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SPWR > SEC Filings for SPWR > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for SUNPOWER CORP

Form 10-Q for SUNPOWER CORP


2-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not represent historical facts and the assumptions underlying such statements. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "potential," "will," "would," "should," and similar expressions to identify forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, projected costs and cost reduction, products, ability to monetize utility projects, competitive positions, management's plans and objectives for future operations, the sufficiency of our cash and our liquidity, our ability to obtain financing, the availability of credit and liquidity support from Total S.A. under the Credit Support Agreement and Liquidity Support Agreement, the ability to comply with debt covenants, trends in average selling prices, the success of our joint ventures and acquisitions, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions, industry trends, impact of changes in government incentives, expected restructuring charges, and the likelihood of any impairment of project assets, long-lived assets, goodwill, and intangible assets. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Please see "Part II. Item 1A:
Risk Factors" herein and our other filings with the Securities and Exchange Commission ("SEC"), including our Annual on Form 10-K for the year ended January 1, 2012 as amended (the "fiscal 2011 Form 10-K"), for additional information on risks and uncertainties that could cause actual results to differ. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

The following information should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year which ends on the Sunday closest to the calendar month end.

General Overview

We are a vertically integrated solar products and services company that designs, manufactures, and delivers high-performance solar electric systems worldwide for residential, commercial and utility-scale power plant customers. 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.

We believe our solar cells provide the following benefits compared with conventional solar cells:

• superior performance, including the ability to generate up to 50% more power per unit area than conventional solar cells;

• superior aesthetics, with our uniformly black surface design that eliminates highly visible reflective grid lines and metal interconnect ribbons;

• more KW per pound can be transported using less packaging, resulting in lower distribution costs; and

• more efficient use of silicon, a key raw material used in the manufacture of solar cells.

The high efficiency and superior aesthetics of our solar power products provide compelling customer benefits. In many situations, we offer a significantly 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 many commercial solar thin film technologies.

We believe our solar power systems provide the following benefits compared with various competitors' systems:


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• channel breadth and flexible delivery capability, including turn-key systems;

• high performance delivered by enhancing energy delivery and financial return through systems technology design; and

• cutting edge systems design to meet customer needs and reduce cost, including non-penetrating, fast roof installation technologies.

Business Segments Overview

In December 2011, we announced a reorganization to align our business and cost structure to a regional focus in order to support the needs of our customers and improve the speed of decision-making processes. As a result, in the first quarter of fiscal 2012, we changed our segment reporting from our Utility and Power Plants ("UPP") Segment and Residential and Commercial ("R&C") Segment to three regional segments: (i) the Americas Segment, (ii) the EMEA Segment, and
(iii) the APAC Segment. The Americas Segment includes both North and South America. The EMEA Segment includes European countries, as well as the Middle East and Africa. The APAC Segment includes all Asia-Pacific countries. Our President and Chief Executive Officer, as the chief operating decision maker ("CODM"), has organized our Company, manages resource allocations and measures performance of our Company's activities among these three regional segments.

Seasonal Trends

Our business is subject to industry-specific seasonal fluctuations. Sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two calendar quarters of a fiscal year. Lower seasonal demand normally results in reduced shipments and revenues in the first two calendar quarters of a fiscal year. 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 fact that the coldest winter months in the Northern Hemisphere 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.

Unit of Power

When referring to our facilities' manufacturing capacity, total sales and components sales, the unit of electricity in watts for kilowatts ("KW"), megawatts ("MW") and gigawatts ("GW") is direct current ("dc"). When referring to our solar power systems, the unit of electricity in watts for KW, MW, and GW is alternating current ("ac").

Levelized Cost of Energy ("LCOE")

The LCOE equation is an evaluation of the life-cycle energy cost and life-cycle energy production of an energy producing system. It allows alternative technologies to be compared when different scales of operation, investment, or operating time periods exist. It captures capital costs and ongoing system-related costs, along with the amount of electricity produced, and converts them into a common metric. Key drivers for LCOE reduction for photovoltaic products include panel efficiency, capacity factors, reliable system performance, and the life of the system.

Fiscal Years

We report on a fiscal-year basis and end our 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 year 2012 and 2011 consist of 52 weeks. The third quarter of fiscal 2012 ended on September 30, 2012 and the third quarter of fiscal 2011 ended on October 2, 2011.

