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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2011
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.)
 
77 Rio Robles Drive, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)
 
(408) 240-5500
(Registrant's Telephone Number, Including Area Code)
 
3939 North First Street, San Jose, California 95134
(Registrant's Former Address)
 
 
 
 
 
 
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  T    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  T    No  o
 
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 o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  T
 
The total number of outstanding shares of the registrant's class A common stock as of May 6, 2011 was 56,981,639.
The total number of outstanding shares of the registrant's class B common stock as of May 6, 2011 was 42,033,287.

SunPower Corporation
 
INDEX TO FORM 10-Q
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 

2

Index

PART I. FINANCIAL INFORMATION
 
Item 1.         Financial Statements
Index

SunPower Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
April 3, 2011
 
January 2, 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
367,860
 
 
$
605,420
 
Restricted cash and cash equivalents, current portion
141,617
 
 
117,462
 
Short-term investments
42,089
 
 
38,720
 
Accounts receivable, net
341,400
 
 
381,200
 
Costs and estimated earnings in excess of billings
136,267
 
 
89,190
 
Inventories
487,448
 
 
313,398
 
Advances to suppliers, current portion
33,673
 
 
31,657
 
Project assets - plants and land, current portion
46,377
 
 
23,868
 
Prepaid expenses and other current assets (1)
207,034
 
 
192,934
 
Total current assets
1,803,765
 
 
1,793,849
 
 
 
 
 
Restricted cash and cash equivalents, net of current portion
119,410
 
 
138,837
 
Property, plant and equipment, net
597,001
 
 
578,620
 
Project assets - plants and land, net of current portion
26,524
 
 
22,238
 
Goodwill
346,159
 
 
345,270
 
Other intangible assets, net
59,753
 
 
66,788
 
Advances to suppliers, net of current portion
266,276
 
 
255,435
 
Other long-term assets (1)
245,733
 
 
178,294
 
Total assets
$
3,464,621
 
 
$
3,379,331
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable (1)
$
365,404
 
 
$
382,884
 
Accrued liabilities
201,612
 
 
137,704
 
Billings in excess of costs and estimated earnings
70,841
 
 
48,715
 
Short-term debt
206,095
 
 
198,010
 
Convertible debt, current portion
185,572
 
 
 
Customer advances, current portion (1)
17,186
 
 
21,044
 
Total current liabilities
1,046,710
 
 
788,357
 
 
 
 
 
Long-term debt
50,000
 
 
50,000
 
Convertible debt, net of current portion
413,046
 
 
591,923
 
Customer advances, net of current portion (1)
157,133
 
 
160,485
 
Other long-term liabilities
170,694
 
 
131,132
 
Total liabilities
1,837,583
 
 
1,721,897
 
Commitments and contingencies (Note 5)
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock, 10,042,490 shares authorized, $0.001 par value; none issued and outstanding
 
 
 
Common stock, 217,500,000 shares of class A common stock authorized, $0.001 par value; 57,966,210 and 56,664,413 shares of class A common stock issued; 56,893,750 and 56,073,083 shares of class A common stock outstanding, as of April 3, 2011 and January 2, 2011, respectively; 150,000,000 shares of class B common stock authorized, $0.001 par value; 42,033,287 shares of class B common stock issued and outstanding as of both April 3, 2011 and January 2, 2011
99
 
 
98
 
Additional paid-in capital
1,619,640
 
 
1,606,697
 
Retained earnings
61,551
 
 
63,672
 
Accumulated other comprehensive income (loss)
(29,502
)
 
3,640
 
Treasury stock, at cost; 1,072,460 and 591,330 shares of class A common stock as of April 3, 2011 and January 2, 2011, respectively
(24,750
)
 
(16,673
)
Total stockholders' equity
1,627,038
 
 
1,657,434
 
Total liabilities and stockholders' equity
$
3,464,621
 
 
$
3,379,331
 
 
(1)
The Company has related party balances in connection with transactions made with its joint ventures which are recorded within the "Prepaid expenses and other current assets," "Other long-term assets," "Accounts payable," "Customer advance, current portion" and "Customer advances, net of current portion" financial statement line items in the Condensed Consolidated Balance Sheets (see Note 5 and Note 6).
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Index

SunPower Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
 
April 3, 2011
 
April 4, 2010
Revenue:
 
 
 
Utility and power plants
$
245,909
 
 
$
144,094
 
Residential and commercial
205,509
 
 
203,180
 
Total revenue
451,418
 
 
347,274
 
Cost of revenue:
 
 
 
Utility and power plants
203,011
 
 
111,428
 
Residential and commercial
159,885
 
 
164,103
 
Total cost of revenue
362,896
 
 
275,531
 
Gross margin
88,522
 
 
71,743
 
Operating expenses:
 
 
 
Research and development
13,646
 
 
10,407
 
Sales, general and administrative
76,179
 
 
64,280
 
Total operating expenses
89,825
 
 
74,687
 
Operating loss
(1,303
)
 
(2,944
)
Other expense, net:
 
 
 
Interest income
743
 
 
273
 
Interest expense
(15,259
)
 
(10,940
)
Loss on mark-to-market derivatives
(44
)
 
(2,218
)
Other, net
(9,207
)
 
(5,591
)
Other expense, net
(23,767
)
 
(18,476
)
Loss before income taxes and equity in earnings of unconsolidated investees
(25,070
)
 
(21,420
)
Benefit from income taxes
15,816
 
 
30,875
 
Equity in earnings of unconsolidated investees
7,133
 
 
3,118
 
Net income (loss)
$
(2,121
)
 
$
12,573
 
 
 
 
 
Net income (loss) per share of class A and class B common stock:
 
 
 
Basic
$
(0.02
)
 
$
0.13
 
Diluted
$
(0.02
)
 
$
0.13
 
 
 
 
 
Weighted-average shares:
 
 
 
Basic
96,453
 
 
95,154
 
Diluted
96,453
 
 
96,472
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Index

SunPower Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Three Months Ended
 
April 3, 2011
 
April 4, 2010
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(2,121
)
 
$
12,573
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Stock-based compensation
13,163
 
 
10,808
 
Depreciation
25,697
 
 
24,715
 
Amortization of other intangible assets
7,064
 
 
4,759
 
Gain on sale of investments
(128
)
 
(1,572
)
Loss on mark-to-market derivatives
44
 
 
2,218
 
Non-cash interest expense
7,325
 
 
6,390
 
Amortization of debt issuance costs
1,256
 
 
699
 
Amortization of promissory notes
1,290
 
 
 
Equity in earnings of unconsolidated investees
(7,133
)
 
(3,118
)
Deferred income taxes and other tax liabilities
(2,171
)
 
(35,720
)
Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
52,274
 
 
30,511
 
Costs and estimated earnings in excess of billings
(40,638
)
 
(4,907
)
Inventories
(163,199
)
 
(51,085
)
Project assets
(27,644
)
 
(3,426
)
Prepaid expenses and other assets
(14,233
)
 
(14,692
)
Advances to suppliers
(12,820
)
 
3,178
 
Accounts payable and other accrued liabilities
(26,368
)
 
26,873
 
Billings in excess of costs and estimated earnings
21,271
 
 
11,615
 
Customer advances
(7,588
)
 
(918
)
Net cash provided by (used in) operating activities
(174,659
)
 
18,901
 
Cash flows from investing activities:
 
 
 
Increase in restricted cash and cash equivalents
(4,728
)
 
(19,717
)
Purchase of property, plant and equipment
(44,757
)
 
(43,658
)
Proceeds from sale of equipment to third-party
209
 
 
2,875
 
Proceeds from sales or maturities of available-for-sale securities
300
 
 
1,572
 
Cash paid for acquisition, net of cash acquired
 
 
(272,699
)
Cash paid for investments in joint ventures and other non-public companies
(20,000
)
 
(1,618
)
Net cash used in investing activities
(68,976
)
 
(333,245
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of bank loans, net of issuance costs
164,221
 
 
1,539
 
Proceeds from issuance of convertible debt, net of issuance costs
 
 
214,921
 
Repayment of bank loans
(156,136
)
 
 
Cash paid for bond hedge
 
 
(66,176
)
Proceeds from warrant transactions
 
 
54,076
 
Proceeds from exercise of stock options
73
 
 
 
Purchases of stock for tax withholding obligations on vested restricted stock
(8,077
)
 
(1,180
)
Net cash provided by financing activities
81
 
 
203,180
 
Effect of exchange rate changes on cash and cash equivalents
5,994
 
 
(5,561
)
Net decrease in cash and cash equivalents
(237,560
)
 
(116,725
)
Cash and cash equivalents at beginning of period
605,420
 
 
615,879
 
Cash and cash equivalents at end of period
$
367,860
 
 
$
499,154
 
 
 
 
 
Non-cash transactions:
 
 
 
Property, plant and equipment acquisitions funded by liabilities
$
6,159
 
 
$
31,831
 
Non-cash interest expense capitalized and added to the cost of qualified assets
499
 
 
535
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Index

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”) is 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.
 
The Company's President and Chief Executive Officer, as the chief operating decision maker (“CODM”), has organized the Company and manages resource allocations and measures performance of the Company's activities between these two business segments: the Utility and Power Plants ("UPP") Segment and the Residential and Commercial ("R&C") Segment. The Company's UPP Segment refers to its large-scale solar products and systems business, which includes power plant project development and project sales, turn-key engineering, procurement and construction (“EPC”) services for power plant construction, and power plant operations and maintenance (“O&M”) services. The UPP Segment also sells components, including large volume sales of solar panels and mounting systems, to third parties, often on a multi-year, firm commitment basis. The Company's R&C Segment focuses on solar equipment sales into the residential and small commercial market through its third-party global dealer network, as well as direct sales and EPC and O&M services in the United States for rooftop and ground-mounted solar power systems for the new homes, commercial and public sectors.
 
