SPWRA Sunpower Corp. (MM)

A Silicon Valley-based manufacturer of high-efficiency solar cells, SunPower Corporation’s (SPWRA) third quarter 2011 adjusted earnings per share came in at 4 cents, easily beating the Zacks Consensus Estimate of a loss of 6 cents. However, earnings were below the year-ago earnings of 26 cents per share.

The results were driven by effective performance from its Residential and Commercial (R&C) and Utility and Power Plants (UPP) businesses. The results also reflect cost reduction efforts and commencement of production on the first line using step-reduced cell manufacturing process.

On a reported basis, the company posted a loss of $3.77 per share versus an EPS of 21 cents in the year-ago quarter.

In the third quarter of 2011, the variation of $3.73 per share between reported and adjusted earnings came from goodwill and other intangible asset impairment ($3.56), tax effects (6 cents), amortization of intangible assets (7 cents), loss on change in European government incentives (1 cent), non-cash interest expense (7 cents) and gain on sale of equity interest in unconsolidated investee of 4 cents.

Operational Results

SunPower generated revenues of $705.4 million, down $7.6 million from the Zacks Consensus Estimate of $713 million. However, sales comfortably surpassed the year-ago figure of $550.6 million.

Revenues from ‘Utility and Power Plant’ rose to $324.5 million from $257.8 million in the prior-year quarter. Revenue from ‘Residential and Commercial’ rose to $380.9 million from $292.8 million in the year-ago quarter.

Financial Condition

SunPower at the end of the reported period had cash and cash equivalents of $374.6 million, compared with $605.4 million at fiscal-end 2010. Convertible debt increased to $612.6 million from $591.9 million at fiscal-end 2010.

Reorganization

The company also announced a reorganization to align its businesses and cost structure with expected market conditions in 2012 and beyond. The reorganization has been planned keeping in mind product and technology innovation, increasing process efficiency and cost reductions.

Effective immediately, as a part of the reorganization, several long-tenured executives will adjust their areas of responsibility. Moreover, the company also announced that its Chief Financial Officer, Dennis Arriola, will be leaving the company in March 2012 and Jim Pape, its President of R&C business, will leave the company later in November 2011.

The company also expects to implement a company-wide restructuring program in the fourth quarter of 2011 to accelerate operating cost reduction and improve overall operating efficiency. Currently, it expects this program to reduce operating expenses by approximately 10% in 2012, while growing the company.  Additionally, as a result of the expected restructuring program under consideration, the company expects to incur a one-time, pre-tax charge of approximately $10 million due to its restructuring program which is currently not included in the GAAP guidance.

Guidance

For fiscal year 2011, the company expects total revenue in the range of $2.40 billion to $2.45 billion. Capital expenditures are expected to be in the range of $125 million to $135 million, and power generation recognized is expected to be in the range of 800 MW to 825 MW. 

For the fourth quarter of 2011, the company expects pro forma earnings to range from a loss per share of 15 cents to an EPS of 10 cents per share. GAAP loss per share is expected to be in the range of 60 cents to 35 cents in the fourth quarter of 2011.

The company expects pro forma earnings to range from a loss of 5 cents per share to an EPS of 20 cents. Including one-time, pre-tax charges of $349.8 million related to the impairment of goodwill and intangibles, pre-tax charges totaling approximately $65.7 million related to the company's panel reallocation strategy and write-down of third-party inventory and costs associated with the termination of third-party cell supply contracts,  and pre-tax charges totaling approximately $14.7 million for expenses related to the Total tender offer, the company expects GAAP guidance to range from a loss per share of $5.90 to $5.65.

Outlook

SunPower’s customer base is spread across North America, Europe, the Middle East, Asia and Australia. The company is also increasing its global market presence within the residential and commercial markets by expanding its network of approximately 1,600 dealers. Additionally, the company is gradually shifting its revenue base from solar panel sales to developments of solar projects, power plants and engineering, procurement and construction (EPC) systems. Earlier in June 2011, oil giant TOTAL S.A. (TOT) acquired 60.0% of SunPower.

However, its present premium valuation is unwarranted in light of higher cost structures vis-à-vis its peers, as well as an oversupply glut of solar panels in the market, subsidy roll back risk in Europe and rising competition. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. The company mainly competes with Suntech Power Holdings Co. Ltd. (STP) that is expected to release its third quarter results on November 22, 2011.

 
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