0000867773-13-000052.txt : 20130802 0000867773-13-000052.hdr.sgml : 20130802 20130801210315 ACCESSION NUMBER: 0000867773-13-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20130630 FILED AS OF DATE: 20130802 DATE AS OF CHANGE: 20130801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNPOWER CORP CENTRAL INDEX KEY: 0000867773 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943008969 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34166 FILM NUMBER: 131004467 BUSINESS ADDRESS: STREET 1: 77 RIO ROBLES CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 408-240-5500 MAIL ADDRESS: STREET 1: 77 RIO ROBLES CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 spwr_06302013x10-q.htm FORM 10-Q SPWR_06.30.2013_10-Q
 
 
 
 
 
 
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 June 30, 2013
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.)
77 Rio Robles, 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  T    No  o

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  T    No  o

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 o
Accelerated filer x
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 common stock as of July 26, 2013 was 121,253,641.

 
 
 
 
 
d




TABLE OF CONTENTS
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
June 30, 2013
 
December 30, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
580,560

 
$
457,487

Restricted cash and cash equivalents, current portion
12,199

 
15,568

Short-term marketable securities
99,921

 

Accounts receivable, net
459,373

 
398,150

Costs and estimated earnings in excess of billings
41,317

 
36,395

Inventories
235,156

 
291,386

Advances to suppliers, current portion
78,381

 
50,282

Project assets - plants and land, current portion
87,430

 
75,911

Prepaid expenses and other current assets (1)
513,108

 
613,053

Total current assets
2,107,445

 
1,938,232

 
 
 
 
Restricted cash and cash equivalents, net of current portion
16,939

 
31,396

Restricted long-term marketable securities
10,231

 
10,885

Property, plant and equipment, net
838,174

 
774,909

Project assets - plants and land, net of current portion
3,235

 
7,596

Other intangible assets, net
556

 
744

Advances to suppliers, net of current portion
280,829

 
301,123

Other long-term assets (1)
416,146

 
276,063

Total assets
$
3,673,555

 
$
3,340,948

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable (1)
$
433,123

 
$
414,335

Accrued liabilities
253,264

 
247,372

Billings in excess of costs and estimated earnings
334,929

 
225,550

Short-term debt
15,912

 
14,700

Convertible debt, current portion
230,000

 

Customer advances, current portion (1)
54,743

 
59,648

Total current liabilities
1,321,971

 
961,605

 
 
 
 
Long-term debt
149,212

 
375,661

Convertible debt, net of current portion (1)
517,017

 
438,629

Customer advances, net of current portion (1)
218,313

 
236,082

Other long-term liabilities
487,196

 
335,619

Total liabilities
2,693,709

 
2,347,596

Commitments and contingencies (Note 7)


 


Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both June 30, 2013 and December 31, 2012

 

Common stock, $0.001 par value, 367,500,000 shares authorized; 126,527,592 shares issued, and 121,251,385 outstanding as of June 30, 2013; 123,315,990 shares issued, and 119,234,280 shares outstanding as of December 30, 2012
121


119

Additional paid-in capital
1,951,191

 
1,931,947

Accumulated deficit
(937,216
)
 
(902,085
)
Accumulated other comprehensive loss
(5,252
)
 
(2,521
)
Treasury stock, at cost; 5,276,207 shares of common stock as of June 30, 2013; 4,081,710 shares of common stock as of December 30, 2012
(50,291
)
 
(34,108
)
Total stockholders' equity
958,553

 
993,352

Noncontrolling interests in subsidiaries
21,293

 

Total equity
979,846

 
993,352

Total liabilities and equity
$
3,673,555

 
$
3,340,948


(1)
The Company has related party balances in connection with transactions made with unconsolidated entities in which the Company has a direct equity investment. These related party balances are recorded within the "Prepaid expenses and other current assets," "Other long-term assets," "Accounts payable," "Customer advances, current portion," "Convertible debt, net of current portion," and "Customer advances, net of current portion" financial statement line items in the Condensed Consolidated Balance Sheets (see Note 2, Note 4, Note 5, Note 7, and Note 8).

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
 
Six Months Ended
 
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012

 
 
 
 
 
 
 
 
Revenue
 
$
576,516

 
$
595,897

 
$
1,211,949

 
$
1,090,028

Cost of revenue
 
468,655

 
522,397

 
1,044,775

 
971,280

Gross margin
 
107,861

 
73,500

 
167,174

 
118,748

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
13,035

 
14,104

 
26,205

 
30,830

Sales, general and administrative
 
62,035

 
62,480

 
132,127

 
138,674

Restructuring charges
 
928

 
47,599

 
591

 
50,645

Total operating expenses
 
75,998

 
124,183

 
158,923

 
220,149

Operating income (loss)
 
31,863

 
(50,683
)
 
8,251

 
(101,401
)
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
326

 
326

 
581

 
668

Interest expense
 
(24,870
)
 