Basis of Presentation and Preparation
 
Principles of Consolidation
 
The accompanying condensed consolidated interim financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include the accounts of the Company and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2011 (the "fiscal 2010 Form 10-K").
 
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 year 2011 and 2010 consist of 52 weeks. The first quarter of fiscal 2011 ended on April 3, 2011 and the first quarter of fiscal 2010 ended on April 4, 2010.
 
Management Estimates
 
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these financial statements include percentage-of-completion for construction projects, allowances for doubtful accounts receivable and sales returns, inventory write-downs, stock-based compensation, estimates for future cash flows and economic useful lives of property, plant and equipment, project assets, goodwill, valuations for business combinations, other intangible assets and other long-term assets, asset impairments, fair value of financial instruments, certain accrued liabilities including accrued warranty reserves, valuation of debt without the conversion feature, valuation of share lending arrangements, income taxes and tax valuation allowances. Actual results could materially 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 April 3, 2011 and its results of operations and cash flows for the three months ended April 3, 2011 and April 4, 2010. These condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.
 
Summary of Significant Accounting Policies

6

Index

 
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and notes thereto contained in the fiscal 2010 Form 10-K.
 
There have been no significant changes in the Company's significant accounting policies for the three months ended April 3, 2011, as compared to the significant accounting policies described in the fiscal 2010 Form 10-K. Further, there has been no issued accounting guidance not yet adopted by the Company that it believes is material, or is potentially material to its condensed consolidated financial statements.
 
Note 2. GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill
 
The following table presents the changes in the carrying amount of goodwill under the Company's reportable business segments:
 
(In thousands)
 
UPP
 
R&C
 
Total
As of October 3, 2010
 
$
225,529
 
 
$
119,332
 
 
$
344,861
 
Goodwill arising from business combination
 
821
 
 
 
 
821
 
Translation adjustment
 
 
 
(412
)
 
(412
)
As of January 2, 2011
 
226,350
 
 
118,920
 
 
345,270
 
Translation adjustment
 
 
 
889
 
 
889
 
As of April 3, 2011
 
$
226,350
 
 
$
119,809
 
 
$
346,159
 
 
Intangible Assets
 
The following tables present details of the Company's acquired other intangible assets:
 
(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of April 3, 2011
 
 
 
 
 
 
Project assets
 
$
79,160
 
 
$
(28,130
)
 
$
51,030
 
Patents, trade names and purchased technology
 
55,207
 
 
(54,867
)
 
340
 
Purchased in-process research and development
 
1,000
 
 
(70
)
 
930
 
Customer relationships and other
 
40,805
 
 
(33,352
)
 
7,453
 
 
 
$
176,172
 
 
$
(116,419
)
 
$
59,753
 
 
 
 
 
 
 
 
 
 
 
As of January 2, 2011
 
 
 
 
 
 
 
 
 
Project assets
 
$
79,160
 
 
$
(22,627
)
 
$
56,533
 
Patents, trade names and purchased technology
 
55,144
 
 
(54,563
)
 
581
 
Purchased in-process research and development
 
1,000
 
 
(28
)
 
972
 
Customer relationships and other
 
40,525
 
 
(31,823
)
 
8,702
 
 
 
$
175,829
 
 
$
(109,041
)
 
$
66,788
 
 
All of the Company's acquired other intangible assets are subject to amortization. Aggregate amortization expense for other intangible assets totaled $7.1 million and $4.8 million in the three months ended April 3, 2011 and April 4, 2010, respectively. As of April 3, 2011, the estimated future amortization expense related to other intangible assets is as follows:
 

7

Index

(In thousands)
 
Amount
Year
 
 
2011 (remaining nine months)
 
$
20,128
 
2012
 
22,718
 
2013
 
16,330
 
2014
 
252
 
2015
 
186
 
Thereafter
 
139
 
 
 
$
59,753
 
 
Index

Note 3. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
April 3, 2011
 
January 2, 2011
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross
 
$
351,170
 
 
$
389,554
 
Less: allowance for doubtful accounts
 
(7,531
)
 
(5,967
)
Less: allowance for sales returns
 
(2,239
)
 
(2,387
)
 
 
$
341,400
 
 
$
381,200
 
Inventories:
 
 
 
 
Raw materials
 
$
98,299
 
 
$
70,683
 
Work-in-process
 
46,518
 
 
35,658
 
Finished goods
 
342,631
 
 
207,057
 
 
 
$
487,448
 
 
$
313,398
 
Prepaid expenses and other current assets:
 
 
 
 
VAT receivables, current portion
 
$
38,876
 
 
$
26,500
 
Short-term deferred tax assets
 
855
 
 
3,605
 
Foreign currency derivatives
 
17,926
 
 
35,954
 
Income tax receivable
 
17,339
 
 
1,513
 
Deferred project costs
 
717
 
 
934
 
Note receivable (1)
 
10,000
 
 
10,000
 
Other receivables (2)
 
88,807
 
 
83,712
 
Other prepaid expenses
 
32,514
 
 
30,716
 
 
 
$
207,034
 
 
$
192,934
 
 
(1)
In June 2008, the Company loaned $10.0 million to a third-party private company under a three-year note receivable that is convertible into equity at the Company's option.
 
(2)
Includes tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the suppliers (see Notes 5 and 6).
 
Project assets - plant and land:
 
 
 
 
Project assets - plant
 
$
54,029
 
 
$
28,784
 
Project assets - land
 
18,872
 
 
17,322
 
 
 
$
72,901
 
 
$
46,106
 
Project assets - plants and land, current portion
 
$
46,377
 
 
$
23,868
 
Project assets - plants and land, net of current portion
 
26,524
 
 
22,238
 
 
 
 
As of
(In thousands)
 
April 3, 2011
 
January 2, 2011
Property, plant and equipment, net:
 
 
 
 
Land and buildings
 
$
13,912
 
 
$
13,912
 
Leasehold improvements
 
209,143
 
 
207,248
 
Manufacturing equipment (3)
 
556,010
 
 
551,815
 
Computer equipment
 
49,771
 
 
46,603
 
Solar power systems
 
10,954
 
 
10,614
 
Furniture and fixtures
 
5,704
 
 
5,555
 
Construction-in-process
 
64,531
 
 
28,308
 
 
 
910,025
 
 
864,055
 
Less: accumulated depreciation (4)
 
(313,024
)
 
(285,435
)
 
 
$
597,001
 
 
$
578,620
 
 
(3)    Certain manufacturing equipment associated with solar cell manufacturing lines located at one of the Company’s facilities in the Philippines is collateralized in favor of a third-party lender. The Company provided security for advance payments received from a third party in fiscal 2008 totaling $40.0 million in the form of collateralized manufacturing equipment with a net book value of $26.4 million and $28.3 million as of April 3, 2011 and January 2, 2011, respectively.
 
(4)    Total depreciation expense was $25.7 million and $24.7 million for the three months ended April 3, 2011 and April 4, 2010, respectively.
    
Property, plant and equipment, net by geography (5):
 
 
 
 
Philippines
 
$
494,455
 
 
$
502,131
 
United States
 
99,956
 
 
73,860
 
Europe
 
2,367
 
 
2,400
 
Australia
 
223
 
 
229
 
 
 
$
597,001
 
 
$
578,620
 
 
(5)    Property, plant and equipment, net are based on the physical location of the assets.
 
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Interest expense:
 
 
 
 
Interest cost incurred
 
$
16,451
 
 
$
11,871
 
Cash interest cost capitalized - property, plant and equipment
 
(330
)
 
(396
)
Non-cash interest cost capitalized - property, plant and equipment
 
(249
)
 
(535
)
Cash interest cost capitalized - project assets - plant and land
 
(364
)
 
 
Non-cash interest cost capitalized - project assets - plant and land
 
(249
)
 
 
Interest expense
 
$
15,259
 
 
$
10,940
 
 
 
 
As of
(In thousands)
 
April 3, 2011
 
January 2, 2011
Other long-term assets:
 
 
 
 
Investments in joint ventures
 
$
143,577
 
 
$
116,444
 
Bond hedge derivative
 
56,344
 
 
34,491
 
Investments in non-public companies
 
6,418
 
 
6,418
 
VAT receivables, net of current portion
 
7,580
 
 
7,002
 
Long-term debt issuance costs
 
10,436
 
 
12,241
 
Other
 
21,378
 
 
1,698
 
 
 
$
245,733
 
 
$
178,294
 
 
Accrued liabilities:
 
 
 
 
VAT payables
 
$
8,311
 
 
$
11,699
 
Foreign currency derivatives
 
89,811
 
 
10,264
 
Short-term warranty reserves
 
16,163
 
 
14,639
 
Interest payable
 
5,970
 
 
6,982
 
Deferred revenue
 
27,272
 
 
21,972
 
Employee compensation and employee benefits
 
21,087
 
 
33,227
 
Other
 
32,998
 
 
38,921
 
 
 
$
201,612
 
 
$
137,704
 
 
 
 
 
 
 
 
Other long-term liabilities:
 
 
 
 
 
 
Embedded conversion option derivatives
 
$
56,735
 
 
$
34,839
 
Long-term warranty reserves
 
53,956
 
 
48,923
 
Unrecognized tax benefits
 
25,987
 
 
24,894
 
Other
 
34,016
 
 
22,476
 
 
 
$
170,694
 
 
$
131,132
 
 
Note 4. INVESTMENTS
 
The Company's investments in money market funds and debt securities are carried at fair value. Fair values are determined based on a hierarchy that prioritizes the inputs to valuation techniques by assigning 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 tables present information about the Company's investments in money market funds and debt securities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Information about the Company's convertible debenture derivatives measured at fair value on a recurring basis is disclosed in Note 7. Information about the Company's foreign currency derivatives measured at fair value on a recurring basis is disclosed in Note 9. The Company does not have any nonfinancial assets or liabilities that are recognized or disclosed at fair value on a recurring basis in its condensed consolidated financial statements.
 
