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May 15,
2009
VIA
FACSIMILE AND U.S. MAIL
Mr. Kevin
L. Vaughn
Accounting
Branch Chief
Securities
and Exchange Commission
100 First
Street, N.E.
Mail Stop
6010
Washington,
D.C. 20549
Re: Response to your letter
dated April 23, 2009,
SunPower Corporation – File
No. 1-34166
Dear Mr.
Vaughn:
As requested in your letter to Tom
Werner dated April 23, 2009, this letter summarizes SunPower Corporation’s
(the “Company”) response to each of your seven comments. We have
spoken with Mr. Ruairi Rean in your office, and he
graciously granted us an extension of time until today to respond to your
letter. Also as you requested, the Company acknowledges the
following:
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The
Company is responsible for the adequacy and accuracy of its disclosure in
the filing;
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Staff
comments or changes to disclosure in response to staff comments do not
foreclose the Securities and Exchange Commission (the “Commission”) from
taking any action with respect to the filing;
and
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The
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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The
following are your comments and our responses to each:
Form 10-K for the year ended
December 28, 2008
Note 1. The
Company and Summary of Significant Accounting Policies, page
61
Revenue Recognition, page
64
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1.
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We
note that certain of your contracts include system output performance
guarantees and that you have concluded that these guarantees qualify as
separate units of accounting under EITF 00-21. Please tell us
and revise this note in future filings to disclose how you determine the
fair value of the system output
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SunPower
Corporation · 3939 North First Street · San Jose, CA 95134 · Phone: (408)
240-5500
http://www.sunpowercorp.com
Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 2
| performance guarantee for purposes of allocating the total revenue to the various elements under EITF 00-21. |
Response:
To date,
the performance guarantees we have provided have constituted an immaterial
portion of our revenues and a small percentage of the revenue related to a
system. The disclosure in our previously filed financial statements
within the Form 10-K as of and for the year ended December 28, 2008 was
developed based upon our expectation that we would sell performance guarantees
that would require separate accounting under EITF 00-21. However, in
reviewing the history of our performance guarantees based upon your
comment, we have concluded that none of the performance guarantees that we have
offered to date qualify as separate deliverables under 00-21. The
Company offers a standard 25-year warranty that is provided to all
customers of solar modules. For certain customers of our systems, the contract
also includes a performance guarantee provision which ranges from 2 to 5 years.
With this provision, the Company agrees to pay predetermined stipulated damages
(defined as performance guarantee payments) in the event the system does not
perform to the stated specifications. The existence of the performance
guarantees that we have contracted to date does not result in any
additional services or efforts by the Company. The performance guarantee
provision simply quantifies our customer's financial remedy in the event of
system under-performance and avoids any potential drawn out settlement
negotiations between the parties if the system does not meet the minimum stated
specifications. Based on our historical experience with more than 450
commercially deployed solar systems, we believe there is a low
probability of not meeting the stated specifications and that performance
guarantee payments, if any, will be nominal. The amount of accrued costs
attributed to contracts that contain such provision for performance guarantees
payments is approximately $1.3 million.
In our
future filings, the Company will revise the disclosure in its Notes to the
Financial Statements to clarify that the performance guarantees it has offered
are not separate units of accounting.
Note
9. Commitments and Contingencies, page 81
Product Warranties, page
82
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2.
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We
note that you provide product warranties for extended periods, usually 20
years, and that you record an estimated warranty liability based on
“historical experience of similar products as well as various other
assumptions that are considered reasonable under the
circumstances.” Separately, we note your disclosure on page 13
that your solar panels have not and cannot be tested in an environment
simulating the 20-year warranty period. Please tell us and
revise your disclosures here and in your Summary of Significant Accounting
Policies on page 64 in future filings to address the
following:
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Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 3
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In
light of the lack of historical experience, explain in greater detail how
you estimate the amount of potential warranty liability. In
this regard, we note the risk factor on page 13 refers to “accelerated
testing of [your] solar cells.” If true, revise here to clearly
indicate that your estimate of the warranty liability is based in part on
the accelerated testing you
perform.