(19,400
)
 
(51,904
)
 
(38,101
)
Other, net
 
443

 
(4,906
)
 
(7,813
)
 
(5,578
)
Other income (expense), net
 
(24,101
)
 
(23,980
)
 
(59,136
)
 
(43,011
)
Income (loss) before income taxes and equity in earnings (loss) of unconsolidated investees
 
7,762

 
(74,663
)
 
(50,885
)
 
(144,412
)
Provision for income taxes
 
(4,506
)
 
(10,593
)
 
(7,495
)
 
(11,949
)
Equity in earnings (loss) of unconsolidated investees
 
1,009

 
1,075

 
676

 
(2,350
)
Net income (loss)
 
$
4,265

 
$
(84,181
)
 
$
(57,704
)
 
$
(158,711
)
Net loss attributable to noncontrolling interests
 
15,300

 

 
22,573

 

Net income (loss) attributable to stockholders
 
$
19,565

 
$
(84,181
)
 
$
(35,131
)
 
$
(158,711
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
(0.71
)
 
$
(0.29
)
 
$
(1.38
)
Diluted
 
$
0.15

 
$
(0.71
)
 
$
(0.29
)
 
$
(1.38
)
Weighted-average shares:
 
 
 
 
 
 
 
 
Basic
 
120,943

 
118,486

 
120,248

 
115,136

Diluted
 
133,973

 
118,486

 
120,248

 
115,136


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

4


SunPower Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)

 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
Net income (loss)
 
$
4,265

 
$
(84,181
)
 
$
(57,704
)
 
$
(158,711
)
Components of comprehensive income (loss):
 
 
 
 
 
 
 
 
Translation adjustment
 
(2,583
)
 
(7,948
)
 
(3,926
)
 
(1,950
)
Net unrealized gain (loss) on derivatives (Note 10)
 
(1,354
)
 
(2,377
)
 
1,481

 
(8,127
)
Unrealized loss on investments
 
(7
)
 

 
(7
)
 

Income taxes
 
254

 
446

 
(279
)
 
1,526

Net change in accumulated other comprehensive income (loss)
 
(3,690
)
 
(9,879
)
 
(2,731
)
 
(8,551
)
Total comprehensive income (loss)
 
$
575

 
$
(94,060
)
 
$
(60,435
)
 
$
(167,262
)
Comprehensive loss attributable to noncontrolling interests
 
15,300

 

 
22,573

 

Comprehensive income (loss) attributable to stockholders
 
$
15,875

 
$
(94,060
)
 
$
(37,862
)
 
$
(167,262
)

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


5


SunPower Corporation
Condensed Consolidated Statements Equity
(In thousands, except share data)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Value
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
(Accumulated Deficit)
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
Balances at December 30, 2012
 
119,234

 
$
119

 
$
1,931,947

 
$
(34,108
)
 
$
(2,521
)
 
$
(902,085
)
 
$
993,352

 
$

 
$
993,352

Net loss
 

 

 

 

 

 
(35,131
)
 
(35,131
)
 
(22,573
)
 
(57,704
)
Other comprehensive loss
 

 

 

 

 
(2,731
)
 

 
(2,731
)
 

 
(2,731
)
Issuance of common stock upon exercise of options
 
26

 

 
49

 

 

 

 
49

 

 
49

Issuance of restricted stock to employees, net of cancellations
 
3,185

 
2

 
(2
)
 

 

 

 

 

 

Stock-based compensation expense
 

 

 
19,197

 

 

 

 
19,197

 

 
19,197

Purchases of treasury stock
 
(1,194
)
 

 

 
(16,183
)
 

 

 
(16,183
)
 

 
(16,183
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 

 
43,866

 
43,866

Balances at June 30, 2013
 
121,251

 
$
121

 
$
1,951,191

 
$
(50,291
)
 
$
(5,252
)
 
$
(937,216
)
 
$
958,553

 
$
21,293

 
$
979,846


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


6


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

 
Six Months Ended
 
June 30, 2013
 
July 1, 2012
(1)
Cash flows from operating activities:
 
 
 
Net loss
$
(57,704
)
 
$
(158,711
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
19,021

 
23,908

Depreciation
48,171

 
58,362

Loss on retirement of property, plant and equipment

 
45,409

Amortization of other intangible assets
189

 
5,477

Gain (loss) on mark-to-market derivatives
27

 
(4
)
Non-cash interest expense
24,071

 
15,346

Amortization of debt issuance costs
2,135

 
1,880

Equity in (earnings) loss of unconsolidated investees
(676
)
 
2,350

Third-party inventories write-down

 
8,869

Deferred income taxes and other tax liabilities
7,147

 
2,663

Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
(107,454
)
 
156,973

Costs and estimated earnings in excess of billings
(4,922
)
 
(13,736
)
Inventories
26,710

 
(54,567
)
Project assets
(31,293
)
 