 
 
April 3, 2011
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Money market funds
 
$
401,085
 
 
$
 
 
$
 
 
$
401,085
 
Debt securities
 
 
 
42,089
 
 
 
 
42,089
 
 
 
$
401,085
 
 
$
42,089
 
 
$
 
 
$
443,174
 
 

8

Index

 
 
January 2, 2011
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Money market funds
 
$
488,626
 
 
$
 
 
$
172
 
 
$
488,798
 
Debt securities
 
 
 
38,548
 
 
 
 
38,548
 
 
 
$
488,626
 
 
$
38,548
 
 
$
172
 
 
$
527,346
 
 
There have been no transfers between Level 1, Level 2 and Level 3 measurements during the three months ended April 3, 2011.
 
Money Market Funds
 
The majority of 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. Investments in money market funds utilizing Level 3 inputs consisted of the Company's investment in the Reserve International Liquidity Fund which amounted to $0.2 million as of January 2, 2011. The Company had estimated the value of its investment in the Reserve International Liquidity Fund to be $0.2 million based on information publicly disclosed by the Reserve International Liquidity Fund relative to its holdings and remaining obligations. On March 3, 2011, the Company recovered $0.3 million from the Reserve International Liquidity Fund. The recovery was $0.1 million in excess of the recorded fair value and was reflected as a gain within "Other, net" in the Condensed Consolidated Statement of Operations for the three months ended April 3, 2011. The Company had no remaining investments with Level 3 measurements as of April 3, 2011.
 
Debt Securities
 
Investments in debt securities utilizing Level 2 inputs consist of bonds purchased in the fourth quarter of fiscal 2010. The bonds are guaranteed by the Italian government. The Company bases its valuation of these bonds on movements of Italian sovereign bond rates since the time of purchase and incurred no other-than-temporary impairment loss in the three months ended April 3, 2011.
 
This valuation is corroborated by comparison to third-party financial institution valuations. The fair value of the Company's investments in bonds totaled $42.1 million and $38.5 million as of April 3, 2011 and January 2, 2011, respectively.
 
Available-for-Sale Securities
 
Available-for-sale securities are comprised of the fair value of the Company's debt securities, including any other-than temporary impairment loss incurred. The classification of available-for-sale securities and cash and cash equivalents is as follows:
 
 
 
April 3, 2011
 
January 2, 2011
(In thousands)
 
Available-For-Sale
 
Cash and Cash Equivalents (2)
 
Total
 
Available-For-Sale
 
Cash and Cash Equivalents (2)
 
Total
Cash and cash equivalents
 
$
 
 
$
367,860
 
 
$
367,860
 
 
$
 
 
$
605,420
 
 
$
605,420
 
Short-term restricted cash and cash equivalents (1)
 
 
 
141,617
 
 
141,617
 
 
 
 
117,462
 
 
117,462
 
Short-term investments
 
42,089
 
 
 
 
42,089
 
 
38,548
 
 
172
 
 
38,720
 
Long-term restricted cash and cash equivalents (1)
 
 
 
119,410
 
 
119,410
 
 
 
 
138,837
 
 
138,837
 
 
 
$
42,089
 
 
$
628,887
 
 
$
670,976
 
 
$
38,548
 
 
$
861,891
 
 
$
900,439
 
 
(1)
Details regarding the Company's cash in restricted accounts are contained in the Company's annual consolidated financial statements and notes thereto for the year ended January 2, 2011 included in its fiscal 2010 Form 10-K filed with the SEC.
 
(2)
Includes money market funds.

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Index

 
The contractual maturities of available-for-sale securities are as follows:
 
(In thousands)
 
April 3, 2011
 
January 2, 2011
Due on November 30, 2028
 
$
42,089
 
 
$
38,548
 
 
Minority Investments in Joint Ventures and Other Non-Public Companies
 
The Company holds minority investments comprised of common and preferred stock in joint ventures and other non-public companies. The Company monitors these minority investments for impairment, which are included in “Other long-term assets” in its Condensed Consolidated Balance Sheets and records reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices and declines in operations of the issuer. As of April 3, 2011 and January 2, 2011, the Company had $143.6 million and $116.4 million, respectively, in investments in joint ventures accounted for under the equity method and $6.4 million, as of both periods, in investments accounted for under the cost method (see Note 6).
 
On September 28, 2010, the Company entered into a $0.2 million investment in a related party accounted for under the cost method. In connection with the investment the Company entered into licensing, lease and facility service agreements. Under the lease and facility service agreements the investee leases space from the Company for a period of five years. Facility services are provided by the Company over the term of the lease on a “cost-plus” basis. Payments received under the lease and facility service agreement totaled $0.1 million in the three months ended April 3, 2011. As of April 3, 2011, $0.8 million remained due and receivable from the investee related to capital purchases made by the Company on behalf of the investee.
 
Note 5. COMMITMENTS AND CONTINGENCIES
 
Operating Lease Commitments
 
The Company leased its San Jose, California facility under a non-cancellable operating lease from Cypress Semiconductor Corporation ("Cypress") which expired in May 2011. In May 2011 the Company moved to new offices in San Jose, California under a non-cancellable operating lease from an unaffiliated third party through April 2021. In addition, the Company leases its Richmond, California facility under a non-cancellable operating lease from an unaffiliated third party, which expires in September 2018. The Company also has various lease arrangements, including for its European headquarters located in Geneva, Switzerland under a lease that expires in September 2012, as well as sales and support offices in Southern California, New Jersey, Oregon, Australia, England, France, Germany, Greece, Israel, Italy, Malta, Spain and South Korea, all of which are leased from unaffiliated third parties. In addition, in the first quarter of fiscal 2010 the Company acquired a lease arrangement in London, England, which is leased from a party affiliated with the Company.
 
The Company leases four solar power systems from Wells Fargo over minimum lease terms of up to 20 years that it had previously sold to Wells Fargo. Separately, the Company entered into power purchase agreements ("PPAs") with end customers, who host those solar power systems and buy the electricity directly from the Company under PPAs with a duration of up to 20 years. At the end of the lease term, the Company has the option to purchase the systems at fair value or remove the systems. The deferred profit on the sale of the systems to Wells Fargo is being recognized over the minimum term of the lease.
 
Future minimum obligations under all non-cancellable operating leases as of April 3, 2011 are as follows:
(In thousands)
 
Amount
Year
 
 
2011 (remaining nine months)
 
$
8,961
 
2012
 
10,599
 
2013
 
10,549
 
2014
 
9,490
 
2015
 
8,241
 
Thereafter
 
38,493
 
 
 
$
86,333
 
 

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Index

Purchase Commitments
 
The Company purchases raw materials for inventory and manufacturing equipment from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based on specifications defined by the Company, or that establish parameters defining the Company's requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company's requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of the Company's disclosed purchase commitments arising from these agreements are firm, non-cancellable and unconditional commitments.
 
The Company also has agreements with several suppliers, including some of its non-consolidated joint ventures, for the procurement of polysilicon, ingots, wafers, solar cells and solar panels which specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 years and provide for certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that the Company terminates the arrangements.
 
As of April 3, 2011, total obligations related to non-cancellable purchase orders totaled $210.2 million and long-term supply agreements with suppliers totaled $5.2 billion. Of the total future purchase commitments of $5.4 billion as of April 3, 2011, $2.6 billion are for commitments to its non-consolidated joint ventures. Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of April 3, 2011 are as follows:
 
(In thousands)
 
Amount
Year
 
 
2011 (remaining nine months)
 
$
878,476
 
2012
 
576,384
 
2013
 
602,414
 
2014
 
816,569
 
2015
 
901,975
 
Thereafter
 
1,648,895
 
 
 
$
5,424,713
 
 
Total future purchase commitments of $5.4 billion as of April 3, 2011 included tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the supplier. Annual future purchase commitments in the table above are calculated using the gross price paid by the Company for silicon ingots and are not reduced by the price paid by suppliers for polysilicon. Total future purchase commitments as of April 3, 2011 would be reduced by $1.3 billion to $4.1 billion had the Company's obligations under such tolling agreements been disclosed using net cash outflows.
 
The Company expects that all obligations related to non-cancellable purchase orders for manufacturing equipment will be recovered through future cash flows of the solar cell manufacturing lines and solar panel assembly lines when such long-lived assets are placed in service. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets and significant negative industry or economic trends. Total obligations related to non-cancellable purchase orders for inventories match current and forecasted sales orders that will consume these ordered materials and actual consumption of these ordered materials are compared to expected demand regularly. The Company anticipates total obligations related to long-term supply agreements for inventories will be recovered because quantities are less than management's expected demand for its solar power products. However, the terms of the long-term supply agreements are reviewed by management and the Company establishes accruals for estimated losses on adverse purchase commitments as necessary, such as lower of cost or market value adjustments, forfeiture of advanced deposits and liquidated damages. Such accruals will be recorded when the Company determines the cost of purchasing the components is higher than the estimated current market value or when it believes it is probable such components will not be utilized in future operations.
 
Advances to Suppliers
 
As noted above, the Company has entered into agreements with various polysilicon, ingot, wafer, solar cell and solar panel vendors that specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 years. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the

11

Index

arrangements. Under certain agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. During the three months ended April 3, 2011, the Company paid advances totaling $17.0 million in accordance with the terms of existing long-term supply agreements. As of April 3, 2011 and January 2, 2011, advances to suppliers totaled $299.9 million and $287.1 million, respectively, the current portion of which is $33.7 million and $31.7 million, respectively. Two suppliers accounted for 78% and 19% of total advances to suppliers as of April 3, 2011, and 83% and 13% as of January 2, 2011.
 