Outlook

During fiscal 2011 we saw a decline in overall demand for solar systems primarily in Europe as a result of the decline in European government incentives. The resulting supply environment drove down average selling prices across all product and service lines. Such pricing pressures have continued and are expected to generally continue throughout fiscal 2012 and 2013.

We continue to be focused on reducing the cost of our solar panels and systems. We continue to emphasize improvement of our solar cell efficiency and LCOE performance through enhancement of our existing products, development


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of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies. We are further working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies and expanding economies of scale.

We plan to continue to expand our business in growing and sustainable markets. We announced the first commercial deployment of our SunPower® C-7 Tracker technology under a power purchase agreement ("PPA") and commenced commercial production of our next generation solar cell with demonstrated efficiencies of up to 24%. Our acquisition of Tenesol S.A. ("Tenesol") in the first quarter of fiscal 2012 has further expanded our European and global customer channels as well as added manufacturing capabilities based in both Europe and South Africa.

Residential Leasing Program

In fiscal 2011, we launched our residential lease program with dealers in the United States, in partnership with a third-party financial institution, which allows customers to obtain SunPower systems under lease agreements up to 20 years, subject to financing availability. On August 8, 2012, we entered into arrangements with two financial institutions that will provide financing to support additional residential solar lease projects. The program includes system maintenance and warranty coverage as well as an early buy-out option after six years or at any time when the lessees sell their home. Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines.

The program does not yet represent a material portion of our revenue. However, we may face additional material risks as the program expands, including our ability to obtain additional financing partners as well as our ability to collect finance and rent receivables in view of the general challenging credit markets worldwide. We believe that our concentration of credit risk is limited because of our large number of customers, credit quality of the customer base, small account balances for most of these customers, and customer geographic diversification. We apply for Treasury Grant payments under Section 1603 of the American Recovery and Reinvestment Act (the "Cash Grant"), which is administered by the U.S. Treasury Department, for residential leases. If the amount or timing of the Cash Grant payments received in connection with the residential lease program varies from what we have projected, this may impact our revenues and margins and we may have to recognize losses, which may adversely impact our results of operations. We make certain assumptions in accounting for the residential lease program, including, among others, the residual value of the leased systems. As the residential lease program grows, if the residual value of leased systems does not materialize as assumed, our results of operations would be adversely affected.

Results of Operations

Revenue
                                        Three Months Ended                                         Nine Months Ended
(In thousands)          September 30, 2012       October 2, 2011     % Change     September 30, 2012       October 2, 2011     % Change
Americas              $            502,373     $         368,643       36%      $          1,176,148     $         942,887       25%
EMEA                                88,547               293,066      (70)%                  400,074               675,702      (41)%
APAC                                58,028                43,718       33%                   162,754               130,511       25%
Total revenue         $            648,948     $         705,427       (8)%     $          1,738,976     $       1,749,100       (1)%

Total Revenue: Total revenue decreased 8% and 1% during the three and nine months ended September 30, 2012 as compared to the three and nine months ended October 2, 2011. The decrease in the three months ended September 30, 2012 as compared to the three months ended October 2, 2011 is primarily due to a decline in utility-scale solar projects and related revenue within the EMEA region partially offset by a 4% increase in revenue per watt. We recognized revenue on
210.0 MW in the three months ended September 30, 2012 as compared to 236.8 MW in the three months ended October 2, 2011. The decrease in the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 is primarily driven by a 13% decrease in revenue per watt. We recognized revenue on
637.9 MW in the nine months ended September 30, 2012 as compared to 559.9 MW in the nine months ended October 2, 2011. The overall decrease in total revenue was partially offset by revenue recognized on additional large scale utility projects within the Americas Segment during fiscal 2012.

Concentrations: The table below represents our significant customers which accounted for greater than 10% of total revenue in each of the three and nine months ended September 30, 2012 and October 2, 2011, respectively. We entered into a project contract with NRG Solar, Inc. in fiscal 2011, which is anticipated to account for 10% or more of total revenue in fiscal 2012.


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                                            Three Months Ended                     Nine Months Ended
Revenue                            September 30, 2012   October 2, 2011   September 30, 2012   October 2, 2011
Significant
Customer:       Business Segment
NRG Solar, Inc. Americas                  46%                  *                 32%                  *
Customer B      EMEA                       *                  10%                 *                  10%
Customer C      EMEA                       *                  11%                 *                   *

* denotes less than 10% during the period

Revenue by Segment: The below table presents our segment revenue as a percentage of total revenue for the three and nine months ended September 30, 2012 and October 2, 2011, respectively.

