form10q.htm
 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 March 29, 2009

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-34166

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

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

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

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

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

Indicate by check mark whether the registrant 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  ¨    No  ¨

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

Large Accelerated Filer T
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 April 30, 2009 was 44,105,162.
The total number of outstanding shares of the registrant’s class B common stock as of April 30, 2009 was 42,033,287.
 
1
 
SunPower Corporation

INDEX TO FORM 10-Q

   
Page
3
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
28
     
Item 3.
39
     
Item 4.
41
     
41
     
Item 1.
41
     
Item 1A.
41
     
Item 6.
43
     
 
44
     
45

2

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

SunPower Corporation

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

   
March 29,
2009
    
December 28,
2008(1)
  
Assets
            
Current assets:
            
Cash and cash equivalents
  
$
149,110
    
$
  202,331
  
Restricted cash and cash equivalents, current portion
    
12,663
      
  13,240
  
Short-term investments
    
2,297
      
  17,179
  
Accounts receivable, net
    
149,179
      
  194,222
  
Costs and estimated earnings in excess of billings
    
34,164
      
  30,326
  
Inventories
    
343,169
      
  251,542
  
Advances to suppliers, current portion
    
39,647
      
  43,190
  
Prepaid expenses and other current assets
    
75,119
      
  98,254
  
Total current assets
    
805,348
      
  850,284
  
Restricted cash and cash equivalents, net of current portion
    
171,799
      
  162,037
  
Long-term investments
    
18,971
      
  23,577
  
Property, plant and equipment, net
    
687,159
      
  629,247
  
Goodwill
    
196,224
      
  196,720
  
Intangible assets, net
    
35,385
      
  39,490
  
Advances to suppliers, net of current portion
    
114,879
      
  119,420
  
Other long-term assets
    
78,316
      
  76,751
  
Total assets
  
$
2,108,081
    
$
  2,097,526
  
Liabilities and Stockholders’ Equity
                
Current liabilities:
                
Accounts payable
  
$
272,600
    
$
  263,241
  
Accrued liabilities
    
104,346
      
  157,049
  
Billings in excess of costs and estimated earnings
    
6,904
      
  11,806
  
Customer advances, current portion
    
15,404
      
  19,035
  
Total current liabilities
    
399,254
      
451,131
  
Long-term debt
    
103,850
      
  54,598
  
Convertible debt
    
363,768
      
  357,173
  
Long-term deferred tax liability
    
10,963
      
  8,141
  
Customer advances, net of current portion
    
85,668
      
  91,359
  
Other long-term liabilities
    
24,509
      
  25,950
  
Total liabilities
    
988,012
      
  988,352
  
Commitments and contingencies (Note 8)
                
Stockholders’ equity:
                
Preferred stock, $0.001 par value, 10,042,490 shares authorized; none issued and outstanding
    
—
      
—
  
Common stock, $0.001 par value, 150,000,000 shares of class B common stock authorized; 42,033,287 shares of class B common stock issued and outstanding; $0.001 par value, 217,500,000 shares of class A common stock authorized; 44,274,852 and 44,055,644 shares of class A common stock issued; 43,999,060 and 43,849,566 shares of class A common stock outstanding, at March 29, 2009 and December 28, 2008, respectively
    
86
      
  86
  
Additional paid-in capital
    
1,077,851
      
 1,065,745
  
Accumulated other comprehensive loss
    
(19,677
 )     
  (25,611
)
Retained earnings
    
72,825
      
 77,611
  
     
1,131,085
      
  1,117,831
  
Less: shares of class A common stock held in treasury, at cost; 275,792 and 206,078 shares at March 29, 2009 and December 28, 2008, respectively
    
(11,016
)
    
(8,657
)
Total stockholders’ equity
    
1,120,069
      
 1,109,174
  
Total liabilities and stockholders’ equity
  
$
2,108,081
    
$
  2,097,526
  

(1)
As adjusted due to the implementation of FSP APB 14-1 (see Note 1).

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

3

SunPower Corporation

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

   
Three Months Ended
  
   
March 29,
2009
    
March 30,
2008(1)
  
Revenue:
            
Systems
  
$
106,097
    
$
178,851
  
Components
    
107,690
      
94,850
  
Total revenue
    
213,787
      
273,701
  
Costs and expenses:
                
Cost of systems revenue
    
88,351
      
143,264
  
Cost of components revenue
    
77,688
      
77,242
  
Research and development
    
7,964
      
4,642
  
Sales, general and administrative
    
42,283
      
33,858
  
Total costs and expenses
    
216,286
      
259,006
  
Operating income (loss)
    
(2,499
 )     
14,695
  
Other income (expense):
                
Interest income
    
1,184
      
4,147
  
Interest expense
    
(6,121
)
    
(6,297
)
Other, net
    
(7,157
)
    
715
  
Other income (expense), net
    
(12,094
 )     
(1,435
)
Income (loss) before income taxes and equity in earnings of unconsolidated investees
    
(14,593
 )     
13,260
  
Income tax provision (benefit)
    
(8,562
 )    
1,805
  
Income (loss) before equity in earnings of unconsolidated investees
    
(6,031
 )    
11,455
  
Equity in earnings of unconsolidated investees, net of taxes
    
1,245
      
544
  
Net income (loss)
  
$
(4,786
 )  
$
11,999
  
                 
Net income (loss) per share of class A and class B common stock:
                
Basic
  
$
(0.06
 )  
$
0.15
  
Diluted
  
$
(0.06
 )   
$
0.14
  
Weighted-average shares:
                
Basic
    
83,749
      
78,965
  
Diluted
    
83,749
      
83,002
  

(1)
As adjusted due to the implementation of FSP APB 14-1 and FSP EITF 03-6-1 (see Note 1).

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

4

SunPower Corporation

Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

   
Three Months Ended
  
   
March 29,
2009
    
March 30,
2008(1)
  
Cash flows from operating activities:
              
Net income (loss)
  
$
(4,786
 )   
$
11,999
  
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                
Stock-based compensation
    
9,483
      
14,508
  
Depreciation
    
18,365
      
10,139
  
Amortization of intangible assets
    
4,052
      
4,317
  
Impairment of long-lived assets
    
1,318
      
5,489
  
Non-cash interest expense
    
5,021
      
4,384
  
Amortization of debt issuance costs
    
537
      
537
  
Equity in earnings of unconsolidated investees
    
(1,245
)
    
(544
)
Excess tax benefits from stock-based award activity
    
—
      
(4,361
)
Deferred income taxes and other tax liabilities
    
(6,369
 )     
(455
 ) 
Changes in operating assets and liabilities, net of effect of acquisition:
                
Accounts receivable
    
40,931
      
(17,162
)
Costs and estimated earnings in excess of billings
    
(3,797
)
    
(20,709
)
Inventories
    
(95,870
)
    
(39,530
)
Prepaid expenses and other assets
    
11,913
      
(13,948
)
Advances to suppliers
    
7,993
      
(2,559
)
Accounts payable and other accrued liabilities
    
(27,199
)
    
22,983
  
Billings in excess of costs and estimated earnings
    
(4,612
)
    
(43,663
)
Customer advances
    
(8,860
)
    
(786
)
Net cash used in operating activities
    
(53,125
)
    
(69,361
)
Cash flows from investing activities:
                
Increase in restricted cash and cash equivalents
    
(9,185
)
    
(55,550
)
Purchase of property, plant and equipment
    
(52,101
)
    
(50,790
)
Purchase of available-for-sale securities
    
—
      
(50,970
)
Proceeds from sales or maturities of available-for-sale securities
    
18,177
      
84,106
  
Cash paid for acquisition, net of cash acquired
    
—
      
(13,484
)
Cash paid for investments in joint ventures and other non-public companies
    
—
      
(5,625
)
Net cash used in investing activities
    
(43,109
)
    
(92,313
)
Cash flows from financing activities:
                
Proceeds from issuance of long-term debt
    
51,232
      
—
  
Proceeds from exercise of stock options
    
396
      
1,138
  
Excess tax benefits from stock-based award activity
    
—
      
4,361
  
Purchases of stock for tax withholding obligations on vested restricted stock
    
(2,359
)
    
(3,334
)
Net cash provided by financing activities
    
49,269
      
2,165
  
Effect of exchange rate changes on cash and cash equivalents
    
(6,256
)
    
6,817
  
Net decrease in cash and cash equivalents
    
(53,221
)
    
(152,692
)
Cash and cash equivalents at beginning of period
    
202,331
      
285,214
  
Cash and cash equivalents at end of period
  
$
149,110
    
$
132,522
  
                 
Non-cash transactions:
                
Additions to property, plant and equipment acquired under accounts payable and other accrued liabilities
  
$
22,571
    
$
4,446
  
Non-cash interest expense capitalized and added to the cost of qualified assets
    
2,073
      
1,784
  
Change in goodwill relating to adjustments to acquired net assets
    
—
      
231
  

(1)
As adjusted due to the implementation of FSP APB 14-1 (see Note 1).