The Company's future prepayment obligations related to these agreements as of April 3, 2011 are as follows:
(In thousands)
 
Amount
Year
 
 
2011 (remaining nine months)
 
$
120,162
 
2012
 
104,523
 
2013
 
7,750
 
 
 
$
232,435
 
 
In January 2008, the Company entered into an Option Agreement with NorSun AS ("NorSun"), a manufacturer of silicon ingots and wafers, under which the Company would deliver cash advance payments to NorSun for the purchase of polysilicon under a long-term polysilicon supply agreement. The Company paid a cash advance of $5.0 million to NorSun during the fourth quarter of fiscal 2009. The Option Agreement provided NorSun an option to sell a 23.3% equity interest in a joint venture to the Company equal to the $5.0 million cash advance. On December 3, 2010, NorSun entered into an agreement with a third party to sell its equity interest in the joint venture at cost, including the Company's indirect equity interest of 23.3% at $5.0 million. That agreement became effective in the first quarter of fiscal 2011 and the Option Agreement was terminated. In connection with the termination of the Option Agreement, on March 31, 2011, the $5.0 million cash advance was returned to the Company.
 
Product Warranties
 
The Company generally warrants or guarantees the performance of the solar panels that it manufactures at certain levels of power output for 25 years. In addition, the Company passes through to customers long-term warranties from the original equipment manufacturers ("OEM") of certain system components, such as inverters. Warranties of 25 years from solar panels suppliers are standard in the solar industry, while inverters typically carry warranty periods ranging from 5 to 10 years. In addition, the Company generally warrants its workmanship on installed systems for periods ranging up to 10 years. The Company maintains reserves to cover the expected costs that could result from these warranties. The Company's expected costs are generally in the form of product replacement or repair. Warranty reserves are based on the Company's best estimate of such costs and are recognized as a cost of revenue. The Company continuously monitors product returns for warranty failures and maintains a reserve for the related warranty expenses based on various factors including historical warranty claims, results of accelerated lab testing, field monitoring, vendor reliability estimates, and data on industry averages for similar products. Historically, warranty costs have been within management's expectations.
 
Provisions for warranty reserves charged to cost of revenue were $7.7 million and $4.1 million during the three months ended April 3, 2011 and April 4, 2010, respectively. Activity within accrued warranty for the first quarter of fiscal 2011 and 2010 is summarized as follows:
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Balance at the beginning of the period
 
$
63,562
 
 
$
46,475
 
Accruals for warranties issued during the period
 
7,739
 
 
4,093
 
Settlements made during the period
 
(1,182
)
 
(1,144
)
Balance at the end of the period
 
$
70,119
 
 
$
49,424
 
 
System Put-Rights
 
Projects often require the Company to undertake customer obligations including: (i) system output performance guarantees; (ii) system maintenance; (iii) penalty payments or customer termination rights if the system the Company is constructing is not commissioned within specified timeframes or other milestones are not achieved; (iv) guarantees of certain

12

Index

minimum residual value of the system at specified future dates; and (v) system put-rights whereby the Company could be required to buy-back a customer's system at fair value on specified future dates if certain minimum performance thresholds are not met. To date, no such repurchase obligations have been required.
 
Future Financing Commitments
 
As specified in the Company's joint venture agreement with AU Optronics Singapore Pte. Ltd. ("AUO"), both the Company and AUO contributed certain funding during fiscal 2010 and on March 16, 2011. The Company and AUO will each contribute additional amounts in fiscal 2011 to 2014 amounting to $301 million, or such lesser amount as the parties may mutually agree. In addition, if the Company, AUO, or the joint venture requests additional equity financing to the joint venture, then both the Company and AUO will be required to make additional cash contributions of up to $50 million in the aggregate.
 
On September 28, 2010, the Company invested $0.2 million in a related party accounted for under the cost method. The Company will be required to provide additional financing of up to $4.9 million, subject to certain conditions.
 
The Company's future financing obligations related to these agreements as of April 3, 2011 are as follows:
(In thousands)
 
Amount
Year
 
 
2011 (remaining nine months)
 
$
31,900
 
2012
 
75,870
 
2013
 
101,400
 
2014
 
96,770
 
 
 
$
305,940
 
 
Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $26.0 million and $24.9 million as of April 3, 2011 and January 2, 2011, respectively, and are included in "Other long-term liabilities" in the Company's Condensed Consolidated Balance Sheets as they are not expected to be paid within the next twelve months. Due to the complexity and uncertainty associated with its tax positions, the Company cannot make a reasonably reliable estimate of the period in which cash settlement will be made for its liabilities associated with uncertain tax positions in other long-term liabilities (see Note 10).
 
Indemnifications
 
The Company is a party to a variety of agreements under which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights and certain tax related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company under the procedures specified in the particular contract. These procedures usually allow the Company to challenge the other party's claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third party claims brought against the other party. Further, the Company's obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.
 
Legal Matters
 
Three securities class action lawsuits were filed against the Company and certain of its current and former officers and directors in the United States District Court for the Northern District of California on behalf of a class consisting of those who acquired the Company's securities from April 17, 2008 through November 16, 2009. The cases were consolidated as Plichta v. SunPower Corp. et al., Case No. CV-09-5473-RS (N.D. Cal.), and lead plaintiffs and lead counsel were appointed on March 5, 2010. Lead plaintiffs filed a consolidated complaint on May 28, 2010. The actions arise from the Audit Committee's investigation announcement on November 16, 2009 regarding certain unsubstantiated accounting entries. The consolidated complaint alleges that the defendants made material misstatements and omissions concerning the Company's financial results for 2008 and 2009, seeks an unspecified amount of damages, and alleges violations of Sections 10(b) and 20(a) of the

13

Index

Securities Exchange Act of 1934, and Sections 11 and 15 of the Securities Act of 1933. The Company believes it has meritorious defenses to these allegations and will vigorously defend itself in these matters. The court held a hearing on the defendants' motions to dismiss the consolidated complaint on November 4, 2010. The court dismissed the consolidated complaint with leave to amend on March 1, 2011. An amended complaint was filed on April 18, 2011. The Company is currently unable to determine if the resolution of these matters will have an adverse effect on the Company's financial position, liquidity or results of operations.
 
Derivative actions purporting to be brought on the Company's behalf have also been filed in state and federal courts against several of the Company's current and former officers and directors based on the same events alleged in the securities class action lawsuits described above. The California state derivative cases were consolidated as In re SunPower Corp. S'holder Derivative Litig., Lead Case No. 1-09-CV-158522 (Santa Clara Sup. Ct.), and co-lead counsel for plaintiffs have been appointed. The complaints assert state-law claims for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement, and waste of corporate assets. Plaintiffs are scheduled to file a consolidated complaint after entry of an order deciding defendants' motion to dismiss the amended class action complaint. The federal derivative complaints were consolidated as In re SunPower Corp. S'holder Derivative Litig., Master File No. CV-09-05731-RS (N.D. Cal.), and lead plaintiffs and co-lead counsel were appointed on January 4, 2010. The complaints assert state-law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment, and seek an unspecified amount of damages. Plaintiffs are scheduled to file a consolidated complaint on May 13, 2011. The Company intends to oppose the derivative plaintiffs' efforts to pursue this litigation on the Company's behalf. The Company is currently unable to determine if the resolution of these matters will have an adverse effect on the Company's financial position, liquidity or results of operations.
 
The Company is also a party to various other litigation matters and claims that arise from time to time in the ordinary course of its business. While the Company believes that the ultimate outcome of such matters will not have a material adverse effect on the Company, their outcomes are not determinable and negative outcomes may adversely affect the Company's financial position, liquidity or results of operations.
 
Note 6. JOINT VENTURES
 
Joint Venture with Woongjin Energy Co., Ltd (“Woongjin Energy”)
 
The Company and Woongjin Holdings Co., Ltd. (“Woongjin”) formed Woongjin Energy in fiscal 2006, a joint venture to manufacture monocrystalline silicon ingots in Korea. On June 30, 2010, Woongjin Energy completed its initial public offering ("IPO") and the sale of 15.9 million new shares of common stock. The Company continues to hold 19.4 million shares, or a percentage equity interest of 31.3%, of Woongjin Energy's common stock with a market value of $316.7 million on April 1, 2011. On October 29, 2010, the Company entered into a revolving credit facility with Union Bank, N.A. ("Union Bank"), and all shares of Woongjin Energy held by the Company have been pledged as security under the revolving credit facility.
 
The Company supplies polysilicon, services and technical support required for silicon ingot manufacturing to the joint venture. Once manufactured, the Company purchases the silicon ingots from the joint venture under a nine-year agreement through 2016. There is no obligation or expectation for the Company to provide additional funding to Woongjin Energy. In addition, as a result of Woongjin Energy completing its IPO and the sale of 15.9 million new shares of common stock on June 30, 2010, the Company has concluded that Woongjin Energy is no longer a variable interest entity ("VIE").
 
As of April 3, 2011 and January 2, 2011, the Company had an investment of $81.1 million and $76.6 million, respectively, in the joint venture in its Condensed Consolidated Balance Sheets. The Company accounts for its investment in Woongjin Energy using the equity method in which the investment is classified as “Other long-term assets” in the Condensed Consolidated Balance Sheets and the Company's share of Woongjin Energy's income totaling $4.5 million and $3.1 million in the three months ended April 3, 2011 and April 4, 2010, respectively, is included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statements of Operations. As of April 3, 2011, the Company's maximum exposure to loss as a result of its involvement with Woongjin Energy is limited to the carrying value of its investment.
 
As of April 3, 2011 and January 2, 2011, $18.8 million and $18.4 million, respectively, remained due and receivable from Woongjin Energy related to the polysilicon the Company supplied to the joint venture for silicon ingot manufacturing. Payments to Woongjin Energy for manufactured silicon ingots totaled $48.8 million and $47.0 million in the three months ended April 3, 2011 and April 4, 2010, respectively. As of April 3, 2011 and January 2, 2011, $33.5 million and $32.6 million, respectively, remained due and payable to Woongjin Energy. In addition, the Company conducted other related-party transactions with Woongjin Energy in the first quarter of fiscal 2011. The Company recognized $1.0 million and zero in revenue during the three months ended April 3, 2011 and April 4, 2010, respectively, related to the sale of solar panels to Woongjin Energy. As of April 3, 2011 and January 2, 2011, $0.2 million and zero remained due and receivable from Woongjin

14

Index

Energy related to the sale of these solar panels.
 
