SunPower’s audit committee investigation continues

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SunPower’s internal investigation into unsubstantiated accounting entries at its Philippine manufacturing base has made progress, according to the company. The discrepancies were announced in November 2009 and concerned the inclusion of some figures on the financial records for 2009 that may have been intended for inclusion on the 2008 books.

The investigation is being carried out by the company’s audit committee in collaboration with outside legal and accounting experts. If the findings of the committee investigation are in line with the suspected discrepancies, SunPower’s interim financial 2009 results will have to be revised.

The preliminary findings of the investigation revealed that the Philippines base may have overstated expenses in its cost of goods sold of approximately $1 million in the first quarter ending March 29, 2009. The figures may also show up an understatement of expenses in its cost of goods sold of approximately $14 million in the second quarter ending June 28, 2009 and around $2 million in the third quarter ending September 27, 2009.

Reported 2009 quarterly revenues and operating income came in at $213.8 million and a loss of $2.5 million, respectively for the first quarter. Figures for the subsequent two quarters were $297.6 million (income) and $9.9 million (loss) for the second quarter and $466.3 million (income) and $34.6 million (loss) in the third quarter. Revenue for the whole year was reported at $1,434.9 million, with a GAAP operating income of $167.5 million.

Commenting on the investigation, Barclays Capital’s Vishal Shah stated that the “incremental positive” of the review will remove any cloudiness regarding the company’s accounting.

Shah believes that the issue could have been overblown for three reasons (points below reproduced from Shah’s Barclays Capital Clean Technology report):

“(i) SPWRA outsources most module/wafer production and we do not expect the cell processing costs to be significantly different compared to Chinese players. Moreover, we believe street ests are already discounting this type of cost structure disadvantage,
(ii) ongoing accounting investigation relates to only 50% of the business, systems business should not be impacted;
(iii) accounting irregularity was mostly related to underutilization accounting.

Reiterate 1-OW: Several factors could lead to share price outperformance:

(i) weak investor sentiment;
(ii) potential resolution of accounting overhang;
(iii) company specific catalysts for outperformance – cost reduction from wafer/module outsourcing, lower third party module procurement costs for systems business, above-average 2H10 visibility are some of the catalysts that could potentially lead to earnings outperformance;
(iv) room for additional upside to street ests – we see ests approaching our ~$2 estimate;
(v) we expect entry barriers in the systems business, US utility markets to continue to increase and SunPower could benefit from strong positioning in these segments.”

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