distribution of $13.8 million from the Reserve Funds will occur over the remaining twelve months as the investments held in the funds mature. Therefore, the Company has changed the designation of its $13.8 million investment in the Reserve Funds that was not received in the subsequent period from cash and cash equivalents to short-term investments at the new cost basis on the Condensed Consolidated Balance Sheets. This re-designation is included in "purchases of available-for-sale securities" in investing activities in the Company’s accompanying Condensed Consolidated Statements of Cash Flows. While the Company expects to receive substantially all of its current holdings in the Reserve Funds within the next twelve months, it is possible the Company may encounter difficulties in receiving distributions given the current credit market conditions. If market conditions were to deteriorate even further such that the current fair value were not achievable, the Company could realize additional losses in its holdings with the Reserve Funds and distributions could be further delayed.
 
Auction rate securities held are typically over-collateralized and secured by pools of student loans originated under the Federal Family Education Loan Program (“FFELP”) that are guaranteed and insured by the U.S. Department of Education. In addition, all auction rate securities held are rated by one or more of the Nationally Recognized Statistical Rating Organizations (“NRSRO”) as triple-A. Historically, these securities have provided liquidity through a Dutch auction at pre-determined intervals every seven to 49 days. At the end of each reset period, investors can continue to hold the securities or sell the securities at par through an auction process. The “stated” or “contractual” maturities for these securities generally are between 20 to 30 years. Beginning in February 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, resulting from a lack of liquidity, which occurs when sell orders exceed buy orders, and does not necessarily signify a default by the issuer.
 
All auction rate securities invested in at September 28, 2008 have failed to clear at auctions. For failed auctions, the Company continues to earn interest on these investments at the maximum contractual rate as the issuer is obligated under contractual terms to pay penalty rates should auctions fail. Historically, failed auctions have rarely occurred, however, such failures could continue to occur in the future. In the event the Company needs to access these funds, the Company will not be able to do so until a future auction is successful, the issuer redeems the securities, a buyer is found outside of the auction process or the securities mature. Accordingly, auction rate securities at September 28, 2008 and December 30, 2007 that were not sold in a subsequent period totaling $25.0 million and $29.1 million, respectively, are classified as long-term investments on the Condensed Consolidated Balance Sheets, because they are not expected to be used to fund current operations and consistent with the stated contractual maturities of the securities.

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The Company determined that use of a valuation model was the best available technique for measuring the fair value of its auction rate securities. The Company used an income approach valuation model to estimate the price that would be received to sell its securities in an orderly transaction between market participants ("exit price") as of September 28, 2008. The exit price was derived as the weighted average present value of expected cash flows over various periods of illiquidity, using a risk-adjusted discount rate that was based on the credit risk and liquidity risk of the securities. While the valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, the Company determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity. The valuation model also reflected the Company's intention to hold its auction rate securities until they can be liquidated in a market that facilitates orderly transactions. The following key assumptions were used in the valuation model:
 
·           5 years to liquidity;
·           continued receipt of contractual interest which provides a premium spread for failed auctions; and
·           discount rates ranging from 4.8% to 6.2%, which incorporate a spread for both credit and liquidity risk.

Based on these assumptions, the Company estimated that the auction rate securities would be valued at approximately 96% of their stated par value, representing a decline in value of approximately $1.0 million. The following table provides a summary of changes in fair value of the Company’s available-for-sale securities utilizing Level 3 inputs as of September 28, 2008:
 
(In thousands)
  
Money Market
Funds
    
Auction Rate Securities
  
             
Balance at December 31, 2007
   $ —     $ —  
Transfers from Level 1 to Level 3
     26,677       —  
Transfers from Level 2 to Level 3
     —       29,050  
Purchases
     —       10,000  
Sales (1)
     —       (13,000 )
Impairment loss recorded in “Other, net”
     (933 )      —  
Unrealized loss included in “Other comprehensive income”
     —       (1,033 )
Balance at September 28, 2008 (2)
   $ 25,744     $ 25,017  
(1) In the second quarter of fiscal 2008, the Company sold auction rate securities with a carrying value of $12.5 million for their stated par value of $13.0 million to the issuer of the securities outside of the auction process.
                
(2) On October 31, 2008, the Company received a distribution of $11.9 million from the Reserve Funds.                