Woongjin Energy qualified as a "significant investee" of the Company in fiscal 2009 as defined in SEC Regulation S-X Rule 10-01(b)(1). Summarized financial information adjusted to conform to U.S. GAAP for Woongjin Energy for the three months ended April 3, 2011 and April 4, 2010 is as follows:
Statement of Operations
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Revenue
 
$
67,272
 
 
$
27,591
 
Cost of revenue
 
55,747
 
 
13,468
 
Gross margin
 
11,525
 
 
14,123
 
Operating income
 
8,609
 
 
13,070
 
Net income
 
11,309
 
 
11,851
 
 
Joint Venture with First Philec Solar Corporation (“First Philec Solar”)
 
The Company and First Philippine Electric Corporation (“First Philec”) formed First Philec Solar in fiscal 2007, a joint venture to provide wafer slicing services of silicon ingots to the Company in the Philippines. The Company supplies to the joint venture silicon ingots and technology required for slicing silicon. Once manufactured, the Company purchases the completed silicon wafers from the joint venture under a five-year wafering supply and sales agreement through 2013. There is no obligation or expectation for the Company to provide additional funding to First Philec Solar.
 
As of April 3, 2011 and January 2, 2011, the Company had an investment of $6.6 million and $6.1 million, respectively, in the joint venture in its Condensed Consolidated Balance Sheets which represented a 15% equity investment in both periods. The Company accounts for its investment in First Philec Solar using the equity method since the Company is able to exercise significant influence over the joint venture due to its board positions. The Company's investment is classified as “Other long-term assets” in the Condensed Consolidated Balance Sheets and the Company's share of First Philec Solar's income of $0.5 million and zero during the three months ended April 3, 2011 and April 4, 2010, respectively, is included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statements of Operations. As of April 3, 2011, the Company's maximum exposure to loss as a result of its involvement with First Philec Solar is limited to the carrying value of its investment.
 
As of April 3, 2011 and January 2, 2011, $2.9 million and $3.3 million, respectively, remained due and receivable from First Philec Solar related to the wafer slicing process of silicon ingots supplied by the Company to the joint venture. Payments to First Philec Solar for wafer slicing services of silicon ingots totaled $28.4 million and $15.5 million during the three months ended April 3, 2011 and April 4, 2010, respectively. As of April 3, 2011 and January 2, 2011, $11.0 million and $9.0 million, respectively, remained due and payable to First Philec Solar related to the purchase of silicon wafers.
 
The Company has concluded that it is not the primary beneficiary of the joint venture since, although the Company and First Philec are both obligated to absorb losses or have the right to receive benefits from First Philec Solar that are significant to First Philec Solar, such variable interests held by the Company do not empower it to direct the activities that most significantly impact First Philec Solar's economic performance. In reaching this determination, the Company considered the significant control exercised by First Philec over the joint venture's Board of Directors, management and daily operations.
 
Joint Venture with AUO SunPower Sdn. Bhd. ("AUOSP")
 
On May 27, 2010, the Company, through its subsidiaries SunPower Technology, Ltd. (“SPTL") and AUOSP, formerly SunPower Malaysia Manufacturing Sdn. Bhd. ("SPMY"), entered into a joint venture agreement with AUO and AU Optronics Corporation, the ultimate parent company of AUO (“AUO Taiwan”). The joint venture transaction closed on July 5, 2010. The Company, through SPTL, and AUO each own 50% of the joint venture AUOSP. AUOSP owns a solar cell manufacturing facility ("FAB 3") in Malaysia and manufactures solar cells and sells them on a “cost-plus” basis to the Company and AUO.
 
On July 5, 2010, the Company and AUO also entered into licensing and joint development, supply, and other ancillary transaction agreements. Through the licensing agreement, SPTL and AUO licensed to AUOSP, on a non-exclusive, royalty-free basis, certain background intellectual property related to solar cell manufacturing (in the case of SPTL), and manufacturing processes (in the case of AUO). Under the seven-year supply agreement with AUOSP, renewable by the Company for one-year periods thereafter, the percentage of AUOSP's total annual output allocated on a monthly basis to the Company, which the

15

Index

Company is committed to purchase, ranges from 95% in the fourth quarter of fiscal 2010 to 80% in fiscal year 2013 and thereafter. The Company and AUO have the right to reallocate supplies from time to time under a written agreement. As required under the joint venture agreement, on November 5, 2010, the Company and AUOSP entered into an agreement under which the Company will resell to AUOSP polysilicon purchased from a third-party supplier and AUOSP will provide prepayments to the Company related to such polysilicon, which prepayment will then be made by the Company to the third-party supplier (see Note 5).
 
The Company and AUO will not be permitted to transfer any of AUOSP's shares held by them, except to each other and to their direct or indirect wholly-owned subsidiaries. During the second half of fiscal 2010, the Company, through SPTL, and AUO each contributed total initial funding of Malaysian Ringgit 88.6 million. On March 16, 2011, both the Company and AUO each contributed an additional $20.0 million in funding and will each contribute additional amounts in fiscal 2011 to 2014 amounting to $301 million, or such lesser amount as the parties may mutually agree. In addition, if AUOSP, SPTL or AUO requests additional equity financing to AUOSP, then SPTL and AUO will each be required to make additional cash contributions of up to $50 million in the aggregate (See Note 5).
 
The Company has concluded that it is not the primary beneficiary of the joint venture since, although the Company and AUO are both obligated to absorb losses or have the right to receive benefits, the Company alone does not have the power to direct the activities of the joint venture that most significantly impact its economic performance. In making this determination the Company considered the shared power arrangement, including equal board governance for significant decisions, elective appointment, and the fact that both parties contribute to the activities that most significantly impact the joint venture's economic performance. As a result of the shared power arrangement the Company deconsolidated AUOSP in the third quarter of fiscal 2010 and accounts for its investment in the joint venture under the equity method.
 
As of April 3, 2011 and January 2, 2011, the Company had an investment of $55.9 million and $33.7 million, respectively, in AUOSP in its Condensed Consolidated Balance Sheets which represents its 50% equity investment. The Company accounts for its investment in AUOSP using the equity method in which the investment is classified as “Other long-term assets” in the Condensed Consolidated Balance Sheets. The Company accounted for its share of AUOSP's net income of $2.2 million for the three months ended January 2, 2011 in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statement of Operations during the first quarter of fiscal 2011 due to a quarterly lag in reporting. As of April 3, 2011 and January 2, 2011, $5.8 million and $6.0 million, respectively, remained due and payable to AUOSP and $32.9 million and $7.5 million, respectively, remained due and receivable from AUOSP. Payments to AUOSP for solar cells totaled $27.9 million during the three months ended April 3, 2011. As of April 3, 2011, the Company's maximum exposure to loss as a result of its involvement with AUOSP is limited to the carrying value of its investment.
 
Note 7. DEBT AND CREDIT SOURCES
 
The following table summarizes the Company's outstanding debt as of April 3, 2011 and their related maturity dates:
 
 
 
 
Payments Due by Period
(In thousands)
 
Face Value
 
2011
(remaining
nine months)
 
2012
 
2013
 
2014
 
2015
 
Beyond
2015
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.50% debentures
 
$
250,000
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
250,000
 
 
$
 
4.75% debentures
 
230,000
 
 
 
 
 
 
 
 
230,000
 
 
 
 
 
1.25% debentures
 
198,608
 
 
 
 
198,608
 
 
 
 
 
 
 
 
 
0.75% debentures
 
79
 
 
 
 
 
 
 
 
 
 
79
 
 
 
IFC mortgage loan
 
50,000
 
 
 
 
 
 
10,000
 
 
10,000
 
 
10,000
 
 
20,000
 
CEDA loan
 
30,000
 
 
30,000
 
 
 
 
 
 
 
 
 
 
 
Union Bank revolving credit facility
 
70,000
 
 
70,000
 
 
 
 
 
 
 
 
 
 
 
Société Générale revolving credit facility
 
106,095
 
 
106,095
 
 
 
 
 
 
 
 
 
 
 
 
 
$
934,782
 
 
$
206,095
 
 
$
198,608
 
 
$
10,000
 
 
$
240,000
 
 
$
260,079
 
 
$
20,000
 

16

Index

 
Convertible Debt
 
The following table summarizes the Company's outstanding convertible debt (which is additionally reflected in the table above):
 
 
April 3, 2011
 
January 2, 2011
(In thousands)
 
Carrying Value
 
Face Value
 
Fair Value (1)
 
Carrying Value
 
Face Value
 
Fair Value (1)
4.50% debentures
 
$
182,967
 
 
$
250,000
 
 
$
260,483
 
 
$
179,821
 
 
$
250,000
 
 
$
230,172
 
4.75% debentures
 
230,000
 
 
230,000
 
 
240,638
 
 
230,000
 
 
230,000
 
 
215,050
 
1.25% debentures (2)
 
185,572
 
 
198,608
 
 
193,146
 
 
182,023
 
 
198,608
 
 
188,429
 
0.75% debentures
 
79
 
 
79
 
 
79
 
 
79
 
 
79
 
 
75
 
 
 
$
598,618
 
 
$
678,687
 
 
$
694,346
 
 
$
591,923
 
 
$
678,687
 
 
$
633,726
 
 
(1)
The fair value of the convertible debt was determined based on quoted market prices as reported by an independent pricing source.
 
(2)
The carrying value of the 1.25% senior convertible debentures ("1.25% debentures") were reclassified from long-term liabilities to short-term liabilities within "Convertible debt, current portion" in the Condensed Consolidated Balance Sheet as of April 3, 2011 as the holders may require the Company to repurchase all of their 1.25% debentures on February 15, 2012.
 