                                            Three Months Ended                     Nine Months Ended
Percentage of total revenue        September 30, 2012   October 2, 2011   September 30, 2012   October 2, 2011
Americas                                  77%                 52%                68%                 54%
EMEA                                      14%                 42%                23%                 39%
APAC                                       9%                 6%                  9%                 7%

Sales outside the Americas Segment represented approximately 23% and 32% of total revenue for the three and nine months ended September 30, 2012, respectively, as compared to 48% and 46% for the three and nine months ended October 2, 2011, respectively. The shift in revenue by geography period over period was due to increasing demand in the United States for our solar power products as a result of additional federal and state initiatives supporting attractive solar incentives within the residential, commercial, and utility sectors as well as a slowdown in project development and component shipments in Europe due to the current over-supply environment within the region.

Americas Revenue: Americas revenue increased 36% during the three months ended September 30, 2012 as compared to the three months ended October 2, 2011 which was primarily driven by additional revenue recognized on large utility-scale projects under construction in the United States. Also contributing to the increase was additional revenue recognized on component sales which increased 16% period over period, which was primarily driven by a 29% increase in the average selling prices of components within the region.

Americas revenue increased 25% during the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011, which was primarily a result of an increase in the number and size of the various utility-scale solar power systems under construction, which includes the ramp up in construction of the 250 MW California Valley Solar Ranch ("CVSR") project in San Luis Obispo County, California, a 25 MW project in Modesto, California, and 20 MW project in North Carolina during the nine months ended September 30, 2012, partially offset by projects which were substantially completed during the interim period. Additionally contributing to the increase was additional revenue recognized on component sales which increased 49% period over period, which was primarily driven by a 32% increase in average selling price.

EMEA Revenue: EMEA revenue decreased 70% and 41% during the three and nine months ended September 30, 2012 compared with the three and nine months ended October 2, 2011 primarily due to changes in European government incentives during fiscal 2011 which had a materially negative effect on the market for solar systems, particularly large-scale solar products and systems in Europe, which caused our sales related to such projects as well as components sales to decline in Europe.

The decrease in EMEA revenue for the three months ended September 30, 2012 as compared to the three months ended October 2, 2011 was due to a 22.1 MW decline in utility-scale solar projects and related revenue as well as a decrease in component sales and average selling prices. In the three months ended September 30, 2012, we recognized revenue on 6.0 MW of component sales as compared to 41.6 MW in the three months ended October 2, 2011, which represents a 86% decrease in volume quarter over quarter. The overall decline in our EMEA revenue was partially offset by $16.1 million in revenue due to Tenesol's results of operations being incorporated into our financial results for the third quarter in fiscal 2012.

The decrease in EMEA revenue for the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 was due to a 47.0 MW decline in utility-scale solar projects and related revenue as well as a decrease in


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components sales and average selling prices. In the nine months ended September 30, 2012, we recognized revenue on 17.0 MW of component sales as compared to 94.4 MW in the nine months ended October 2, 2011, which represents an 82% decrease in volume, period over period. The overall decline in our EMEA revenue was partially offset by $79.3 million in revenue due to Tenesol's results of operations being incorporated into our financial results for the nine months eneded September 30, 2012.

APAC Revenue: APAC revenue increased 33% during the three months ended September 30, 2012 compared with the three month ended October 2, 2011 due to higher component sales and shipments, primarily in Japan. In the three months ended September 30, 2012, we recognized revenue on 31.1 MW of component sales as compared to 14.4 MW in the three months ended October 2, 2011, which represents a 116% increase in volume quarter over quarter.

APAC revenue increased 25% during the nine months ended September 30, 2012 compared with the nine months ended October 2, 2011. Revenue increased due to an increase in component sales partially offset by a reduction in systems revenue. In the nine months ended September 30, 2012, we recognized revenue on 79.7 MW of component sales as compared to 31.9 MW in the nine months ended October 2, 2011, which represents a 150% increase in volume quarter over quarter. This increase was partially offset by a decrease in systems revenue due to a shift in demand for our solar products in the residential and commercial markets coupled with an overall decrease in revenue per watt in the region.