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

5

SunPower Corporation

Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

SunPower Corporation (together with its subsidiaries, the “Company” or “SunPower”) designs, manufactures and markets high-performance solar electric power technologies. The Company’s solar cells and solar panels are manufactured using proprietary processes, and our technologies are based on more than 15 years of research and development. The Company operates in two business segments: systems and components. The Systems Segment generally represents sales directly to systems owners of engineering, procurement, construction and other services relating to solar electric power systems that integrate the Company’s solar panels and balance of systems components, as well as materials sourced from other manufacturers. The Components Segment primarily represents sales of the Company’s solar cells, solar panels and inverters to solar systems installers and other resellers, including the Company’s global dealer network.

The Company was a majority-owned subsidiary of Cypress Semiconductor Corporation (“Cypress”) through September 29, 2008. After the close of trading on September 29, 2008, Cypress completed a spin-off of all of its shares of the Company’s class B common stock in the form of a pro rata dividend to the holders of record of Cypress common stock as of September 17, 2008. As a result, the Company’s class B common stock now trades publicly and is listed on the Nasdaq Global Select Market, along with the Company’s class A common stock.

Recently Adopted Accounting Pronouncements

Convertible Debt

On December 29, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the convertible debt and the fair value of the liability, after adjusting for the deferred tax impact. FSP APB 14-1 also requires an accretion of the resulting debt discount over the expected life of the convertible debt. FSP APB 14-1 is required to be applied retrospectively to prior periods, and accordingly, financial statements for prior periods have been adjusted to reflect its adoption.

In February 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures, or the 1.25% debentures. In the fourth quarter of fiscal 2008, the Company received notices for the conversion of approximately $1.4 million of the 1.25% debentures. In July 2007, the Company issued $225.0 million in principal amount of its 0.75% senior convertible debentures, or the 0.75% debentures. The 1.25% debentures and the 0.75% debentures contain partial cash settlement features and are therefore subject to FSP APB 14-1. As of December 28, 2008, the carrying value of the equity component was $61.8 million and the principal amount of the outstanding debentures, the unamortized discount and the net carrying value was $423.6 million, $66.4 million and $357.2 million, respectively (see Note 10). On a cumulative basis from the respective issuance dates of the 1.25% debentures and the 0.75% debentures through December 28, 2008, the Company has retrospectively recognized $22.6 million in non-cash interest expense related to the adoption of FSP APB 14-1 excluding the related tax effects.

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Balance Sheet as of December 28, 2008 has been adjusted as follows:

(In thousands)
  
As Adjusted
in this
Quarterly Report
on Form 10-Q
  
As Previously Reported in
Annual Report
on Form 10-K
  
Assets
          
Inventories
  
$ 
251,542
  
$
251,388
  
Prepaid expenses and other current assets
  
98,254
  
96,104
  
Property, plant and equipment, net
  
629,247
  
612,687
  
Other long-term assets
  
76,751
  
74,224
  
Total assets
  
2,097,526
  
2,076,135
  
Liabilities
          
Convertible debt
  
357,173
  
423,608
  
Deferred tax liability, net of current portion
  
8,141
  
8,115
  
Total liabilities
  
988,352
  
1,054,761
  
Stockholders’ Equity
          
Additional paid-in capital
  
1,065,745
  
1,003,954
  
Retained earnings
  
77,611
  
51,602
  
Total stockholders’ equity
   1,109,174   
1,021,374
  

6

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Statement of Operations for the three months ended March 30, 2008 has been adjusted as follows:

 (In thousands)
  
As Adjusted
in this
Quarterly Report
on Form 10-Q
    
As Previously Reported in
Quarterly Report
on Form 10-Q
  
Cost of systems revenue
   $ 143,264     $ 143,213  
Cost of components revenue
     77,242       77,168  
Operating income
     14,695       14,820  
Interest expense
     (6,297 )     (1,464 )
Other, net
     715       (257 )
Income before income taxes and equity in earnings of unconsolidated investees
     13,260       17,246  
Income tax provision
     1,805       5,033  
Income before equity in earnings of unconsolidated investees
     11,455       12,213  
Net income
     11,999       12,757  

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Statement of Cash Flows for the three months ended March 30, 2008 has been adjusted as follows:

(In thousands)
  
As Adjusted
in this
Quarterly Report
on Form 10-Q
    
As Previously Reported in
Quarterly Report
on Form 10-Q
  
Cash flows from operating activities:
            
Net income
   $ 11,999     $ 12,757  
Depreciation
     10,139       10,102  
Non-cash interest expense
     4,384       —  
Amortization of debt issuance costs
     537       972  
Deferred income taxes and other tax liabilities
     (455 )      2,773  
Net cash used in operating activities
     (69,361 )     (69,361 )

Earnings Per Share

On December 29, 2008, the Company adopted FSP Emerging Issues Task Force Issue (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which clarifies that all outstanding unvested share-based payment awards that contain rights to nonforteitable dividends participate in undistributed earnings with common shareholders. In fiscal 2007, the Company granted restricted stock awards with the same dividend rights as its other stockholders, therefore, unvested restricted stock awards are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied (see Note 14). The new guidance was applied retroactively to the Company’s historical results of operations, and as a result, the Company’s Condensed Consolidated Statement of Operations for the three months ended March 30, 2008 has been adjusted as follows:

(In thousands, except per share data)
  
As Adjusted
in this
Quarterly Report
on Form 10-Q
  
As Previously Reported in
Quarterly Report
on Form 10-Q
  
Net income
  
$
11,999
  
$
11,999
  
             
Net income per share of class A and class B common stock:
            
Basic
  
$
0.15
  
$
0.15
  
Diluted
  
$
0.14
  
$
0.14
  
Weighted-average shares:
            
Basic
  
78,965
    
78,965
  
Diluted
  
83,002
    
83,661
  

7

Disclosures about Derivative Instruments and Hedging Activities

On December 29, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS No. 161”), which had no financial impact on the Company’s condensed consolidated financial statements and only required additional financial statement disclosures as set forth in Note 12. SFAS No. 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

Fair Value of Nonfinancial Assets and Nonfinancial Liabilities

In February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS No. 157-2”), which delayed the effective date of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. Therefore, in the first quarter of fiscal 2009, the Company adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities. The adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are not measured and recorded at fair value on a recurring basis did not have a significant impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In April 2009, the FASB issued three Staff Positions: (i) FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP SFAS No. 157-4”), (ii) SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP SFAS No. 115-2 and FSP SFAS No. 124-2”), and (iii) SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP SFAS No. 107 and APB 28-1”), which will be effective for interim and annual periods ending after June 15, 2009. FSP SFAS No. 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP SFAS No. 115-2 and FSP SFAS No. 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP SFAS No. 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS No. 157 for both interim and annual periods. The Company is currently evaluating the potential impact, if any, of the adoption of these Staff Positions on its financial position, results of operations and disclosures.

In April 2009, the FASB issued FSP SFAS No. 141(R)-1 which amends the provisions in SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP SFAS No. 141(R)-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141(R) and instead carries forward most of the provisions in SFAS No. 141, "Business Combinations" ("SFAS No. 141"), for acquired contingencies. FSP SFAS No. 141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company expects FSP SFAS No. 141(R)-1 will have an impact in its condensed consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

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. Fiscal year 2009 consists of 53 weeks while fiscal year 2008 consists of 52 weeks. The first quarter of fiscal 2009 ended on March 29, 2009 and the first quarter of fiscal 2008 ended on March 30, 2008.