4.50% Debentures
 
On April 1, 2010, the Company issued $220.0 million in principal amount of its 4.50% senior cash convertible debentures (“4.50% debentures”). On April 5, 2010, the initial purchasers of the 4.50% debentures exercised the $30.0 million over-allotment option in full. Interest is payable semi-annually, on March 15 and September 15 of each year, at a rate of 4.50% per annum. The 4.50% debentures mature on March 15, 2015 unless repurchased or converted in accordance with their terms prior to such date. The 4.50% debentures are convertible only into cash, and not into shares of the Company's class A common stock (or any other securities).
 
The embedded cash conversion option within the 4.50% debentures and the over-allotment option related to the 4.50% debentures are derivative instruments that are required to be separated from the 4.50% debentures and accounted for separately as derivative instruments (derivative liabilities) with changes in fair value reported in the Company's Condensed Consolidated Statements of Operations until such transactions settle or expire. The over-allotment option was settled on April 5, 2010, however, the embedded cash conversion option continues to require mark-to-market accounting treatment. The initial fair value liabilities of the embedded cash conversion option and over-allotment option were classified within “Other long-term liabilities” and simultaneously reduced the carrying value of “Convertible debt, net of current portion” in the Company's Condensed Consolidated Balance Sheet.
 
In the three months ended April 3, 2011, the Company recognized a non-cash loss of $21.9 million recorded in “Loss on mark-to-market derivatives” in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the embedded cash conversion option. In the three months ended April 4, 2010, the Company recognized a non-cash loss of $0.3 million recorded in “Loss on mark-to-market derivatives” in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the embedded cash conversion option and over-allotment option. The fair value liability of the embedded cash conversion option as of April 3, 2011 and January 2, 2011 totaled $56.7 million and $34.8 million, respectively, and is classified within “Other long-term liabilities” in the Company's Condensed Consolidated Balance Sheets.
 
The embedded cash conversion option is fair valued utilizing Level 2 inputs consisting of the exercise price of the instrument, the Company's class A common stock price and volatility, the risk free interest rate and the contractual term. Such derivative instruments are not traded on an open market as the banks are the counterparties to the instruments.
 
Significant inputs for the valuation of the embedded cash conversion option are as follows:
 

17

Index

 
As of (1)
 
April 3, 2011
 
January 2, 2011
Stock price
$
17.19
 
 
$
12.83
 
Exercise price
$
22.53
 
 
$
22.53
 
Interest rate
1.79
%
 
1.63
%
Stock volatility
47.50
%
 
49.80
%
Maturity date
February 18, 2015
 
 
February 18, 2015
 
 
(1)
The valuation model utilizes these inputs to value the right but not the obligation to purchase one share at $22.53. The Company utilized a Black-Scholes valuation model to value the embedded cash conversion option. The underlying input assumptions were determined as follows:
(i)
Stock price. The closing price of the Company's class A common stock on the last trading day of the quarter.
(ii)
Exercise price. The exercise price of the embedded conversion option.
(iii)
Interest rate. The Treasury Strip rate associated with the life of the embedded conversion option.
(iv)
Stock volatility. The volatility of the Company's class A common stock over the life of the embedded conversion option.
 
Call Spread Overlay with Respect to 4.50% Debentures (“CSO2015”)
 
Concurrent with the issuance of the 4.50% debentures, the Company entered into privately negotiated convertible debenture hedge transactions (collectively, the "Bond Hedge") and warrant transactions (collectively, the "Warrants" and together with the Bond Hedge, the “CSO2015”), with certain of the initial purchasers of the 4.50% cash convertible debentures or their affiliates. The CSO2015 transaction represents a call spread overlay with respect to the 4.50% debentures. Assuming full performance by the counterparties, the transactions effectively reduce the Company's potential payout over the principal amount on the 4.50% debentures upon conversion of the 4.50% debentures.
 
Under the terms of the Bond Hedge, the Company bought from affiliates of certain of the initial purchasers options to acquire, at an exercise price of $22.53 per share, subject to anti-dilution adjustments, cash in an amount equal to the market value of up to 11.1 million shares of the Company's class A common stock. Under the terms of the original Warrants, the Company sold to affiliates of certain of the initial purchasers of the 4.50% cash convertible debentures warrants to acquire, at an exercise price of $27.03 per share, cash in an amount equal to the market value of up to 11.1 million shares of the Company's class A common stock. Each Bond Hedge and Warrant transaction is a separate transaction, entered into by the Company with each option counterparty, and is not part of the terms of the 4.50% debentures. On December 23, 2010, the Company amended and restated the original Warrants so that the holders would, upon exercise of the Warrants, no longer receive cash but instead would acquire up to 11.1 million shares of the Company's class A common stock.
 
The Bond Hedge, which is indexed to the Company's class A common stock, is a derivative instrument that requires mark-to-market accounting treatment due to the cash settlement features until such transactions settle or expire. Similarly, the original Warrants was a derivative instrument that required mark-to-market accounting treatment through December 23, 2010. The initial fair value of the Bond Hedge was classified as “Other long-term assets” in the Company's Condensed Consolidated Balance Sheet. As of April 3, 2011, the fair value of the Bond Hedge is $56.3 million, an increase of $21.8 million since January 2, 2011. The change in fair value of the Bond Hedge resulted in a mark-to-market non-cash gain of $21.8 million in “Loss on mark-to-market derivatives” in the Company's Condensed Consolidated Statement of Operations during the first quarter of fiscal 2011. In the first quarter of fiscal 2010, the change in fair value of the original CSO2015 resulted in a mark-to-market non-cash loss of $2.0 million in “Loss on mark-to-market derivatives” in the Company's Condensed Consolidated Statement of Operations.
 
The Bond Hedge derivative instruments are fair valued utilizing Level 2 inputs consisting of the exercise price of the instruments, the Company's class A stock price and volatility, the risk free interest rate and the contractual term. Such derivative instruments are not traded on an open market. Valuation techniques utilize the inputs described above in addition to liquidity and institutional credit risk inputs.
 
Significant inputs for the valuation of the Bond Hedge at the measurement date are as follows:
 

18

Index

 
As of (1)
 
April 3, 2011
 
January 2, 2011
Stock price
$
17.19
 
 
$
12.83
 
Exercise price
$
22.53
 
 
$
22.53
 
Interest rate
1.79
%
 
1.63
%
Stock volatility
47.50
%
 
49.80
%
Credit risk adjustment
1.03
%
 
1.25
%
Maturity date
February 18, 2015
 
 
February 18, 2015
 
 
(1)
The valuation model utilizes these inputs to value the right but not the obligation to purchase one share at $22.53 for the Bond Hedge. The Company utilized a Black-Scholes valuation model to value the Bond Hedge. The underlying input assumptions were determined as follows:
(i)
Stock price. The closing price of the Company's class A common stock on the last trading day of the quarter.
(ii)
Exercise price. The exercise price of the Bond Hedge.
(iii)
Interest rate. The Treasury Strip rate associated with the life of the Bond Hedge.
(iv)
Stock volatility. The volatility of the Company's class A common stock over the life of the Bond Hedge.
(v)
Credit risk adjustment. Represents the weighted average of the credit default swap rate of the counterparties.
 
July 2007 Share Lending Arrangement
 
Concurrent with the offering of the 0.75% senior convertible debentures ("0.75% debentures"), the Company lent 1.8 million shares of its class A common stock to Credit Suisse International ("CSI"), an affiliate of Credit Suisse Securities (USA) LLC ("Credit Suisse"), one of the underwriters of the 0.75% debentures. The loaned shares are to be used to facilitate the establishment by investors in the 1.25% debentures and 0.75% debentures of hedged positions in the Company's class A common stock. The Company did not receive any proceeds from the offerings of class A common stock, but received a nominal lending fee of $0.001 per share for each share of common stock that is loaned under the share lending agreement. As of April 3, 2011 the fair value of the 1.8 million outstanding loaned shares of class A common stock was $30.9 million (based on a market price of $17.19 as of April 1, 2011).
 
Share loans under the share lending agreement terminate and the borrowed shares must be returned to the Company under the following circumstances: (i) CSI may terminate all or any portion of a loan at any time; (ii) the Company may terminate any or all of the outstanding loans upon a default by CSI under the share lending agreement, including a breach by CSI of any of its representations and warranties, covenants or agreements under the share lending agreement, or the bankruptcy or administrative proceeding of CSI; or (iii) if the Company enters into a merger or similar business combination transaction with an unaffiliated third party (as defined in the agreement). In addition, CSI has agreed to return to the Company any borrowed shares in its possession on the date anticipated to be five business days before the closing of certain merger or similar business combinations described in the share lending agreement. Except in limited circumstances, any such shares returned to the Company cannot be re-borrowed.
 
Any shares loaned to CSI are considered issued and outstanding for corporate law purposes and, accordingly, the holders of the borrowed shares have all of the rights of a holder of the Company's outstanding shares, including the right to vote the shares on all matters submitted to a vote of the Company's stockholders and the right to receive any dividends or other distributions that the Company may pay or make on its outstanding shares of class A common stock. However, CSI agreed that it will not participate in shareholder voting matters and further agreed to pay to the Company an amount equal to any dividends or other distributions that the Company pays on the borrowed shares. The shares are listed for trading on the Nasdaq Global Select Market.
 
While the share lending agreement does not require cash payment upon return of the shares, physical settlement is required (i.e., the loaned shares must be returned at the end of the arrangement). In view of this share return provision and other contractual undertakings of CSI in the share lending agreement, which have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the borrowed shares, historically the loaned shares were not considered issued and outstanding for the purpose of computing and reporting the Company's basic and diluted weighted average shares or earnings per share.
 