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Clearly
disclose the significant “various other assumptions that are considered
reasonable under the
circumstances.”
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If
you elect to continue to state that you consider assumptions that are
“considered reasonable under the circumstances,” revise to clearly state,
if true, that such “reasonable” determination is based on management
judgment.
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Response:
The
process of estimating our warranty liability takes into consideration multiple
components including:
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We
have five years of warranty claims history which provides us with base
data on the various failure rates of our modules and
components. We continually assess the root cause of failures
and assess the impact on potential warranty
claims;
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We
perform accelerated lifecycle testing that expose our modules and
components to extreme stress and climate conditions in both environmental
simulation chambers and in actual field deployments. While our risk
factors highlight the risk that we cannot precisely simulate 25 years of
field conditions, our accelerated testing is designed to highlight
potential failures that would occur over this
period;
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We
maintain field monitoring on installed systems which provide data on the
various failure rates of our modules and
components;
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We
obtain reliability data from our key module and component vendors;
and
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We
compare our warranty reserve ratio to others in our industry for
reasonableness.
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Although
we cannot fully replicate all environmental variables in our accelerated testing
lab environment, we believe we have adequate data from the above sources to
reasonably estimate our warranty liability. Specifically, our
methodology for estimating the warranty reserve is to extrapolate warranty costs
over the 25-year warranty period based on actual experience to date over the
past 5 years. Based on the results of our accelerated testing, we have no reason
to believe that there would be significant change in the warranty claim rate in
future periods.
Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 4
In our
future filings, the Company will revise and disclose the following in the Notes
to the Financial Statements.
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 (“OEMs”) of certain system
components. 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 a period of 1, 2, 5 or 10 years. The Company maintains
reserves to cover potential liability that could result from these warranties.
The Company’s potential liability is generally in the form of product
replacement or repair. Warranty reserves are based on the Company’s best
estimate of such liabilities and are recognized as a cost of revenue. The
Company continuously monitors product returns for warranty failures and
maintains a reserve for the related warranty expenses based on various factors
including, historical warranty claims, results of accelerated lab testing, field
monitoring, vendor reliability estimates, and data on industry averages for
similar products. Historically, warranty costs have been within management’s
expectations.
Exhibits 31.1 and 31.2,
Certifications
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3.
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We
note that the identification of the certifying individual at the beginning
of the certification required by Exchange Act Rule 13a-14(a) also includes
the title of the certifying individual. In future filings, the
identification of the certifying individual at the beginning of the
certification should be revised so as not to include the individual’s
title.
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Response:
In future
filings, the Company will not
include the title of the certifying individual at the beginning of the
certifications presented in Exhibits 31.1 and 31.2.
Form 10-Q for the quarterly
period ended September 28, 2008
Item 4. Controls
and Procedures, page 53
Changes in Internal Control
over Financial Reporting, page 53
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4.
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We
note your disclosure in the first paragraph that “there were no material
changes in [y]our internal control over financial reporting…”. Separately,
we note your disclosure in the next paragraph regarding a new system you
implemented in the 3rd
quarter “which resulted in a material update to [y]our system of internal
control over financial reporting”. You state that after the
system was implemented, you
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Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 5
| had to “further revise [y]our internal control processes and procedures in order to correct and supplement [y]our processing capabilities within the new system”. Please clarify whether the outcome of implementing this system resulted in a material change in your internal control over financial reporting. |
Response:
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance that our books and records accurately reflect
our transactions and that our established policies and procedures are
followed.
In the
third quarter of fiscal 2008, we deployed a new global enterprise
resource planning (“ERP”) system. However, since our key controls over
financial reporting are principally manual in nature, our new ERP system did not
cause any significant changes in either the design or operation of our
controls. Accordingly,
we concluded that we did not have a material change in our internal control over
financial reporting as a result of deploying the new ERP
system.
Proxy Statement on Schedule
14A filed March 23, 2009
Executive Officers, page
19
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5.
