SunPower Reports Second Quarter 2016 Results

SAN JOSE, Calif., Aug. 9, 2016 /PRNewswire/ -- SunPower Corp. (NASDAQ: SPWR) today announced financial results for its second quarter ended July 3, 2016.

"Our second quarter execution was solid as we met our financial targets and achieved key milestones across the company," said Tom Werner, SunPower president and CEO.  "During the quarter we saw significant customer demand for our recently introduced Helix™ and SunPower Equinox™ complete commercial and residential solutions, respectively. We are also seeing stronger than anticipated demand and price premium for our highest efficiency, next generation X-21 and X-22 Series solar panels.  In our upstream solar cell and panel manufacturing operations, we delivered strong yields and panel output in our fabs, continued our technology leadership with the announcement of our world record 24.1 percent efficient rooftop solar panel and successfully started up our first high volume, Performance Series production lines in Mexico.  

"In our distributed generation business for the second quarter, we saw solid execution in both the residential and commercial segments.  In commercial, our performance was above plan as we successfully ramped our Helix product deployment to approximately 20 megawatts (MW) in the second quarter while signing over 25 MW of new contracts for customers such as the U.S. Army.  We were also pleased to complete the drop down of our Macy's project to 8point3 Energy Partners, and we continue to believe that 8point3 Energy Partners will be a key strategic vehicle for the company going forward.  With a record pipeline of more than $1.3 billion, strong bookings, currently stable pricing and the continued successful ramp of our Helix solution, we are well positioned to gain share in the commercial market.  Our residential segment also performed well, with solid fundamentals in the U.S. and improving traction in Europe and Japan.  In the U.S., we are seeing a pronounced shift to our new SunPower Equinox complete solution which accounted for 50 percent of bookings by the end of the quarter.  Total U.S. residential MW deployment was up approximately 25 percent year-over-year, and we continued to expand our utility channel initiatives, most recently a new solar plus storage partnership with Consolidated Edison.

"In our power plant segment, we expanded our international project backlog with the announcement of more than 250 MW of projects in Chile, bringing our total Latin America signed Power Purchase Agreement (PPA) portfolio to over 800 MW.  Additionally, we secured 40 MW of innovative solar plus battery storage projects for deployment in the French overseas territories.  In the U.S., we were pleased to announce the sale of a controlling interest in our 102-MW Henrietta project to Southern Company and added to our public sector footprint as we started construction of our 9.5-MW project for the California Department of Water Resources.

"However, while the long-term fundamentals for solar power remain strong, we see a number of near-term industry challenges, primarily in our power plant segment, that we expect to impact our business and financial performance in the second half of 2016.  The extension of the Investment Tax Credit, as well as the bonus depreciation credit, while beneficial to the long-term health of the industry, has reduced the urgency to complete new solar projects by the end of 2016, with many customers adopting a longer-term timeline for project completion.  Additionally, near-term economic returns have deteriorated due to aggressive PPA pricing by new market entrants, including a number of large, global independent power companies.  We are also seeing customer project IRRs rising in the near term as buyers have increased their hurdle rates due to industry conditions.  Finally, the continued market disruption in the YieldCo environment has impacted our assumptions related to monetizing deferred profits.

"As a result, we have proactively decided to streamline our power plant development segment while shifting investment to our distributed generation (DG) segments.  We intend to focus our development resources on a limited number of core markets, primarily in the Americas, where we believe we have a sustainable competitive advantage and a project pipeline of over 9 gigawatts (GW). Outside these core markets, we will focus our power plant business on the sale of our new Oasis complete solution incorporating Performance Series panel technology to developers and Engineering, Procurement and Construction companies in global markets, including Total.  We also plan to delay the timing of certain projects in our 2016 and 2017 pipeline to take advantage of planned cost reduction efforts over the next two years.   We expect these actions to significantly lower operating expense and capital deployment in our power plant business while maintaining leadership in our core markets. 

"Additionally, we are realigning our manufacturing operations to increase the relative mix of X-Series capacity due to expected strong customer demand in our DG business as well as adjusting our panel assembly capacity to be closer to our core markets.  We plan to utilize equipment from some of our older solar cell manufacturing lines in Fab 2 to debottleneck capacity of our latest generation technology in order to increase the supply of X-Series panels.  These initiatives will enable us to increase X-Series output by up to 100 MW by the end of 2017.  Additionally, in connection with the realignment of our power plant segment principally around our core markets, we have made the decision to close our Philippine panel assembly facility and transfer the equipment to our latest generation, lower cost facilities in Mexico. This change will optimize our supply chain and move final panel assembly closer to our key markets.