8

Basis of Presentation

The accompanying condensed consolidated interim financial statements have been prepared pursuant to 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 adjusted for the retrospective application of FSP APB 14-1 discussed above. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2008.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("United States" or "U.S.") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these financial statements include percentage-of-completion for construction projects, allowances for doubtful accounts receivable and sales returns, inventory write-downs, estimates for future cash flows and economic useful lives of property, plant and equipment, goodwill, intangible assets and other long-term assets, asset impairments, valuation of auction rate securities, investments in joint ventures, certain accrued liabilities including accrued warranty reserves, valuation of debt without the conversion feature, and income taxes and tax valuation allowances. Actual results could materially differ from those estimates.

In the opinion of management, the accompanying condensed consolidated interim 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 March 29, 2009 and its results of operations for the three months ended March 29, 2009 and March 30, 2008 and its cash flows for the three months ended March 29, 2009 and March 30, 2008. These condensed consolidated interim financial statements are not necessarily indicative of the results to be expected for the entire year.

Note 2. INVENTORIES

(In thousands)
  
March 29,
2009
    
December 28,
2008(2)
  
Inventories:
                
Raw materials(1)
  
$
124,759
    
$
130,082
  
Work-in-process
    
12,872
      
15,505
  
Finished goods
    
205,538
      
105,955
  
   
$
343,169
    
$
251,542
  
(1)
In addition to polysilicon and other raw materials for solar cell manufacturing, raw materials include solar panels purchased from third-party vendors and installation materials for systems projects.
(2)
The balance of finished goods increased by $0.2 million for the change in amortization of capitalized non-cash interest expense capitalized in inventory as a result of the Company’s adoption of FSP APB 14-1 (see Note 1).

Note 3. PROPERTY, PLANT AND EQUIPMENT

(In thousands)
  
March 29,
2009
    
December 28,
2008(1)
  
Property, plant and equipment, net:
                
Land and buildings
  
$
13,914
    
$
  13,912
  
Manufacturing equipment
    
450,879
      
  387,860
  
Computer equipment
    
36,849
      
  26,957
  
Furniture and fixtures
    
4,330
      
  4,327
  
Leasehold improvements
    
159,748
      
  148,190
  
Construction-in-process
    
141,869
      
  149,657
  
     
807,589
      
  730,903
  
Less: Accumulated depreciation
    
(120,430
)
    
(101,656
)
   
$
687,159
    
$
  629,247
  
(1)
Property, plant and equipment, net increased $16.6 million for non-cash interest expense associated with the 1.25% debentures and 0.75% debentures that was capitalized and added to the cost of qualified assets as a result of the Company’s adoption of FSP APB 14-1 (see Note 1).

9

Certain manufacturing equipment associated with solar cell manufacturing lines located at our second facility in the Philippines are collateralized in favor of a customer by way of a chattel mortgage, a first ranking mortgage and a security interest in the property. The Company provided security for advance payments received from a customer in fiscal 2008 totaling $40.0 million in the form of collateralized manufacturing equipment with a net book value of $41.2 million and $43.1 million as of March 29, 2009 and December 28, 2008, respectively.

The Company evaluates its long-lived assets, including property, plant and equipment and intangible assets with finite lives (see Note 4), for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets and significant negative industry or economic trends.

Ongoing weak global credit market conditions have had a negative impact on the Company’s earnings during the first quarter of fiscal 2009. In addition, the Company expects that the current credit market conditions will continue through at least the first half of fiscal 2009, reducing demand for its solar power products in the near term, which could harm future earnings. From time to time, the Company may temporarily remove certain long-lived assets from service based on projections of reduced capacity needs. The Company believes the current adverse change in its business climate resulting in lower forecasted revenue for fiscal 2009 is temporary in nature and does not indicate that the fair values of its long-lived assets have fallen below their carrying values as of March 29, 2009.

Note 4. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

(In thousands)
  
Systems
    
Components
    
Total
  
As of December 28, 2008
  
$
181,801
    
$
14,919
    
$
196,720
  
Translation adjustment
    
—
      
(496
 )    
(496
 )
As of March 29, 2009
  
$
181,801
    
$
14,423
    
$
196,224
  

The Company records a translation adjustment for the revaluation of its Euro functional currency and Australian dollar functional currency subsidiaries’ goodwill and intangible assets into U.S. dollar. As of March 29, 2009, the translation adjustment decreased the balance of goodwill by $0.5 million.

In accordance with SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. The Company conducts its annual impairment test of goodwill as of the Sunday closest to the end of the third fiscal quarter of each year. Impairment of goodwill is tested at the Company’s reporting unit level which is at the segment level by comparing each segment’s carrying amount, including goodwill, to the fair value of that segment. To determine fair value, the Company’s process has historically utilized a market multiples comparative approach. In performing its analysis, the Company has utilized information with assumptions and projections it considers reasonable and supportable. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based on its last impairment test as of September 28, 2008, the Company determined there was no impairment.

Under SFAS No. 142, goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Ongoing weak global credit market conditions have had a negative impact on the Company’s earnings and the profitability of its reporting units during the first quarter of fiscal 2009. The Company expects that the current credit market conditions will continue through at least the first half of fiscal 2009, negatively affecting its ability to finance systems projects. Management evaluated all the facts and circumstances, including the duration and severity of the decline in its revenue and market capitalization and the reasons for it, to assess whether an impairment indicator exists that would require impairment testing of its reporting units. Management has concluded that no impairment indicator exists as of March 29, 2009, because the decline in revenue is temporary in nature and management does not believe that there is a significant adverse change in the long-term business climate.

Intangible Assets

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

(In thousands)
  
Gross
    
Accumulated
Amortization
    
Net
  
As of March 29, 2009
                  
Patents and purchased technology
  
$
51,398
    
$
(33,995
 )  
$
17,403
  
Tradenames
    
2,478
      
(1,768
 )    
710
  
Customer relationships and other
    
27,381
      
(10,109
 )    
17,272
  
   
$
81,257
    
$
(45,872
 )  
$
35,385
  
                         
As of December 28, 2008
                        
Patents and purchased technology
  
$
51,398
    
$
(31,322
)
  
$
  20,076
  
Tradenames
    
2,501
      
(1,685
)
    
  816
  
Customer relationships and other
    
27,456
      
(8,858
)
    
  18,598
  
   
$
81,355
    
$
(41,865
)
  
$
  39,490
  

10

All of the Company’s acquired identifiable intangible assets are subject to amortization. Amortization expense for intangible assets totaled $4.1 million and $4.3 million for the three months ended March 29, 2009 and March 30, 2008, respectively. As of March 29, 2009, the estimated future amortization expense related to intangible assets is as follows (in thousands):

2009 (remaining nine months)
  
$
12,182
  
2010
  
14,656
  
2011
  
4,546
  
2012
  
3,896
  
Thereafter
  
105
  
   
$
35,385
  

Note 5. INVESTMENTS

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.

Assets Measured at Fair Value on a Recurring Basis

The following tables present information about the Company’s available-for-sale securities accounted for under SFAS No. 115, “Accounting for Investment in Certain Debt and Equity Securities” (“SFAS No. 115”), 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 in accordance with the provisions of SFAS No. 157. Information about the Company’s foreign currency derivatives measured at fair value on a recurring basis is disclosed in Note 12 below. The Company does not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value in its condensed consolidated financial statements on a recurring basis.

   
March 29, 2009
  
(In thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
  
Asset
                                
Money market funds
  
$
186,462
    
$
—
    
$
2,297
    
$
188,759
  
Bank notes
    
16,631
      
—
      
—
      
16,631
  
Corporate securities
    
—
      
—
      
18,971
      
18,971
  
Total available-for-sale securities
  
$
203,093
    
$
—
    
$
21,268
    
$
224,361
  

   
December 28, 2008
  
(In thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
  
Asset
                                
Money market funds
  
$
227,190
    
$
—
    
$
7,185
    
$
234,375
  
Bank notes
    
49,610
      
—
      
—
      
49,610
  
Corporate securities
    
—
      
9,994
      
23,577
      
33,571
  
Total available-for-sale securities
  
$
276,800
    
$
9,994
    
$
30,762
    
$
317,556
  

Available-for-sale securities utilizing Level 3 inputs to determine fair value are comprised of investments in money market funds totaling $2.3 million and $7.2 million as of March 29, 2009 and December 28, 2008, respectively, and auction rate securities totaling $19.0 million and $23.6 million as of March 29, 2009 and December 28, 2008, respectively.