The shares lent to CSI will continue to be excluded for the purpose of computing and reporting the Company's basic and diluted weighted average shares or earnings per share. If Credit Suisse or its affiliates, including CSI, were to file bankruptcy or

19

Index

commence similar administrative, liquidating, restructuring or other proceedings, the Company may have to consider 1.8 million shares lent to CSI as issued and outstanding for purposes of calculating earnings per share.
 
Other Debt and Credit Sources
 
There has been no significant change in the Company's remaining debt balance, composition or terms since the end of the most recently completed fiscal year end. Additional details regarding the Company's debt arrangements may be referenced from the Company's annual consolidated financial statements and notes thereto for the year ended January 2, 2011 included in its fiscal 2010 Form 10-K filed with the SEC.
 
Note 8. COMPREHENSIVE INCOME (LOSS)
 
The components of comprehensive income (loss) are as follows:
 
 
As of
 (In thousands)
 
April 3, 2011
 
January 2, 2011
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
Cumulative translation adjustment
 
$
(2,951
)
 
$
(2,761
)
Net unrealized gain (loss) on derivatives
 
(30,402
)
 
10,647
 
Net unrealized gain on investments
 
355
 
 
 
Deferred taxes
 
3,496
 
 
(4,246
)
 
 
$
(29,502
)
 
$
3,640
 
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Net income (loss)
 
$
(2,121
)
 
$
12,573
 
Components of comprehensive income (loss):
 
 
 
 
Translation adjustment
 
(190
)
 
171
 
Net unrealized gain (loss) on derivatives (Note 9)
 
(41,049
)
 
25,990
 
Unrealized gain on investments
 
355
 
 
 
Income taxes
 
7,742
 
 
(2,954
)
Net change in accumulated other comprehensive income (loss)
 
(33,142
)
 
23,207
 
Total comprehensive income (loss)
 
$
(35,263
)
 
$
35,780
 
 
Note 9. FOREIGN CURRENCY DERIVATIVES
 
The Company has non-U.S. subsidiaries that operate and sell the Company's products in various global markets, primarily in Europe. As a result, the Company is exposed to risks associated with changes in foreign currency exchange rates. It is the Company's policy to use various techniques, including entering into foreign currency derivative instruments, to manage the exposures associated with forecasted revenues, purchases of foreign sourced equipment and non-U.S. dollar denominated monetary assets and liabilities. The Company does not enter into foreign currency derivative financial instruments for speculative or trading purposes.
 
The Company is required to recognize derivative instruments as either assets or liabilities at fair value in its Condensed Consolidated Balance Sheets. The Company utilizes the income approach and mid-market pricing to calculate the fair value of its option and forward contracts based on market volatilities, spot and forward rates, interest rates and credit default swaps rates from published sources. The following table presents information about the Company's hedge instruments measured at fair value on a recurring basis as of April 3, 2011 and January 2, 2011, all of which utilize Level 2 inputs under the fair value hierarchy:

20

Index

(In thousands)
 
Balance Sheet Classification
 
April 3, 2011
 
January 2, 2011
Assets
 
Prepaid expenses and other current assets
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 
 
$
7,772
 
 
$
16,432
 
Foreign currency forward exchange contracts
 
 
 
208
 
 
16,314
 
 
 
 
 
$
7,980
 
 
$
32,746
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
 
 
$
9,946
 
 
$
3,208
 
 
 
 
 
 
 
 
Liabilities
 
Accrued liabilities
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 
 
$
12,413
 
 
$
2,909
 
Foreign currency forward exchange contracts
 
 
 
9,228
 
 
3,295
 
 
 
 
 
$
21,641
 
 
$
6,204
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forward exchange contracts
 
 
 
$
68,170
 
 
$
4,060
 
 
 
 
 
 
 
 
 
Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. The selection of a particular technique to value an over-the-counter (“OTC”) foreign currency derivative depends upon the contractual term of, and specific risks inherent with, the instrument as well as the availability of pricing information in the market. We generally use similar techniques to value similar instruments. Valuation techniques utilize a variety of inputs, including contractual terms, market prices, yield curves, credit curves and measures of volatility. For OTC foreign currency derivatives that trade in liquid markets, such as generic forward and option contracts, inputs can generally be verified and selections do not involve significant management judgment.
 
The following table summarizes the amount of unrealized gain (loss) recognized in “Accumulated other comprehensive income (loss)” (“OCI”) in “Stockholders' equity” in the Condensed Consolidated Balance Sheets:
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Derivatives designated as cash flow hedges:
 
 
 
 
Unrealized gain (loss) recognized in OCI (effective portion)
 
$
(47,993
)
 
$
17,622
 
Less: Loss (gain) reclassified from OCI to revenue (effective portion)
 
3,055
 
 
(4,110
)
Less: Loss reclassified from OCI to other, net (1)
 
3,889
 
 
 
Add: Loss reclassified from OCI to cost of revenue (effective portion)
 
 
 
12,478
 
Net gain (loss) on derivatives (Note 8)
 
$
(41,049
)
 
$
25,990
 
 
(1)    During the three months ended April 3, 2011, the Company reclassified from OCI to "Other, net" a net gain totaling $0.8 million relating to transactions previously designated as effective cash flow hedges as the related forecasted transactions did not occur in the hedge period or within an additional two month time period thereafter. In addition, the Company reclassified from OCI to "Other, net" a net loss totaling $4.7 million relating to transactions previously designated as effective cash hedges as the Company concluded that the related forecasted transactions are probable not to occur in the hedge period or within an additional two month time period thereafter.
 
The following table summarizes the amount of gain (loss) recognized in “Other, net” in the Condensed Consolidated Statements of Operations in the three months ended April 3, 2011 and April 4, 2010:

21

Index

 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Derivatives designated as cash flow hedges:
 
 
 
 
Loss recognized in "Other, net" on derivatives (ineffective portion and amount excluded from effectiveness testing) (1)
 
$
(12,692
)
 
$
(2,002
)
Derivatives not designated as hedging instruments:
 
 
 
 
Gain (loss) recognized in "Other, net"
 
$
(38,195
)
 
$
15,390
 
 
(1)
The amount of loss recognized related to the ineffective portion of derivatives was insignificant. This amount also includes a net $3.9 million loss reclassified from OCI to “Other, net” relating to transactions previously designated as effective cash flow hedges which did not occur or were now probable not to occur in the hedge period or within an additional two month time period thereafter.
 
Foreign Currency Exchange Risk
 
Designated Derivatives Hedging Cash Flow Exposure
 
The Company's subsidiaries have had and will continue to have material cash flows, including revenues and expenses, which are denominated in currencies other than their functional currencies. The Company's cash flow exposure primarily relates to anticipated third party foreign currency revenues and expenses. Changes in exchange rates between the Company's subsidiaries' functional currencies and other currencies in which it transacts will cause fluctuations in margin, cash flows expectations, and cash flows realized or settled. Accordingly, the Company enters into derivative contracts to hedge the value of a portion of these forecasted cash flows and to protect financial performance.
 
As of April 3, 2011, the Company had designated outstanding cash flow hedge option contracts and forward contracts with an aggregate notional value of $430.2 million and $363.0 million, respectively. The maturity dates of the outstanding contracts as of April 3, 2011 range from April to December 2011. During the first quarter of fiscal 2011, the Company entered into additional designated cash flow hedges to protect certain portions of its anticipated non-functional currency cash flows related to foreign denominated revenues. As of January 2, 2011, the Company had designated outstanding hedge option contracts and forward contracts with an aggregate notional value of $358.9 million and $534.7 million, respectively. The Company designates either gross external or intercompany revenue up to its net economic exposure. These derivatives have a maturity of one year or less and consist of foreign currency option and forward contracts. The effective portion of these cash flow hedges are reclassified into revenue when third party revenue is recognized in the Condensed Consolidated Statements of Operations.
 
The Company expects to reclassify substantially all of its net losses related to these option and forward contracts that are included in accumulated other comprehensive loss as of April 3, 2011 to revenue in fiscal 2011. Cash flow hedges are tested for effectiveness each period based on changes in the spot rate applicable to the hedge contracts against the present value period to period change in spot rates applicable to the hedged item using regression analysis. The change in the time value of the options as well as the cost of forward points (the difference between forward and spot rates at inception) on forward exchange contracts are excluded from the Company's assessment of hedge effectiveness. The premium paid or time value of an option whose strike price is equal to or greater than the market price on the date of purchase is recorded as an asset in the Condensed Consolidated Balance Sheets. Thereafter, any change to this time value and the cost of forward points is included in “Other, net” in the Condensed Consolidated Statements of Operations.
 
Under hedge accounting rules for foreign currency derivatives, the Company is required to reflect mark-to-market gains and losses on its hedged transactions in accumulated other comprehensive income (loss) rather than current earnings until the hedged transactions occur. However, if the Company determines that the anticipated hedged transactions are probable not to occur, it must immediately reclassify any cumulative market gains and losses into its Condensed Consolidated Statement of Operations. During the three months ended April 3, 2011, the Company determined that certain anticipated hedged transactions are probable not to occur due, in part, to the announcement of the feed-in-tariff changes in Italy. As a result, a loss of $3.9 million was reclassified from accumulated other comprehensive income (loss) to "Other, net" in the Company's Condensed Consolidated Statement of Operations.
 
Non-Designated Derivatives Hedging Transaction Exposure
 
Other derivatives not designated as hedging instruments consist of forward contracts used to hedge re-measurement of

22

Index

foreign currency denominated monetary assets and liabilities primarily for intercompany transactions, receivables from customers, prepayments to suppliers and advances received from customers, and payables to third parties. Changes in exchange rates between the Company's subsidiaries' functional currencies and the currencies in which these assets and liabilities are denominated can create fluctuations in the Company's reported consolidated financial position, results of operations and cash flows. The Company enters into forward contracts, which are originally designated as cash flow hedges, and de-designates them upon recognition of the anticipated transaction to protect resulting non-functional currency monetary assets. These forward contracts as well as additional forward contracts are entered into to hedge foreign currency denominated monetary assets and liabilities against the short-term effects of currency exchange rate fluctuations. The Company records its derivative contracts that are not designated as hedging instruments at fair value with the related gains or losses recorded in “Other, net” in the Condensed Consolidated Statements of Operations. The gains or losses on these contracts are substantially offset by transaction gains or losses on the underlying balances being hedged. As of April 3, 2011 and January 2, 2011, the Company held forward contracts with an aggregate notional value of $566.6 million and $934.8 million, respectively, to hedge balance sheet exposure. These forward contracts have maturities of three month or less.
 