"Overall, we expect these initiatives will strengthen our overall competitive position and enable us to profitably capitalize on the anticipated global growth of solar power as a long term, mainstream energy source.  The core foundation of our long-term strategy remains unchanged, namely, developing innovative, complete customer solutions based on differentiated technology and deploying these solutions across a diversified portfolio of applications and geographic markets," concluded Werner.

"Our solid second quarter performance reflects the benefits of our diversified go-to-market strategy" said Chuck Boynton, SunPower Chief Financial Officer.  "Our balance sheet remains strong as we exited the quarter with more than $590 million in cash.  Looking forward, we believe our realignment plan will enable us to expand our leadership position in distributed generation, further strengthen our presence in our core power plant markets, improve cash flow and lower our annual operating expenses by up to 10 percent."

As a result of the announced realignment, the company expects the following:

• Workforce reduction of approximately 15 percent or 1,200 employees, primarily related to its Philippine facility closure
• Restructuring charges totaling $30-$45 million
• Substantial portion of charges to be incurred in the third quarter of 2016 with more than 50 percent of the total charges to be cash
• Annual operating expense reductions of approximately 10 percent

Additionally, second quarter fiscal 2016 non-GAAP results include net adjustments that, in the aggregate, decreased (increased) non-GAAP net loss by $39.9 million, including $18.0 million related to 8point3 Energy Partners, $4.1 million related to utility and power plant projects, $3.0 million related to sale of operating lease assets, $3.0 million related to sale-leaseback transactions, $16.5 million related to stock-based compensation expense, $(2.2) million related to other adjustments, and $(2.5) million related to tax effect.

Financial Outlook

As a result of the challenges described above, the company is updating its previously disclosed fiscal year 2016 guidance, as well as providing selected forecasts for fiscal year 2017.

On a GAAP basis, the company now expects 2016 revenue of $2.8 billion to $3.0 billion, gross margin of 9.5 percent to 11.5 percent and net loss of $175 million to $125 million.   Fiscal year 2016 GAAP guidance includes the impact of the company's HoldCo asset strategy and revenue and timing deferrals due to real estate accounting.

The company's updated 2016 non-GAAP financial guidance is as follows:  revenue of $3.0 billion to $3.2 billion, gross margin of 10.5 percent to 12.5 percent, EBITDA of $275 million to $325 million, capital expenditures of $225 million to $245 million and gigawatts deployed in the range of 1.45 GW to 1.65 GW. 

For 2017, the company expects a GAAP net loss of $200 million to $100 million and EBITDA in the range of $300 million to $400 million.  The company expects that at the lower end of the guidance range, 2017 EBITDA would be generated almost entirely from the company's DG business and believes that with the announced realignment, it will be well positioned to capitalize on the long term growth potential in the global power plant market. 

The company's third quarter fiscal 2016 GAAP guidance is as follows: revenue of $700 million to $800 million, gross margin of 14.5 percent to 16.5 percent and net loss of $5 million to net income of $20 million.  Third quarter 2016 GAAP guidance includes the impact of the company's HoldCo asset strategy and revenue and timing deferrals due to real estate accounting.  On a non-GAAP basis, the company expects revenue of $750 million to $850 million, gross margin of 16.5 percent to 18.5 percent, EBITDA of $115 million to $140 million and megawatts deployed in the range of 380 MW to 420 MW. 

The company will host a conference call for investors this afternoon to discuss its second quarter 2016 performance at 1:30 p.m. Pacific Time.  The call will be webcast and can be accessed from SunPower's website at http://investors.sunpower.com/events.cfm.

This press release contains both GAAP and non-GAAP financial information.  Non-GAAP figures are reconciled to the closest GAAP equivalent categories in the financial attachment of this press release.  Please note that the company has posted supplemental information and slides related to its second quarter 2016 performance on the Events and Presentations section of SunPower's Investor Relations page at http://investors.sunpower.com/events.cfm.  The capacity of power plants in this release is described in approximate megawatts on a direct current (dc) basis unless otherwise noted.