The following table summarizes unrealized gains and losses by major security type designated as available-for-sale:
 
   
September 28, 2008
    
December 30, 2007
  
         
Unrealized
                
Unrealized
        
(In thousands)
  
Cost
    
Gross
Gains
    
Gross
Losses
    
Fair
Value
    
Cost
    
Gross
Gains
    
Gross
Losses
    
Fair
Value
  
Money market funds
     131,048       —       —       131,048       281,458       —       —       281,458  
Corporate securities
     253,936       15       (1,199 )     252,752       92,395       6       (50 )      92,351  
Commercial paper
     —       —       —       —       78,163       2       (2 )     78,163  
Total available-for-sale securities
   $ 384,984     $ 15     $ (1,199 )   $ 383,800     $ 452,016     $ 8     $ (52 )   $ 451,972  

In accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” the following table summarizes the fair value and gross unrealized losses of the Company’s available-for-sale securities, aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position:
 
   
As of September 28, 2008
  
   
Less than 12 Months
    
12 Months or Greater
    
Total
  
(In thousands)
  
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
  
Corporate securities
  
$
45,112
    
$
(1,199
)
  
$
—
    
$
—
    
$
45,112
    
$
(1,199
)

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As of December 30, 2007
 
 
 
Less than 12 Months
 
 
12 Months or Greater
 
 
Total
 
(In thousands)
 
Fair Value
 
 
Gross Unrealized Losses
 
 
Fair Value
 
 
Gross Unrealized Losses
 
 
Fair Value
 
 
Gross Unrealized Losses
 
Corporate securities
 
$
25,536
 
 
$
(50
)
 
$
—
 
 
$
—
 
 
$
25,536
 
 
$
(50
)
Commercial paper
 
 
24,002
 
 
 
(2
)
 
 
—
 
 
 
—
 
 
 
24,002
 
 
 
(2
)
 
 
$
49,538
 
 
$
(52
)
 
$
—
 
 
$
—
 
 
$
49,538
 
 
$
(52
)
 
As of September 28, 2008 and December 30, 2007, the Company did not have any investments in available-for-sale securities that were in an unrealized loss position for 12 months or greater. Of the $1.2 million gross unrealized losses of the Company’s corporate securities, $1.0 million resulted from the decline in the estimated fair value of auction rate securities primarily due to their lack of liquidity. The decline in fair value for the remaining corporate securities was primarily related to changes in interest rates. The Company has concluded that no other-than-temporary impairment losses occurred in the nine months ended September 28, 2008 in regards to the corporate securities because the lack of liquidity in the market for auction rate securities and changes in interest rates are considered temporary in nature for which the Company has recorded an unrealized loss within comprehensive income, a component of stockholders' equity. The Company has the ability and intent to hold these corporate securities until a recovery of fair value. In addition, the Company evaluated the near-term prospects of the corporate securities in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these corporate securities for a reasonable period of time, the Company did not consider these investments to be other-than-temporarily impaired. If it is determined that the fair value of these corporate securities is other-than-temporarily impaired, the Company would record a loss in its Condensed Consolidated Statements of Operations in the future, which could be material.
 
 The classification and contractual maturities of available-for-sale securities is as follows:
 
(In thousands)
  
September 28,
2008
    
December 30,
2007
  
Included in:
            
Cash equivalents
  
$
209,761
    
$
249,582
  
Short-term restricted cash(1)
    
47,983
      
—
  
Short-term investments
    
38,982
      
105,453
  
Long-term restricted cash(1)
    
62,057
      
67,887
  
Long-term investments
    
25,017
      
29,050
  
   
$
383,800
    
$
451,972
  
Contractual maturities:
                
Due in less than one year
  
$
296,804
    
$
396,228
  
Due from one to two years (2)
    
2,423
      
4,994
  
Due from two to 30 years
    
84,573
      
50,750
  
   
$
383,800
    
$
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 classifies all available-for-sale securities that are intended to be available for use in current operations as short-term investments.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures its nonpublicly traded investments at fair value on a nonrecurring basis, of which $5.0 million is accounted for using the cost method and $18.9 million is accounted under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (see Note 8). These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three and nine months ended September 28, 2008, the Company did not record any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.

Note 6. ADVANCES TO SUPPLIERS

The Company has entered into agreements with various polysilicon, ingot, wafer, solar cells and solar module vendors and manufacturers. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 12 years. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements (see Note 8). Under certain of these agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. In the nine months ended September 28, 2008, the Company paid advances totaling $8.0 million in accordance with the terms of existing supply agreements. As of September 28, 2008, advances to suppliers totaled $144.8 million, the current portion of which is $60.1 million.

17

The Company’s future prepayment obligations related to these agreements as of September 28, 2008 are as follows (in thousands):
 
2008 (remaining three months)
  
$
50,490
  
2009
  
78,006
  
2010
  
59,642
  
2011
  
19,792
  
   
$
207,930
  

In October 2008, the Company paid advances of $44.9 million in accordance with the terms of existing supply agreements.