11

Money Market Funds

Investments in money market funds utilizing Level 3 inputs consist of the Company’s investments in the Reserve Primary Fund and the Reserve International Liquidity Fund (collectively referred to as the "Reserve Funds"). The net asset value per share for the Reserve Funds fell below $1.00 because the funds had investments in Lehman Brothers Holdings, Inc. (“Lehman”), which filed for bankruptcy on September 15, 2008. As a result of this event, the Reserve Funds wrote down their investments in Lehman to zero and also announced that the funds would be closed and distributed to holders. The Company has estimated its loss on the Reserve Funds to be approximately $2.2 million based upon information publicly disclosed by the Reserve Funds relative to its holdings and remaining obligations. The Company recorded impairment charges of $1.2 million and $1.0 million during the first quarter of fiscal 2009 and the second half of fiscal 2008, respectively, in “Other, net” in its Condensed Consolidated Statements of Operations, thereby establishing a new cost basis for each fund. The Company’s other 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.

Auction Rate Securities

Auction rate securities in which the Company invested are typically over-collateralized and secured by pools of student loans originated under the Federal Family Education Loan Program (“FFELP”) that are guaranteed and insured by the U.S. Department of Education. In addition, all auction rate securities held are rated by one or more of the Nationally Recognized Statistical Rating Organizations (“NRSRO”) as triple-A. Historically, these securities have provided liquidity through a Dutch auction at pre-determined intervals every 7 to 49 days. At the end of each reset period, investors can continue to hold the securities or sell the securities at par through an auction process. The “stated” or “contractual” maturities for these securities generally are between 20 to 30 years. Beginning in February 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, resulting from a lack of liquidity, which occurs when sell orders exceed buy orders, and does not necessarily signify a default by the issuer.

All auction rate securities held by the Company have failed to clear at auctions in subsequent periods. For failed auctions, the Company continues to earn interest on these investments at the contractual rate. Prior to last year, failed auctions have rarely occurred, however, such failures could continue to occur in the future. In the event the Company needs to access these funds, the Company will not be able to do so until a future auction is successful, the issuer redeems the securities, a buyer is found outside of the auction process or the securities mature. Accordingly, auction rate securities held are classified as “Long-term investments” in the Condensed Consolidated Balance Sheets, because they are not expected to be used to fund current operations and consistent with the stated contractual maturities of the securities.

The Company determined that use of a valuation model was the best available technique for measuring the fair value of its auction rate securities. The Company used an income approach valuation model to estimate the price that would be received to sell its securities in an orderly transaction between market participants ("exit price") as of the balance sheet dates. The exit price was derived as the weighted average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that was based on the credit risk and liquidity risk of the securities. While the valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, the Company determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity. The valuation model also reflected the Company's intention to hold its auction rate securities until they can be liquidated in a market that facilitates orderly transactions. The following key assumptions were used in the valuation model:

 
·
5 years to liquidity;
 
·
continued receipt of contractual interest which provides a premium spread for failed auctions; and
 
·
discount rates ranging from 4.5% to 6.3%, which incorporates a spread for both credit and liquidity risk.

Based on these assumptions, the Company estimated that the auction rate securities with a stated par value of $21.1 million at March 29, 2009 would be valued at approximately 90% of their stated par value, or $19.0 million, representing a decline in value of approximately $2.1 million. At December 28, 2008, the Company estimated that auction rate securities with a stated par value of $26.1 million would be valued at approximately 91% of their stated par value, or $23.6 million, representing a decline in value of approximately $2.5 million. Due to the length of time that has passed since the auctions failed and the ongoing uncertainties regarding future access to liquidity, the Company has determined the impairment is other-than-temporary and recorded impairment losses of $0.1 million and $2.5 million in the first quarter of fiscal 2009 and fourth quarter of fiscal 2008, respectively, in “Other, net” in its Condensed Consolidated Statements of Operations. The following table provides a summary of changes in fair value of the Company’s available-for-sale securities utilizing Level 3 inputs for the three months ended March 29, 2009:

(In thousands)
  
Money Market
Funds
    
Auction Rate Securities
  
Balance at December 28, 2008
  
$
7,185
    
$
23,577
  
Sales and distributions (1)
    
(3,650
)
    
(4,526
)
Impairment loss recorded in “Other, net”
    
(1,238
)
    
(80
)
Balance at March 29, 2009 (2)
  
$
2,297
    
$
18,971
  
(1)
The Company sold an auction rate security with a carrying value of $4.5 million for $4.6 million to a third-party outside of the auction process and received distributions of $3.7 million from the Reserve Funds.
(2)
On April 17, 2009, the Company received distributions of $1.1 million from the Reserve Funds.

12

The following table provides a summary of changes in fair value of the Company’s available-for-sale securities which utilized Level 3 inputs for the three months ended March 30, 2008:

(In thousands)
  
Auction Rate Securities
  
       
Balance at December 31, 2007
  
$
—
  
Transfers from Level 2 to Level 3
    
29,050
  
Purchases
    
10,000
  
Unrealized loss included in other comprehensive income
    
(1,445
)
Balance at March 30, 2008
  
$
37,605
  

 The classification of available-for-sale securities is as follows:

(In thousands)
  
March 29,
2009
    
December 28,
2008
  
Included in:
            
Cash equivalents
  
$
18,631
    
$
  101,523
  
Short-term restricted cash and cash equivalents(1)
    
12,663
      
  13,240
  
Short-term investments
    
2,297
      
  17,179
  
Long-term restricted cash and cash equivalents(1, 2)
    
171,799
      
  162,037
  
Long-term investments
    
18,971
      
  23,577
  
   
$
224,361
    
$
  317,556
  

(1)
The Company provided security in the form of cash collateralized bank standby letters of credit for advance payments received from customers.
(2)
In January 2009 and December 2008, the Company borrowed Malaysian Ringgit 185.0 million and 190.0 million, respectively, or approximately $51.2 million and $52.7 million, respectively, from the Malaysian Government under its facility agreement to finance the construction of its planned third solar cell manufacturing facility in Malaysia.

13
 
Note 6. ADVANCES TO SUPPLIERS

The Company has entered into agreements with various polysilicon, ingot, wafer, solar cell and solar panel vendors and manufacturers. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 12 years. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements (see Note 8). Under certain of these agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. In the first quarter of fiscal 2009, the Company paid advances totaling $5.6 million in accordance with the terms of existing supply agreements. As of March 29, 2009 and December 28, 2008, advances to suppliers totaled $154.5 million and $162.6 million, respectively, the current portion of which is $39.6 million and $43.2 million, respectively.

The Company’s future prepayment obligations related to these agreements as of March 29, 2009 are as follows (in thousands):

2009 (remaining nine months)
  
$
92,546
  
2010
  
161,414
  
2011
  
121,564
  
2012
  
72,694
  
   
$
448,218
  

Note 7. RESTRUCTURING COSTS

The Company records restructuring costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). In response to deteriorating economic conditions, the Company reduced its global workforce of regular employees by approximately 60 positions in the first quarter of fiscal 2009 in order to reduce its annual operating expenses. The restructuring actions included charges of $1.2 million for other severance, benefits and related costs.

A summary of total restructuring activity for the three months ended March 29, 2009 is as follows:

 
(in thousands)
  
Workforce
Reduction
  
Balance as of December 28, 2008
   $ —  
  Restructuring charges
     1,185  
  Cash payments
     (1,029 )
Balance as of March 29, 2009
   $ 156  

Restructuring accruals totaled $0.2 million as of March 29, 2009 and are recorded in “Accrued liabilities” in the Condensed Consolidated Balance Sheet and represent estimated future cash outlays primarily related to severance expected to be paid within the second quarter of fiscal 2009.