About SunPower

As one of the world's most innovative and sustainable energy companies, SunPower Corp. (NASDAQ: SPWR) provides a diverse group of customers with complete solar solutions and services. Residential customers, businesses, governments, schools and utilities around the globe rely on SunPower's more than 30 years of proven experience. From the first flip of the switch, SunPower delivers maximum value and performance throughout the long life of every solar system. Headquartered in Silicon Valley, SunPower has dedicated, customer-focused employees in Africa, Asia, Australia, Europe, and North and South America. For more information about how SunPower is changing the way our world is powered, visit www.sunpower.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding: (a) our positioning for future success, gains in market share, competitive advantage, and ability to profitably capitalize on future market growth, including in our core markets; (b) the long-term fundamentals for solar power; (c) our plans for realignment of our manufacturing operations and power plant segment, including the anticipated increase in X-series output; (d) our expectations for the success and financial impact of our planned realignment, including impact on our balance sheet, long term cash flow and annual operating expenses; (e) our ability to reduce costs, including operating expense and capital deployment in our power plant business; (f) our project pipeline;  (g) 8point3's role within our company strategy; (h) the ramp of our Helix solution; (i) third quarter fiscal 2016 guidance, including GAAP revenue, gross margin, and net income (loss), as well as non-GAAP revenue, gross margin, EBITDA, and MW deployed; (j) full year fiscal 2016 guidance, including GAAP revenue, gross margin and net loss, as well as non-GAAP revenue, gross margin, capital expenditures, EBITDA, and gigawatts deployed and (k) our full year fiscal 2017 selected forecasts.  These forward-looking statements are based on our current assumptions, expectations and beliefs and involve substantial risks and uncertainties that may cause results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (1) competition in the solar and general energy industry and downward pressure on selling prices and wholesale energy pricing; (2) our liquidity, substantial indebtedness, and ability to obtain additional financing for our projects and customers; (3) regulatory changes and the availability of economic incentives promoting use of solar energy; (4) challenges inherent in constructing certain of our large projects; (5) the success of our ongoing research and development efforts and our ability to commercialize new products and services, including products and services developed through strategic partnerships; (6) fluctuations in our operating results; (7) maintaining or increasing our manufacturing capacity and containing manufacturing difficulties that could arise; (8) challenges managing our joint ventures and partnerships; (9) challenges executing on our HoldCo and YieldCo strategies, including the risk that 8point3 Energy Partners may be unsuccessful; (10) fluctuations or declines in the performance of our solar panels and other products and solutions; (11) our ability to meet our cost reduction targets and implement the planned realignment of our manufacturing operations and power plant segment and (12) the outcomes of previously disclosed litigation.  A detailed discussion of these factors and other risks that affect our business is included in filings we make with the Securities and Exchange Commission (SEC) from time to time, including our most recent reports on Form 10-K and Form 10-Q, particularly under the heading "Risk Factors."  Copies of these filings are available online from the SEC or on the SEC Filings section of our Investor Relations website at investors.sunpower.com.  All forward-looking statements in this press release are based on information currently available to us, and we assume no obligation to update these forward-looking statements in light of new information or future events.

©2016 SunPower Corporation. All rights reserved. SUNPOWER, the SUNPOWER logo, SUNPOWER EQUINOX, HELIX and OASIS are trademarks or registered trademarks of SunPower Corporation in the U.S. and other countries as well.

Use of Non-GAAP Financial Measures

To supplement its consolidated financial results presented in accordance with GAAP, the company uses non-GAAP measures that are adjusted for certain items from the most directly comparable GAAP measures, as described below. The specific non-GAAP measures listed below are: revenue; gross margin; net income; net income per diluted share; and earnings before interest, taxes, depreciation and amortization ("EBITDA"). Management believes that each of these non-GAAP measures is useful to investors, enabling them to better assess changes in each of these key elements of the company's results of operations across different reporting periods on a consistent basis, independent of certain items as described below. Thus, each of these non-GAAP financial measures provides investors with another method to assess the company's operating results in a manner that is focused on its ongoing, core operating performance, absent the effects of these items. Management uses these non-GAAP measures internally to assess the business, its financial performance, current and historical results, as well as for strategic decision-making and forecasting future results. Many of the analysts covering the company also use these non-GAAP measures in their analyses. Given management's use of these non-GAAP measures, the company believes these measures are important to investors in understanding the company's operating results as seen through the eyes of management. These non-GAAP measures are not prepared in accordance with GAAP or intended to be a replacement for GAAP financial data; the non-GAAP measures should be reviewed together with the GAAP measures and are not intended to serve as a substitute for results under GAAP, and may be different from non-GAAP measures used by other companies.