Credit Risk
 
The Company's option and forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counterparties of its option and forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any single counterparty. In addition, the derivative contracts are limited to a time period of less than one year and the Company continuously evaluates the credit standing of its counterparties.
 
Note 10. INCOME TAXES
 
In the three months ended April 3, 2011, the Company's income tax benefit of $15.8 million on a loss before income taxes and equity in earnings of unconsolidated investees of $25.1 million was primarily due to domestic and foreign losses in certain jurisdictions, nondeductible amortization of purchased intangible assets, non deductible equity compensation, amortization of debt discount from convertible debentures, mark-to-market fair value adjustments, changes in the valuation allowance on deferred tax assets and discrete stock option deductions. In the three months ended April 4, 2010, the Company's income tax benefit was $30.9 million on a loss before income taxes and equity in earnings of unconsolidated investees of $21.4 million primarily due to domestic and foreign income losses in certain jurisdictions, nondeductible amortization of purchased intangible assets, non deductible equity compensation, amortization of debt discount from convertible debentures and discrete stock option deductions. The Company’s interim period tax provision or benefit is estimated based on the expected annual worldwide tax rate and takes into account the tax effect of discrete items.
 
Index

Note 11. NET INCOME (LOSS) PER SHARE OF CLASS A AND CLASS B COMMON STOCK
 
The Company calculates net income per share under the two-class method. Under the two-class method, net income per share is computed by dividing earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, earnings are allocated to both classes of common stock and other participating securities based on their respective weighted average shares outstanding during the period. No allocation is generally made to other participating securities in the case of a net loss per share.
 
Basic weighted average shares is computed using the weighted average of the combined class A and class B common stock outstanding. Class A and class B common stock are considered equivalent securities for purposes of the earnings per share calculation because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. The Company's outstanding unvested restricted stock awards are considered participating securities as they may participate in dividends, if declared, even though the awards are not vested. As participating securities, the unvested restricted stock awards are allocated a proportionate share of net income, but excluded from the basic weighted average shares. Diluted weighted average shares is computed using basic weighted average shares plus any potentially dilutive securities outstanding during the period using the if-converted method and treasury-stock-type method, except when their effect is anti-dilutive. Potentially dilutive securities include stock options, restricted stock units, senior convertible debentures and amended warrants associated with the CSO2015.
 
The following is a summary of other outstanding anti-dilutive potential common stock:

23

Index

 
 
As of
(In thousands)
 
April 3, 2011
 
April 4, 2010
Stock options
 
1,168
 
 
394
 
Restricted stock units
 
3,488
 
 
1,061
 
Warrants (under the CSO2015)
 
*
 
 
N/A
 
4.75% debentures
 
8,712
 
 
8,712
 
1.25% debentures
 
*
 
 
*
 
0.75% debentures
 
*
 
 
*
 
 
(1)     As a result of the net loss per share for the three months ended April 3, 2011, the inclusion of all potentially dilutive stock options, restricted stock units, and common shares under the 4.75% debentures would be anti-dilutive, therefore, those shares were excluded from the computation of the weighted-average shares for diluted net loss per share.
 
*     The Company's average stock price during the three months ended April 3, 2011 and April 4, 2010 did not exceed the conversion price for the amended warrants (under the CSO2015), 1.25% debentures and 0.75% debentures and were thus non-dilutive in both quarters.
 
The following table presents the calculation of basic and diluted net income (loss) per share:
 
 
 
Three Months Ended
(In thousands, except per share amounts)
 
April 3, 2011
 
April 4, 2010
Basic net income (loss) per share:
 
 
 
 
Net income (loss)
 
$
(2,121
)
 
$
12,573
 
Less: undistributed earnings allocated to unvested restricted stock awards (1)
 
 
 
(30
)
Net income (loss) available to common stockholders
 
$
(2,121
)
 
$
12,543
 
 
 
 
 
 
Basic weighted-average common shares
 
96,453
 
 
95,154
 
 
 
 
 
 
Basic net income (loss) per share
 
$
(0.02
)
 
$
0.13
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
Net income (loss)
 
$
(2,121
)
 
$
12,573
 
Less:  undistributed earnings allocated to unvested restricted stock awards (1)
 
 
 
(29
)
Net income (loss) available to common stockholders
 
$
(2,121
)
 
$
12,544
 
 
 
 
 
 
Basic weighted-average common shares
 
96,453
 
 
95,154
 
Effect of dilutive securities:
 
 
 
 
Stock options
 
 
 
1,214
 
Restricted stock units
 
 
 
104
 
Diluted weighted-average common shares
 
96,453
 
 
96,472
 
 
 
 
 
 
Diluted net income (loss) per share
 
$
(0.02
)
 
$
0.13
 
 
(1)    Losses are not allocated to unvested restricted stock awards because such awards do not contain an obligation to participate in losses.
 
Holders of the Company's 4.75% senior convertible debentures ("4.75% debentures") may convert the debentures into shares of the Company's class A common stock, at the applicable conversion rate, at any time on or prior to maturity. The 4.75% debentures are included in the calculation of diluted net income per share if their inclusion is dilutive under the if-converted method. In the first quarter of fiscal 2011 and 2010, there were no dilutive potential common shares under the 4.75%

24

Index

debentures.
 
Holders of the Company's 1.25% debentures and 0.75% debentures may, under certain circumstances at their option, convert the debentures into cash and, if applicable, shares of the Company's class A common stock at the applicable conversion rate, at any time on or prior to maturity. The 1.25% debentures and 0.75% debentures are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury-stock-type method. The Company's average stock price during the three months ended April 3, 2011 and April 4, 2010 did not exceed the conversion price for the 1.25% debentures and 0.75% debentures. Under the treasury-stock-type method, the Company's 1.25% debentures and 0.75% debentures will generally have a dilutive impact on net income per share if the Company's average stock price for the period exceeds the conversion price for the debentures.
 
Holders of the Company's 4.50% debentures may, under certain circumstances at their option, convert the debentures into cash, and not into shares of the Company's class A common stock (or any other securities). Therefore, the 4.50% debentures are excluded from the net income per share calculation. Upon exercise of the amended warrants (under the CSO2015), holders will acquire, at an exercise price of $27.03 per share, up to 11.1 million shares of the Company's class A common stock (see Note 7). If the market price per share of the Company's class A common stock exceeds the exercise price of $27.03 per share, the amended warrants will have a dilutive effect on its dilutive net income per share using the treasury-stock-type method.
 
Note 12. STOCK-BASED COMPENSATION
 
The following table summarizes the consolidated stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Cost of UPP revenue
 
$
885
 
 
$
1,191
 
Cost of R&C revenue
 
1,036
 
 
1,491
 
Research and development
 
1,769
 
 
1,683
 
Sales, general and administrative
 
9,473
 
 
6,443
 
 
 
$
13,163
 
 
$
10,808
 
 
The following table summarizes the consolidated stock-based compensation expense by type of awards:
 
 
Three Months Ended
(In thousands)
 
April 3, 2011
 
April 4, 2010
Employee stock options
 
$
460
 
 
$
877
 
Restricted stock awards and units
 
14,826
 
 
10,815
 
Change in stock-based compensation capitalized in inventory
 
(2,123
)
 
(884
)
 
 
$
13,163
 
 
$
10,808
 
 
Note 13. SEGMENT AND GEOGRAPHICAL INFORMATION
 
The CODM assesses the performance of the UPP Segment and R&C Segment using information about their revenue and gross margin after adding back certain non-cash expenses such as amortization of other intangible assets, stock-based compensation expense and interest expense. The following tables present revenue by segment, cost of revenue by segment and gross margin by segment, revenue by geography and revenue by significant customer. Revenue is based on the destination of the shipments.
 

25

Index

 
 
Three Months Ended
(As a percentage of total revenue)
 
April 3, 2011
 
April 4, 2010
Revenue by geography:
 
 
 
 
North America
 
45
%
 
30
%
Europe:
 
 
 
 
Italy
 
17
 
 
18
 
Germany
 
5
 
 
18
 
France
 
16
 
 
11
 
Other
 
5
 
 
13
 
Rest of world
 
12
 
 
10
 
 
 
100
%
 
100
%
Revenue by segment (in thousands):
 
 
 
 
 
 
Utility and power plants
 
$
245,909
 
 
$
144,094
 
Residential and commercial
 
205,509
 
 
203,180
 
 
 
 
 
 
Cost of revenue by segment (in thousands):
 
 
 
 
 
 
Utility and power plants (as reviewed by CODM)
 
$
201,639
 
 
$
109,147
 
Amortization of intangible assets
 
102
 
 
689
 
Stock-based compensation expense
 
885
 
 
1,191
 
Non-cash interest expense
 
385
 
 
401
 
Utility and power plants
 
$
203,011
 
 
$
111,428
 
 
 
 
 
 
Residential and commercial (as reviewed by CODM)
 
$
158,007
 
 
$
159,986
 
Amortization of intangible assets
 
193
 
 
2,124
 
Stock-based compensation expense
 
1,036
 
 
1,491
 
Non-cash interest expense
 
649
 
 
502
 
Residential and commercial
 
$
159,885
 
 
$
164,103
 
 
 
 
 
 
 
 
Gross margin by segment:
 
 
 
 
 
 
Utility and power plants (as reviewed by CODM)
 
18
%
 
24
%
Residential and commercial (as reviewed by CODM)
 
23
%