A summary of the charges in the Condensed Consolidated Statement of Operations resulting from workforce reductions is as follows:

   
Three Months Ended
  
(in thousands)
  
March 29, 2009
  
Cost of systems revenue
   $ 179  
Cost of components revenue
     28  
Research and development
     77  
Sales, general and administrative
     901  
Total restructuring charges
   $ 1,185  

Note 8. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases its San Jose, California facility under a non-cancelable operating lease from Cypress, which expires in April 2011. In addition, the Company leases its Richmond, California facility under a non-cancelable operating lease from an unaffiliated third-party, which expires in September 2018. The Company also has various lease arrangements, including its European headquarters located in Geneva, Switzerland under a lease that expires in September 2012, as well as sales and support offices in Southern California, New Jersey, Australia, Canada, Germany, Italy, Spain and South Korea, all of which are leased from unaffiliated third-parties. Future minimum obligations under all non-cancelable operating leases as of March 29, 2009 are as follows (in thousands):

2009 (remaining nine months)
  
$
4,096
  
2010
    
4,932
  
2011
    
3,642
  
2012
    
2,814
  
2013
    
2,756
  
Thereafter
    
14,597
  
   
$
32,837
  

14

Purchase Commitments

The Company purchases raw materials for inventory, services and manufacturing equipment from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based upon specifications defined by the Company, or that establish parameters defining the Company’s requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company’s requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of the Company’s disclosed purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments.

The Company also has agreements with several suppliers, including joint ventures, for the procurement of polysilicon, ingots, wafers, solar cells and solar panels which specify future quantities and pricing of products to be supplied by the vendors for periods up to 12 years and provide for certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that the Company terminates the arrangements (see Note 6).

As of March 29, 2009, total obligations related to non-cancelable purchase orders totaled approximately $115.6 million and long-term supply agreements totaled approximately $3,992.2 million. Future purchase obligations under non-cancelable purchase orders and long-term supply agreements as of March 29, 2009 are as follows (in thousands):

2009 (remaining nine months)
  
$
376,790
  
2010
    
519,550
  
2011
    
546,438
  
2012
    
359,223
  
2013
    
277,531
  
Thereafter
    
2,028,257
  
   
$
4,107,789
  

Total future purchase commitments of $4,107.8 million as of March 29, 2009 include tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the supplier. Annual future purchase commitments in the table above are calculated using the gross price paid by the Company for silicon ingots and are not reduced by the price paid by suppliers for polysilicon. Total future purchase commitments as of March 29, 2009 would be reduced by $614.9 million to $3,492.9 million had the Company’s obligations under such tolling agreements been disclosed using net cash outflows.

Product Warranties

The Company warrants or guarantees the performance of the solar panels that the Company manufactures at certain levels of power output for extended periods, usually 25 years. It also warrants that the solar cells will be free from defects for at least 10 years. In addition, it 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, while inverters typically carry a 2-, 5- or 10-year warranty. The Company generally warrants at the time of sale or guarantees systems installed for a period of 1, 2, 5 or 10 years. The Company maintains warranty reserves to cover potential liability that could result from these guarantees. The Company’s potential liability is generally in the form of product replacement or repair. Warranty reserves are based on the Company’s best estimate of such liabilities and are recognized as a cost of revenue. The Company continuously monitors product returns for warranty failures and maintains a reserve for the related warranty expenses based on various factors including, historical warranty claims, results of accelerated testing, field monitoring and vendor reliability estimates, and data on industry average for similar products. Historically, warranty costs have been within management’s expectations.

Provisions for warranty reserves charged to cost of revenue were $3.7 million and $4.9 million during the three months ended March 29, 2009 and March 30, 2008, respectively. Activity within accrued warranty for the three months ended March 29, 2009 and March 30, 2008 is summarized as follows:

(In thousands)
  
March 29,
2009
    
March 30,
2008
  
Balance at the beginning of the period
  
$
28,062
    
$
17,194
  
Accruals for warranties issued during the period
    
3,677
      
4,899
  
Settlements made during the period
    
(1,173
)
    
(2,576
)
Balance at the end of the period
  
$
30,566
    
$
19,517
  

15

The accrued warranty balance at March 29, 2009 and December 28, 2008 includes $3.9 million and $4.2 million, respectively, of accrued costs primarily related to servicing the Company’s obligations under long-term maintenance contracts entered into under the Systems Segment and the balance is included in “Other long-term liabilities” in the Condensed Consolidated Balance Sheets.

Uncertain Tax Positions

Total liabilities associated with uncertain tax positions under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related Implementation Issues” (“FIN 48”), were $12.8 million as of both March 29, 2009 and December 28, 2008 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.

Indemnifications

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights and certain tax related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company pursuant to the procedures specified in the particular contract. These procedures usually allow the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company’s obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third-parties and/or insurance covering certain payments made by the Company.

Legal Matters

From time to time the Company is a party to litigation matters and claims that are normal in the course of its operations. While the Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company, the outcome of these matters is not determinable and negative outcomes may adversely affect its financial position, liquidity or results of operations.

Note 9. JOINT VENTURES

Woongjin Energy Co., Ltd (“Woongjin Energy”)

The Company and Woongjin Holdings Co., Ltd. (“Woongjin”), a provider of environmental products located in Korea, formed Woongjin Energy in fiscal 2006, a joint venture to manufacture monocrystalline silicon ingots. The Company and Woongjin have funded the joint venture through capital investments. In January 2008, the Company invested an additional $5.4 million in the joint venture. Until Woongjin Energy engages in an IPO, Woongjin Energy will refrain from declaring or making any distributions, including dividends, unless its debt-to-equity ratio immediately following such distribution would not be greater than 200%. The Company supplies polysilicon, services and technical support required for silicon ingot manufacturing to the joint venture, and the Company procures the manufactured silicon ingots from the joint venture under a five-year agreement. For the three months ended March 29, 2009 and March 30, 2008, the Company paid $32.3 million and $5.8 million, respectively, to Woongjin Energy for manufacturing silicon ingots. As of March 29, 2009 and December 28, 2008, $29.9 million and $22.5 million, respectively, remained due and payable to Woongjin Energy.

As of March 29, 2009 and December 28, 2008, the Company had a $25.3 million and $24.0 million, respectively, investment in the joint venture in its Condensed Consolidated Balance Sheets which consisted of a 40% equity investment. The Company periodically evaluates the qualitative and quantitative attributes of its relationship with Woongjin Energy to determine whether the Company is the primary beneficiary of the joint venture and needs to consolidate Woongjin Energy’s results into the Company’s financial statements in accordance with FSP FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FSP FIN 46(R)”). The Company has concluded it is not the primary beneficiary of the joint venture because Woongjin Energy supplies only a portion of the Company’s future estimated total ingot requirement through 2012 and the existing supply agreement is shorter than the estimated economic life of the joint venture. In addition, the Company believes that Woongjin is the primary beneficiary of the joint venture because Woongjin guarantees the initial $33.0 million loan for Woongjin Energy and exercises significant control over Woongjin Energy’s board of directors, management, and daily operations.

16

The Company accounts for its investment in Woongjin Energy under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (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 $1.3 million and $0.5 million for the three months ended March 29, 2009 and March 30, 2008, respectively, is included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statements of Operations. The amount of equity earnings increased due to 1) increases in production since Woongjin Energy began manufacturing in the third quarter of fiscal 2007; and 2) the Company’s equity investment increased from 27.4% as of March 30, 2008 to 40% as of March 29, 2009. Neither party has contractual obligations to provide any additional funding to the joint venture. The Company’s maximum exposure to loss as a result of its involvement with Woongjin Energy is limited to its carrying value.

The Company conducted other related-party transactions with Woongjin Energy during fiscal 2008. The Company recognized $0.6 million in components revenue during the three months ended March 30, 2008 related to the sale of solar panels to Woongjin Energy. As of March 29, 2009 and December 28, 2008, zero and $0.8 million, respectively, remained due and receivable from Woongjin Energy related to the sale of solar panels.

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. The Company and First Philec have funded the joint venture through capital investments. In fiscal 2008, the Company invested an additional $4.2 million in the joint venture. The Company supplies to the joint venture silicon ingots and technology required for slicing silicon, and the Company procures the silicon wafers from the joint venture under a five-year wafering supply and sales agreement. This joint venture is located in the Philippines and became operational in the second quarter of fiscal 2008. In the three months ended March 29, 2009, the Company paid $6.8 million to First Philec Solar for wafer slicing services of silicon ingots. As of March 29, 2009 and December 28, 2008, $2.1 million and $1.9 million, respectively, remained due and payable to First Philec Solar.