Non-GAAP revenue includes adjustments relating to 8point3, utility and power plant projects, the sale of operating lease assets, and sale-leaseback transactions, each as described below. Non-GAAP gross margin includes adjustments relating to 8point3, utility and power plant projects, the sale of operating lease assets, sale-leaseback transactions, stock-based compensation, and other items, each as described below. In addition to those same adjustments, non-GAAP net income and non-GAAP net income per diluted share are adjusted for the tax effect of these non-GAAP adjustments as described below. In addition to the same adjustments as non-GAAP net income, EBITDA includes adjustments relating to cash interest expense (net of interest income), provision for income taxes, and depreciation.

Non-GAAP Adjustments Based on International Financial Reporting Standards ("IFRS")

Management utilizes IFRS guidance for non-GAAP purposes to record the revenue and profit recognition of certain transactions, each of which are further described below. In these situations, management believes that the IFRS standards enable investors to better evaluate the company's revenue and profit generation performance.

• 8point3. In 2015, 8point3 Energy Partners LP ("8point3 Energy Partners"), a joint YieldCo vehicle, was formed by the company and First Solar, Inc. ("First Solar" and, together with the company, the "Sponsors") to own, operate and acquire solar energy generation assets. Class A shares of 8point3 Energy Partners are now listed on the NASDAQ Global Select Market under the trading symbol "CAFD." Immediately after the IPO, the company contributed a portfolio of 170 MW of its solar generation assets (the "SPWR Projects") to 8point3 Operating Company, LLC ("OpCo"), 8point3 Energy Partners' primary operating subsidiary. In exchange for the SPWR Projects, the company received cash proceeds as well as equity interests in several 8point3 Energy Partners affiliated entities: primarily common and subordinated units representing a 40.7% stake in OpCo and a 50.0% economic and management stake in 8point3 Holding Company, LLC ("Holdings"), the parent company of the general partner of 8point3 Energy Partners and the owner of incentive distribution rights in OpCo. Holdings, OpCo, 8point3 Energy Partners and their respective subsidiaries are referred to herein as the "8point3 Group" or "8point3."
  
  The company includes adjustments related to the sales of projects contributed to 8point3 based on the difference between the fair market value of the consideration received and the net carrying value of the projects contributed, of which, a portion is deferred in proportion to the company's retained equity stake in 8point3. The deferred profit is subsequently recognized over time. This treatment is consistent with the accounting rules relating to the sale of such projects under IFRS. Under these rules, with certain exceptions such as for projects already in operation, the company's revenue is equal to the fair market value of the consideration received, and cost of goods sold is equal to the net carrying value plus a partial deferral of profit proportionate with the retained equity stake. Under GAAP, these sales are recognized under either real estate, lease, or consolidation accounting guidance depending upon the nature of the individual asset contributed, with outcomes ranging from no profit recognition to full profit recognition. IFRS profit, less deferrals associated with retained equity, is recognized for sales related to the residential lease portfolio. Revenue recognition for other projects sold to 8point3 is deferred until these projects reach commercial operations, consistent with IFRS rules. Equity in earnings of unconsolidated investees also includes the impact of the company's share of 8point3's earnings related to sales of projects receiving sales recognition under IFRS but not GAAP.
  
  
• Utility and power plant projects. The company includes adjustments related to the revenue recognition of utility and power plant projects based on the separately-identifiable components of transactions in order to reflect the substance of the transactions. This treatment is consistent with accounting rules relating to such projects under IFRS. Under GAAP, such projects are accounted for under real estate accounting guidance. Management calculates separate revenue and cost of revenue amounts each fiscal period in accordance with the two treatments above and the aggregate difference for the company's affected projects is included in the relevant reconciliation tables below. Over the life of each project, cumulative revenue and gross margin will be equivalent under the two treatments; however, revenue and gross margin will generally be recognized earlier under the company's non-GAAP treatment than under the company's GAAP treatment. Among other factors, this is due to the attribution of non-GAAP revenue and margin to the company's project development efforts at the time of initial project sale as required under IFRS accounting rules, whereas no separate attribution to this element occurs under GAAP real estate accounting guidance. Within each project, the relationship between the adjustments to revenue and gross margins is generally consistent. However, as the company may have multiple utility and power plant projects in progress at any given time, the relationship in the aggregate will occasionally appear otherwise.
  