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It
does not appear that you have described the experience of two of your
named executive officers, Thomas L. Dinwoodie and Emmanuel T. Hernandez,
as required by Item 401(b) of Regulation S-K. Please provide us
with such information and provide such disclosure in your future filings
or tell us why you do not believe such information is required for these
two executives.
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Response:
Messrs.
Dinwoodie and Hernandez were named executive officers of the Company, for
purposes of Item 401(b) of Regulation S-K, but neither Mr. Dinwoodie nor Mr.
Hernandez was serving as an executive officer of the Company when the Company
filed its Proxy Statement on Schedule 14A on March 23, 2009. Because
neither was an executive officer when the Company filed its Proxy Statement,
Item 401(b) of Regulation S-K does not require the Company to summarize their
experience. Please note that Mr. Dinwoodie had assumed a
non-executive officer role within the Company in January
2008. However, he was still a named executive officer under Item
402(a)(3)(iv) of Regulation S-K. Similarly, Mr. Hernandez had
resigned as CFO and assumed a different role within the Company in November
2008. However, he was still a named executive officer under Item
402(a)(3)(ii) of Regulation S-K.
Compensation Discussion and
Analysis, page 21
Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 6
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6.
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We
note your disclosure under the caption “Performance Based Cash Bonus
Awards,” as incorporated by reference from page 23 of the Schedule 14A
Proxy Statement filed March 23, 2009, that bonuses are based upon annual
revenue and profits before tax targets and personal
milestones. In future filings, please clearly disclose all
previously established targets and milestones and discuss how the
compensation awarded reflects those targets and milestones. To
the extent you believe that disclosure of such information, on a
historical basis, would result in competitive harm such that the
information could be excluded under Instruction 4 to Item 402(b) of
Regulation S-K, please provide us with a detailed explanation supporting
your conclusion. To the extent that it is appropriate to omit
specific targets or performance milestones, you are required to provide
appropriate disclosure pursuant to Instruction 4 to Item 402(b) of
Regulation S-K. Refer also to Question 118.04 of the Regulation
S-K Compliance and Disclosure Interpretations available on our website at
http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm. In
discussing how difficult or likely it will be to achieve the target levels
or other factors, you should provide as much detail as necessary without
disclosing information that poses a reasonable risk of competitive
harm.
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Response:
In future
filings, the Company will clearly disclose all previously established targets
and milestones and discuss how the compensation awarded reflects those targets
and milestones. If the Company determines it is appropriate to omit
specific targets or performance milestones, it will provide appropriate
disclosure pursuant to Instruction 4 of Item 402(b) of Regulation S-K, and the
Company will provide as much detail as necessary without disclosing information
that poses a reasonable risk of competitive harm.
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7.
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We
refer to your disclosure under the caption “Time-Based and
Performance-Based Equity Awards” on page 24 of the proxy statement that
you have incorporated by reference into your Annual Report on Form
10-K. We note that equity awards were determined based upon
several factors including corporate and individual performance
targets. In your future filings, as applicable, please include
an expanded discussion of how your Compensation Committee made its equity
award determinations with respect to each named executive
officer. Refer to subparagraphs (b)(1)(iii) and (v) of Item 402
of Regulation S-K. For example, please discuss and analyze
performance targets and their significance in determining equity awards
and how and why those awards varied among the named executive
officers.
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Response:
In future
filings, the Company will include an expanded discussion of how its Compensation
Committee made its equity award determinations with respect to each named
executive officer,
Mr.
Kevin L. Vaughn
Securities and Exchange Commission
May 15, 2009
Page 7
including
a discussion and analysis of performance targets and their significance in
determining equity awards and how and why those awards varied among the named
executive officers.
Regards,
/s/
Dennis V. Arriola
Dennis V.
Arriola
Senior
Vice President and
Chief
Financial Officer
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cc:
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Mr.
Thomas H. Werner
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Mr.
Bruce Ledesma Esq.
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SunPower
Corporation
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