As of March 29, 2009 and December 28, 2008, the Company had a $4.9 million and $5.0 million, respectively, investment in the joint venture in its Condensed Consolidated Balance Sheets which consisted of a 19% equity investment. The Company periodically evaluates the qualitative and quantitative attributes of its relationship with First Philec Solar to determine whether the Company is the primary beneficiary of the joint venture and needs to consolidate First Philec Solar’s results into the Company’s financial statements in accordance with FSP FIN 46(R). The Company has concluded it is not the primary beneficiary of the joint venture because the existing five-year agreement named above is considered a short period compared against the estimated economic life of the joint venture. In addition, the Company believes that First Philec is the primary beneficiary of the joint venture because First Philec exercises significant control over First Philec Solar’s board of directors, management, and daily operations.

The Company accounts for this investment using the equity method of accounting since the Company is able to exercise significant influence over First Philec Solar 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 losses totaling $0.1 million in the three months ended March 29, 2009 are included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statement of Operations. The Company’s maximum exposure to loss as a result of its involvement with First Philec Solar is limited to its carrying value.

Note 10. DEBT AND CREDIT SOURCES

Line of Credit

On July 13, 2007, the Company entered into a credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) and has entered into amendments to the credit agreement from time to time. As of March 29, 2009, the credit agreement provides for a $50.0 million uncollateralized revolving credit line, with a $50.0 million uncollateralized letter of credit subfeature, and a separate $150.0 million collateralized letter of credit facility. The Company may borrow up to $50.0 million and request that Wells Fargo issue up to $50.0 million in letters of credit under the uncollateralized letter of credit subfeature through March 27, 2010. Letters of credit issued under the subfeature reduce the Company’s borrowing capacity under the revolving credit line. Additionally, the Company may request that Wells Fargo issue up to $150.0 million in letters of credit under the collateralized letter of credit facility through March 27, 2014. As detailed in the agreement, the Company pays interest of LIBOR plus 1.25% on outstanding borrowings under the uncollateralized revolving credit line, and a fee of 2% and 0.2% to 0.3% depending on maturity for outstanding letters of credit under the uncollateralized letter of credit subfeature and collateralized letter of credit facility, respectively. At any time, the Company can prepay outstanding loans. All borrowings under the uncollateralized revolving credit line must be repaid by March 27, 2010, and all letters of credit issued under the uncollateralized letter of credit subfeature expire on or before March 27, 2010 unless the Company provides by such date collateral in the form of cash or cash equivalents in the aggregate amount available to be drawn under letters of credit outstanding at such time. All letters of credit issued under the collateralized letter of credit facility expire no later than March 27, 2014.

17

In connection with the credit agreement, the Company entered into a security agreement with Wells Fargo, granting a security interest in a securities account and deposit account to secure its obligations in connection with any letters of credit that might be issued under the credit agreement. SunPower North America, LLC and SunPower Corporation, Systems (“SP Systems”), both wholly-owned subsidiaries of the Company, also entered into an associated continuing guaranty with Wells Fargo. In addition, SP Systems will pledge 60% of its equity interest in SunPower Systems SA to Wells Fargo in the second quarter of fiscal 2009 to collateralize up to $50.0 million of the Company’s obligations under the credit agreement. The terms of the credit agreement include certain conditions to borrowings, representations and covenants, and events of default customary for financing transactions of this type. If the Company fails to comply with the financial and other restrictive covenants contained in the credit agreement resulting in an event of default, all debt could become immediately due and payable. Financial and other restrictive covenants include, but are not limited to, net income adjusted for purchase accounting not less than $1.00 in each period of four consecutive quarters as of the recently completed fiscal quarter, total liabilities divided by tangible net worth not exceeding two to one as of the end of each fiscal quarter, and no declaration or payment of dividends.

As of March 29, 2009 and December 28, 2008, letters of credit totaling $49.7 million and $29.9 million, respectively, were issued by Wells Fargo under the uncollateralized letter of credit subfeature. In addition, letters of credit totaling $74.5 million and $76.5 million were issued by Wells Fargo under the collateralized letter of credit facility as of March 29, 2009 and December 28, 2008, respectively. As of March 29, 2009 and December 28, 2008, cash available to be borrowed under the uncollateralized revolving credit line was $0.3 million and $20.1 million, respectively, and includes letter of credit capacities available to be issued by Wells Fargo under the uncollateralized letter of credit subfeature. Letters of credit available under the collateralized letter of credit facility at March 29, 2009 and December 28, 2008 totaled $75.5 million and $73.5 million, respectively.

Debt Facility Agreement with the Malaysian Government

On December 18, 2008, the Company entered into a facility agreement with the Malaysian Government. In connection with the facility agreement, the Company executed a debenture and deed of assignment in favor of the Malaysian Government, granting a security interest in a deposit account and all assets of SunPower Malaysia Manufacturing Sdn. Bhd., a wholly-owned subsidiary of the Company, to secure its obligations under the facility agreement.

Under the terms of the facility agreement, the Company may borrow up to Malaysian Ringgit 1.0 billion (approximately $276.9 million) to finance the construction of its planned third solar cell manufacturing facility (“FAB3”) in Malaysia. The loans within the facility agreement are divided into two tranches that may be drawn through June 2010. Principal is to be repaid in six quarterly payments starting in July 2015, and a non-weighted average interest rate of approximately 4.4% per annum accrues and is payable starting in July 2015. The Company has the ability to prepay outstanding loans and all borrowings must be repaid by October 30, 2016. The terms of the facility agreement include certain conditions to borrowings, representations and covenants, and events of default customary for financing transactions of this type. As of March 29, 2009 and December 28, 2008, the Company had borrowed Malaysian Ringgit 375.0 million (approximately $103.9 million) and Malaysian Ringgit 190.0 million (approximately $54.6 million), respectively, under the facility agreement.

1.25% and 0.75% Convertible Debenture Issuances

In February 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures. Interest on the 1.25% debentures is payable on February 15 and August 15 of each year, which commenced August 15, 2007. The 1.25% debentures mature on February 15, 2027. Holders may require the Company to repurchase all or a portion of their 1.25% debentures on each of February 15, 2012, February 15, 2017 and February 15, 2022, or if the Company experiences certain types of corporate transactions constituting a fundamental change. In addition, the Company may redeem some or all of the 1.25% debentures on or after February 15, 2012. The 1.25% debentures are initially convertible, subject to certain conditions, into cash up to the lesser of the principal amount or the conversion value. If the conversion value is greater than $1,000, then the excess conversion value will be convertible into the Company’s class A common stock. The initial effective conversion price of the 1.25% debentures is approximately $56.75 per share, which represented a premium of 27.5% over the closing price of the Company's class A common stock on the date of issuance. The applicable conversion rate will be subject to customary adjustments in certain circumstances.

In July 2007, the Company issued $225.0 million in principal amount of its 0.75% senior convertible debentures. Interest on the 0.75% debentures is payable on February 1 and August 1 of each year, which commenced February 1, 2008. The 0.75% debentures mature on August 1, 2027. Holders may require the Company to repurchase all or a portion of their 0.75% debentures on each of August 1, 2010, August 1, 2015, August 1, 2020, and August 1, 2025, or if the Company is involved in certain types of corporate transactions constituting a fundamental change. In addition, the Company may redeem some or all of the 0.75% debentures on or after August 1, 2010. The 0.75% debentures will be classified as short-term debt in the Company’s Condensed Consolidated Balance Sheet beginning on August 1, 2009. The 0.75% debentures are initially convertible, subject to certain conditions, into cash up to the lesser of the principal amount or the conversion value. If the conversion value is greater than $1,000, then the excess conversion value will be convertible into cash, class A common stock or a combination of cash and class A common stock, at the Company’s election. The initial effective conversion price of the 0.75% debentures is approximately $82.24 per share, which represented a premium of 27.5% over the closing price of the Company's class A common stock on the date of issuance. The applicable conversion rate will be subject to customary adjustments in certain circumstances.

18

The 1.25% debentures and 0.75% debentures are senior, unsecured obligations of the Company, ranking equally with all existing and future senior unsecured indebtedness of the Company. The 1.25% debentures and 0.75% debentures are effectively subordinated to the Company’s secured indebtedness to the extent of the value of the related collateral and structurally subordinated to indebtedness and other liabilities of the Company’s subsidiaries. The 1.25% debentures and 0.75% debentures do not contain any covenants or sinking fund requirements.