  
• Sale of operating lease assets. The company includes adjustments related to the revenue recognition of the sale of certain solar assets subject to an operating lease (or of solar assets that are leased by or intended to be leased by the third-party purchaser to another party) based on the net proceeds received from the purchaser. This treatment is consistent with accounting rules relating to the sale of such assets under IFRS. Under GAAP, these sales are accounted for as borrowing transactions in accordance with lease accounting guidance. Under such guidance, revenue and profit recognition is based on rental payments made by the end lessee, and the net proceeds from the purchaser are recorded as a non-recourse borrowing liability, with imputed interest expense recorded on the liability. This treatment continues until the company has transferred the substantial risks of ownership, as defined by lease accounting guidance, to the purchaser, at which point the sale is recognized.
  
  
• Sale-leaseback transactions. The company includes adjustments related to the revenue recognition of certain sale-leaseback transactions based on the net proceeds received from the buyer-lessor. This treatment is consistent with accounting rules relating to such transactions under IFRS. Under GAAP, these transactions are accounted for under the financing method in accordance with real estate accounting guidance. Under such guidance, no revenue or profit is recognized at the inception of the transaction, and the net proceeds from the buyer-lessor are recorded as a financing liability. Imputed interest is recorded on the liability equal to the company's incremental borrowing rate adjusted solely to prevent negative amortization.

Other Non-GAAP Adjustments

• Stock-based compensation. Stock-based compensation relates primarily to the company's equity incentive awards. Stock-based compensation is a non-cash expense that varies from period to period and is dependent on market forces that are difficult to predict. Due to this unpredictability, management excludes this item from its internal operating forecasts and models. Management believes that this adjustment for stock-based compensation provides investors with a basis to measure the company's core performance, including compared with the performance of other companies, without the period-to-period variability created by stock-based compensation.
  
  
• Other. The company combines amounts previously disclosed under separate captions into "Other" when amounts do not have a significant impact on the current fiscal period. Management believes that these adjustments provide investors with a basis to evaluate the company's performance, including compared with the performance of other companies, without similar impacts.
  
  The amounts recorded in "Other" during the second quarter of fiscal 2016 are driven by adjustments which would have previously been disclosed under other non-GAAP adjustment captions, including "FPSC arbitration ruling," "IPO related costs," "Amortization of intangible assets," "Non-cash interest expense," and "Restructuring."
  
  
• Tax effect. This amount is used to present each of the adjustments described above on an after-tax basis in connection with the presentation of non-GAAP net income and non-GAAP net income per diluted share. The company's non-GAAP tax amount is based on estimated cash tax expense and reserves. The company forecasts its annual cash tax liability and allocates the tax to each quarter in a manner generally consistent with its GAAP methodology. This approach is designed to enhance investors' ability to understand the impact of the company's tax expense on its current operations, provide improved modeling accuracy, and substantially reduce fluctuations caused by GAAP to non-GAAP adjustments, which may not reflect actual cash tax expense.
  
  
• EBITDA adjustments. When calculating EBITDA, in addition to adjustments described above, the company excludes the impact during the period of the following items:
  
  
  • Cash interest expense, net of interest income
  • Provision for income taxes
  • Depreciation

Management presents this non-GAAP financial measure to enable investors to evaluate the company's performance, including compared with the performance of other companies.

For more information about these non-GAAP financial measures, please see the tables captioned "Reconciliations of GAAP Measures to Non-GAAP Measures" set forth at the end of this release, which should be read together with the preceding financial statements prepared in accordance with GAAP. 

The following supplemental data represent the adjustments, individual charges and credits that are included or excluded from SunPower's non-GAAP revenue, gross margin, net income and net income per diluted share measures for each period presented in the Consolidated Statements of Operations contained herein.

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