Cost of Revenue
                                      Three Months Ended                                     Nine Months Ended
(In thousands)         September 30, 2012     October 2, 2011    % Change    September 30, 2012     October 2, 2011     % Change
Americas              $         409,432      $       326,372       25%      $          978,062     $        839,465       17%
EMEA                            111,622              265,515      (58)%                422,922              620,618      (32)%
APAC                             47,121               37,416       26%                 138,471              105,077       32%
Total cost of
revenue               $         568,175      $       629,303      (10)%     $        1,539,455     $      1,565,160       (2)%
Total cost of
revenue as a
percentage of
revenue                              88 %                 89 %                              89 %                 89 %
Total gross margin
percentage                           12 %                 11 %                              11 %                 11 %

Total Cost of Revenue: Our cost of revenue will fluctuate from period to period due to the mix of projects completed and recognized as revenue, in particular between large utility projects and large commercial installation projects. The cost of solar panels is the single largest cost element in our cost of revenue. Other cost of revenue associated with the construction of solar power systems includes real estate, mounting systems, inverters, third-party contract manufacturer costs, construction subcontract and dealer costs. In addition, other factors contributing to cost of revenue include amortization of other intangible assets, stock-based compensation, depreciation, provisions for estimated warranty claims, 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 manufacturing facilities.

Total cost of revenue decreased 10% and 2% during the three and nine months ended September 30, 2012, respectively, as compared to the three and nine months ended October 2, 2011 primarily due to lower material costs and higher yields. The decrease during the third quarter of fiscal 2012 as compared to the same period in fiscal 2011 was also a result of an 11% decline in total MW sold. Additionally contributing to the decrease for the nine months ended September 30, 2012 as compared to the same period in fiscal 2011 was $48.5 million of charges incurred in the second quarter of fiscal 2011 associated with the change in European government incentives and resulting write-downs in project assets and third-party inventory, as well as costs associated with the termination of third-party solar cell contracts. These decreases for the nine months ended September 30, 2012 were partially offset by a 14% increase in total MW of solar power products sold.

Gross Margin
                                    Three Months Ended                                 Nine Months Ended
(In thousands)        September 30, 2012   October 2, 2011   % Change   September 30, 2012   October 2, 2011   % Change
Americas                     19%                 11%            8%             17%                 11%            6%
EMEA                        (26)%                9%           (35)%            (6)%                8%           (14)%
APAC                         19%                 14%            5%             15%                 19%           (4)%


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Americas Gross Margin: Gross margin for our Americas Segment was $92.9 million and $198.1 million, respectively, for the three and nine months ended September 30, 2012 as compared to $42.3 million and $103.4 million, respectively, for the three and nine months ended October 2, 2011. The increase in gross margin from 11% to 19% and from 11% to 17%, over the respective periods is primarily driven by increased revenue from large utility-scale solar power systems under construction and components sales combined with lower material costs. The overall increase was partially offset by industry declines in average selling prices.

EMEA Gross Margin: Gross margin for our EMEA Segment was negative $23.1 million and negative $22.8 million, respectively, for the three and nine months ended September 30, 2012 as compared to $27.6 million and $55.1 million, respectively, for the three and nine months ended October 2, 2011. The overall decrease in EMEA gross margin over both periods is a result of declines in government incentives resulting in changes in market demand. The changes in demand, general financing constraints experienced in the European economy, and the over-supply environment continued to significantly drive down average selling prices throughout the region in fiscal 2012.

APAC Gross Margin: Gross margin for our for our APAC Segment was $10.9 million and $24.3 million, respectively, for the three and nine months ended September 30, 2012, as compared to $6.3 million and $25.4 million, respectively, for the three and nine months ended October 2, 2011. Gross margin increased from 14% to 19% quarter over quarter due to additional volumes of higher margin component sales partially offset by declining average selling prices. The 4% decrease in gross margin during the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 is primarily due to project completion and declining average selling prices.

Research and Development ("R&D")

                                      Three Months Ended                                     Nine Months Ended
(In thousands)         September 30, 2012     October 2, 2011    % Change    September 30, 2012     October 2, 2011    % Change
R&D Expense           $           14,956     $        12,664       18%      $           45,786     $        41,565       10%
As a percentage of
revenue                                2 %                 2 %                               3 %                 2 %

In the three and nine months ended September 30, 2012, R&D expense was $15.0 million and $45.8 million, respectively, which represents an increase of 18% and 10% as compared to the same period in fiscal 2011. The increase in our . . .

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