For the quarter ended September 28, 2008, the closing price of the Company’s class A common stock equaled or exceeded 125% of the $56.75 per share initial effective conversion price governing the 1.25% debentures for 20 out of 30 consecutive trading days ending on September 28, 2008, thus satisfying the market price conversion trigger pursuant to the terms of the 1.25% debentures. During the fourth quarter in fiscal 2008, holders of the 1.25% debentures were able to exercise their right to convert the debentures any day in that fiscal quarter. As of December 28, 2008, the Company received notices for the conversion of approximately $1.4 million of the 1.25% debentures which the Company settled for approximately $1.2 million in cash and 1,000 shares of class A common stock.

Because the closing price of the Company’s class A common stock on at least 20 of the last 30 trading days during the fiscal quarters ending March 29, 2009 and December 28, 2008 did not equal or exceed $70.94, or 125% of the applicable conversion price for its 1.25% debentures, and $102.80, or 125% of the applicable conversion price governing its 0.75% debentures, holders of the 1.25% debentures and 0.75% debentures are unable to exercise their right to convert the debentures, based on the market price conversion trigger, any day in the first and second quarters of fiscal 2009. Accordingly, the Company classified the convertible debt as long-term debt in its Condensed Consolidated Balance Sheets as of March 29, 2009 and December 28, 2008. This test is repeated each fiscal quarter, therefore, if the market price conversion trigger is satisfied in a subsequent quarter, the debentures may again be re-classified as short-term debt.

The 1.25% debentures and 0.75% debentures are subject to the provisions of FSP APB 14-1, adopted by the Company on December 29, 2008, since the debentures can be settled in cash upon conversion. The Company estimated that the effective interest rate for similar debt without the conversion feature was 9.25% and 8.125% on the 1.25% debentures and 0.75% debentures, respectively. The principal amount of the outstanding debentures, the unamortized discount and the net carrying value as of March 29, 2009 was $423.6 million, $59.8 million and $363.8 million, respectively, and as of December 28, 2008 was $423.6 million, $66.4 million and $357.2 million, respectively. The Company recognized $5.0 million and $4.4 million in non-cash interest expense in the three months ended March 29, 2009 and March 30, 2008, respectively, related to the adoption of FSP APB 14-1 (see Note 1). As of March 29, 2009, the remaining weighted average period over which the unamortized discount will be recognized is as follows (in thousands):

2009 (remaining nine months)
  
$
20,589
  
2010
  
22,667
  
2011
  
14,686
  
2012
  
1,898
  
   
$
59,840
  

The following table summarizes the Company’s outstanding convertible debt:

   
As of
  
   
March 29, 2009
    
December 28, 2008
  
(In thousands)
  
Face Value
    
Fair Value*
    
Face Value
    
Fair Value*
  
1.25% debentures
  
$
  198,608
    
$
151,190
    
$
  198,608
    
$
  143,991
  
0.75% debentures
    
225,000
      
187,875
      
225,000
      
  166,747
  
Total convertible debt
  
$
  423,608
    
$
339,065
    
$
  423,608
    
$
  310,738
  

*
The fair value of the convertible debt was determined based on quoted market prices as reported by an independent pricing source.

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Note 11. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income includes unrealized gains and losses on the Company’s available-for-sale investments, foreign currency derivatives designated as cash flow hedges and translation adjustments. The components of comprehensive income were as follows:

   
Three Months Ended
  
(In thousands)
  
March 29,
2009
    
March 30,
2008
  
Net income (loss)
  
$
(4,786
)
  
$
11,999
  
Other comprehensive income:
                
Translation adjustment
    
(16,608
)
    
10,405
  
Unrealized gain (loss) on investments, net of tax
    
8
      
(1,471
)
Unrealized gain (loss) on derivatives, net of tax
    
22,534
      
(1,456
)
Total comprehensive income
  
$
1,148
    
$
19,477
  

Note 12. FOREIGN CURRENCY DERIVATIVES

The Company has non-U.S. subsidiaries that operate and sell the Company’s products in various global markets, primarily in Europe. As a result, the Company is exposed to risks associated with changes in foreign currency exchange rates. It is the Company’s policy to use various hedge instruments to manage the exposures associated with purchases of foreign sourced equipment, net asset or liability positions of its subsidiaries and forecasted revenues and expenses. In connection with its global tax planning, the Company changed the flow of transactions to European subsidiaries that have Euro functional currency, resulting in greater exposure to changes in the value of the Euro beginning in the second quarter of fiscal 2008. Implementation of this tax strategy had, and will continue to have, the ancillary effect of limiting the Company’s ability to fully hedge certain Euro-denominated revenue. The Company currently does not enter into foreign currency derivative financial instruments for speculative or trading purposes.

On December 29, 2008, the Company adopted SFAS No. 161 which had no financial impact on the Company’s condensed consolidated financial statements and only required additional financial statement disclosures (see Note 1). The Company has applied the requirements of SFAS No. 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.

Under SFAS No. 133, the Company is required to recognize derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The Company calculates the fair value of its option and forward contracts based on market volatilities, spot rates and interest differentials from published sources. The following table presents information about the Company’s hedge instruments measured at fair value on a recurring basis as of March 29, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value in accordance with the provisions of SFAS No. 157:

(In thousands)
  
Balance Sheet Location
  
Significant Other
Observable Inputs
(Level 2)
  
Asset
            
Derivatives not designated as hedging instruments under SFAS No. 133
            
Balance sheet hedges
            
Foreign currency forward exchange contracts
  
Prepaid expenses and other current assets
  
$
2,173
  
             
Liability
            
Derivatives not designated as hedging instruments under SFAS No. 133
            
Balance sheet hedges
            
Foreign currency forward exchange contracts
  
Accrued liabilities
  
$
9,940
  
Derivatives designated as hedging instruments under SFAS No. 133
            
Cash flow hedges
            
Foreign currency forward exchange contracts
  
Accrued liabilities
  
$
7,856
  
Foreign currency option contracts
  
Accrued liabilities
    
485
  
       
$
8,341
  

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The following table summarizes the amount of unrealized loss recognized in “Accumulated other comprehensive loss” (“OCI”) in “Stockholders’ equity” in the Condensed Consolidated Balance Sheet:

   
Unrealized Loss Recognized in OCI (Effective Portion)
  
Loss Reclassified from OCI to Cost of Revenue (Effective Portion)
  
Loss Recognized in Other, Net on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
  
   
As of
  
Three Months Ended
  
Three Months Ended
  
(In thousands)
  
March 29,
2009
  
March 29,
2009
  
March 29,
2009
  
Cash flow hedges
              
Foreign currency forward exchange contracts
   $ (3,551 ) $ (125 ) $ (1,478 )
Foreign currency option contracts
     —     —     (485 )
    $ (3,551 ) $ (125 ) $ (1,963 )

The following table summarizes the amount of loss recognized in “Other, net” in the Condensed Consolidated Statement of Operations in the three months ended March 29, 2009:

(In thousands)
      
Derivatives not designated as hedging instruments under SFAS No. 133
      
Balance sheet hedges
      
Foreign currency forward exchange contracts
   $ (1,838 ) 

Foreign Currency Exchange Risk

Cash Flow Exposure

The Company’s subsidiaries have had and will continue to have material future cash flows, including revenues and expenses, that are denominated in currencies other than their functional currencies. The Company’s cash flow exposure primarily relates to trade accounts receivable and accounts payable. Changes in exchange rates between the Company’s subsidiaries’ functional currencies and other currencies in which they transact will cause fluctuations in cash flows expectations and cash flows realized or settled. Accordingly, the Company enters into option and forward contracts to hedge the value of a portion of these forecasted cash flows.

In accordance with SFAS No. 133, the Company accounts for its hedges of forecasted foreign currency purchases as cash flow hedges. As of March 29, 2009, the Company has outstanding cash flow hedge forward contracts and option contracts with an aggregate notional value of $397.9 million and $76.3 million, respectively. As of December 28, 2008, the Company had outstanding cash flow hedge forward contracts and option contracts with an aggregate notional value of $364.5 million and $147.5 million, respectively. The maturity dates of the outstanding contracts as of March 29, 2009 range from April 2009 to December 2009. Changes in fair value of the effective portion of hedge contracts are recorded in “Accumulated other comprehensive loss” in “Stockholders’ equity” in the Condensed Consolidated Balance Sheets. Amounts deferred in accumulated other comprehensive loss are reclassified to “Cost of revenue” in the Condensed Consolidated Statements of Operations in the periods in which the hedged exposure impacts earnings. The Company expects to reclassify $3.6 million of net losses related to these option and forward contracts that are included in accumulated other comprehensive loss at March 29, 2009 to “Cost of revenue” in the following nine months as the Company realizes the cost effects of the related forecasted foreign currency cost of revenue transactions. The amounts ultimately recorded in the Condensed Consolidated Statements of Operations will be contingent upon the actual exchange rates when the related forecasted foreign currency cost of revenue transactions are realized, and therefore, unrealized losses at March 29, 2009 could change.

Cash flow hedges are tested for effectiveness each period on an average to average rate basis 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. Amounts recorded in “Other, net” were losses of $2.0 million and none during the three months ended March 29, 2009 and March 30, 2008, respectively, due to loss in time value and cost of forward points.

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Transaction Exposure

Other derivatives not designated as hedging instruments under SFAS No. 133 consist of forward contracts used to hedge the net balance sheet effect of foreign currency denominated assets and liabilities primarily for intercompany transactions, receivables from customers, prepayments to suppliers and advances received from customers. 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 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 at fair value with the related gains or losses recorded in “Other, net.” The gains or losses on these contracts are substantially offset by transaction gains or losses on the underlying balances being hedged. As of March 29, 2009 and December 28, 2008, the Company held forward contracts with an aggregate notional value of $248.9 million and $66.6 million, respectively, to hedge balance sheet exposure related to transactions with third-parties. These forward contracts have maturities of one 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 counter-parties 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 one counter-party. 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 counter-party financial institutions.

Note 13. INCOME TAXES

In the three months ended March 29, 2009, the Company’s effective rate of income tax benefit of 58.7% was primarily attributable to domestic and foreign income losses in certain jurisdictions, nondeductible amortization of purchased intangible assets and discrete stock option deductions. The Company’s tax provision for the three months ended March 30, 2008 of 13.6% was primarily attributable to domestic and foreign income taxes in certain jurisdictions where the Company’s operations were profitable, net of the consumption of non-stock net operating loss carryforwards. As a result of the Company’s adoption of FSP APB 14-1, the tax provision during the first quarter of fiscal 2008 was retroactively adjusted from 28.3% to 13.6% (see Note 1). The Company’s interim period tax provision is estimated based on the expected annual worldwide tax rate and takes into account the tax effect of discrete items.

Note 14. NET INCOME (LOSS) PER SHARE OF CLASS A AND CLASS B COMMON STOCK
 
Effective December 29, 2008, the Company adopted FSP EITF 03-6-1, which requires it to use the two-class method to calculate net income (loss) per share. Under the two-class method, net income (loss) 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 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 loss per share. In accordance with the implementation provisions of FSP EITF 03-6-1, prior period share data and net income (loss) per share has been retroactively adjusted (see Note 1).

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 the basic weighted-average common stock outstanding plus any potentially dilutive securities outstanding during the period using the treasury stock method, except when their effect is anti-dilutive. Potentially dilutive securities include stock options, restricted stock units and senior convertible 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 (see Note 10). Pursuant to EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion” (“EITF 90-19”), the 1.25% debentures and 0.75% debentures are included in the calculation of diluted net income (loss) per share if their inclusion is dilutive under the treasury stock method.

The following is a summary of other outstanding anti-dilutive potential common stock:

   
As of
(In thousands)
  
March 29,
2009
    
March 30,
2008
  
Stock options
    
2,089
      
17
  
Restricted stock units
    
332
      
412
  

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The following table presents the calculation of basic and diluted net income (loss) per share:

   
Three Months Ended
(In thousands, except per share amounts)
  
March 29,
2009
    
March 30,
2008
  
Basic net income (loss) per share
                
Net income (loss)
   $
(4,786
)
   $
11,999
  
Less:  Undistributed earnings allocated to unvested restricted stock awards(1)
    
—
      
187
  
Net income (loss) available to common stockholders
   $
(4,786
)
   $
11,812
  
                 
Basic weighted-average common shares
    
83,749
      
78,965
  
                 
Net income (loss) per share
   $
(0.06
)
   $
0.15
  
                 
Diluted net income (loss) per share
                
Net income (loss)
   $
(4,786
)
   $
11,999
  
Less:  Undistributed earnings allocated to unvested restricted stock awards(1)
    
—
      
178
  
Net income (loss) available to common stockholders
   $
(4,786
)
   $
11,821
  
                 
Basic weighted-average common shares
    
83,749
      
78,965
  
Effect of dilutive securities:
                
Stock options
    
—
      
3,038
  
Restricted stock units
    
—
      
39
  
1.25% debentures
    
—
      
960
  
Diluted weighted-average common shares
    
83,749
      
83,002
  
                 
Net income (loss) per share
   $
(0.06
)
   $
0.14
  

(1) Losses are not allocated to unvested restricted stock awards because such awards do not contain an obligation to participate in losses.

Beginning on September 15, 2008, the date on which Lehman Brothers International (Europe) Limited (“LBIE”) commenced administrative proceedings regarding the Lehman bankruptcy, approximately 2.9 million shares of class A common stock lent to LBIE in connection with the 1.25% debentures are included in basic weighted-average common shares. Basic weighted-average common shares exclude approximately 1.8 million shares of class A common stock lent to Credit Suisse International (“CSI”) in connection with the 0.75% debentures. If Credit Suisse Securities (USA) LLC (“Credit Suisse”) or its affiliates, including CSI, were to file bankruptcy or commence similar administrative, liquidating, restructuring or other proceedings, the Company may have to include approximately 1.8 million shares lent to CSI in basic weighted-average common shares.

For the three months ended March 29, 2009, the Company’s average stock price for the period did not exceed the conversion price for the senior convertible debentures. For the three months ended March 30, 2008, dilutive potential common shares includes approximately 1.0 million shares for the impact of the 1.25% debentures as the Company experienced a substantial increase in its common stock price during the first quarter of fiscal 2008 as compared to the conversion price pursuant to the terms of the 1.25% debentures. For the three months ended March 30, 2008, the Company’s average stock price for the period did not exceed the conversion price for the 0.75% debentures. Under the treasury stock method, the Company’s senior convertible debentures will generally have a dilutive impact on net income per share if the Company’s average stock price for the period exceeds the conversion price for the senior convertible debentures.

Note 15. 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)
  
March 29,
2009
    
March 30,
2008
  
Cost of systems revenue
  
$
298
    
$
2,511
  
Cost of components revenue
    
525
      
1,203
  
Research and development
    
1,431
      
811
  
Sales, general and administrative
    
7,229
      
9,983
  
Total stock-based compensation expense
  
$
9,483
    
$
14,508
  

23

The following table summarizes the consolidated stock-based compensation expense, by type of awards:

   
Three Months Ended
  
(In thousands)
  
March 29,
2009
    
March 30,
2008
  
Employee stock options
  
$
1,028
    
$
1,187
  
Restricted stock awards and units
    
10,513
      
7,901
  
Shares and options released from re-vesting restrictions
    
168
      
6,006
  
Change in stock-based compensation capitalized in inventory
    
(2,226
)
    
(586
)
Total stock-based compensation expense
  
$
9,483
    
$
14,508
  

In connection with its acquisition of PowerLight Corporation (now known as SP Systems) on January 10, 2007, the Company issued 1.1 million shares of its class A common stock and 0.5 million stock options to employees of SP Systems. The class A common stock and stock options were valued at $60.4 million and were subject to certain transfer restrictions and a repurchase option held by the Company. The Company recognized the expense as the re-vesting restrictions of these shares lapsed over the two-year period beginning on the date of acquisition. The value of shares released from such re-vesting restrictions is included in stock-based compensation expense in the table above.

The following table summarizes the Company’s stock option activities:

   
Shares
(in thousands)
    
Weighted-
Average
Exercise
Price Per Share
  
Outstanding as of December 28, 2008
    
2,545
    
$
8.96
  
Exercised
    
(118
)
    
3.36
  
Forfeited
    
(24
)
    
28.83