(39,246
)
Prepaid expenses and other assets
54,670

 
(81,677
)
Advances to suppliers
(7,805
)
 
(18,320
)
Accounts payable and other accrued liabilities
41,692

 
(63,726
)
Billings in excess of costs and estimated earnings
109,379

 
(25,167
)
Customer advances
(22,674
)
 
4,095

Net cash provided by (used in) operating activities
100,684

 
(129,822
)
Cash flows from investing activities:
 
 
 
Decrease in restricted cash and cash equivalents
17,826

 
51,621

Purchase of property, plant and equipment
(19,881
)
 
(62,644
)
Cash paid for solar power systems, leased and to be leased
(65,075
)
 
(51,406
)
Purchases of marketable securities
(99,928
)
 

Proceeds from sale of equipment to third-party
17

 
419

Cash received for sale of investment in unconsolidated investees

 
17,403

Cash paid for investments in unconsolidated investees
(1,411
)
 
(10,000
)
Net cash used in investing activities
(168,452
)
 
(54,607
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible debt, net of issuance costs
296,283

 

Proceeds from issuance of bank loans, net of issuance costs

 
125,000

Proceeds from issuance of project loans, net of issuance costs
56,615

 
13,787

Proceeds from residential lease financing
56,548

 
8,247

Proceeds from sale-leaseback financing
40,757

 

Contributions from noncontrolling interests
43,866

 

Repayment of bank loans, project loans and other debt
(281,712
)
 
(101,132
)
Repayment of sale-leaseback financing
(5,124
)
 

Cash paid for repurchase of convertible debt

 
(198,608
)
Proceeds from private offering of common stock, net of issuance costs

 
163,681

Cash distributions to Parent in connection with the transfer of entities under common control

 
(178,290
)
Proceeds from exercise of stock options
49

 
34

Purchases of stock for tax withholding obligations on vested restricted stock
(16,183
)
 
(5,204
)
Net cash provided by (used in) financing activities
191,099

 
(172,485
)
Effect of exchange rate changes on cash and cash equivalents
(258
)
 
(2,454
)
Net increase (decrease) in cash and cash equivalents
123,073

 
(359,368
)
Cash and cash equivalents, beginning of period
457,487

 
725,618

Cash and cash equivalents, end of period
$
580,560

 
$
366,250

 
 
 
 
Non-cash transactions:
 
 
 
Assignment of residential lease receivables to a third party financial institution
$
45,234

 
$
2,523

Property, plant and equipment acquisitions funded by liabilities
$
6,356

 
$
12,124

Costs of solar power systems, leased and to be leased, sourced from existing inventory
$
29,714

 
$
41,476

Costs of solar power systems, leased and to be leased, funded by liabilities
$
1,708

 
$
5,064

Costs of solar power systems under sale-leaseback financing arrangements, sourced by project assets
$
24,399

 
$

Non-cash interest expense capitalized and added to the cost of qualified assets
$
321

 
$
750

Issuance of warrants in connection with the Liquidity Support Agreement
$

 
$
50,327


(1)
As adjusted to conform to the current period presentation for solar power systems leased and to be leased (see Note 1)

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

7


Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company
 
SunPower Corporation (together with its subsidiaries, the "Company" or "SunPower") is a vertically integrated solar products and solutions company that designs, manufactures and delivers high-performance solar systems worldwide, serving as a one-stop shop for residential, commercial, and utility-scale power plant customers.

The Company's President and Chief Executive Officer, as the chief operating decision maker ("CODM"), has organized the Company, manages resource allocations and measures performance of the Company's activities among three regional segments: (i) the Americas Segment, (ii) the EMEA Segment, and (iii) the APAC Segment. The Americas Segment includes both North and South America. The EMEA Segment includes European countries, as well as the Middle East and Africa. The APAC segment includes all Asia-Pacific countries.

On June 21, 2011, the Company became a majority owned subsidiary of Total Energies Nouvelles Activités USA, SAS, formerly known as Total Gas & Power USA, SAS ("Total"), a subsidiary of Total S.A. ("Total S.A."), through a tender offer and Total's purchase of 60% of the outstanding former class A common stock and former class B common stock of the Company as of June 13, 2011. On January 31, 2012, Total purchased an additional 18.6 million shares of the Company's common stock in a private placement, thereby increasing Total's ownership to approximately 66% of the Company's outstanding common stock as of that date (see Note 2).

Basis of Presentation and Preparation
    
Principles of Consolidation

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("United States" or "U.S.") and include the accounts of the Company, all of its subsidiaries and special purpose entities, as appropriate under consolidation accounting guidelines. Intercompany transactions and balances have been eliminated in consolidation. The assets of the special purpose entities that the Company sets up related to project financing for customers are not designed to be available to service the general liabilities and obligations of the Company in certain circumstances.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the Company's condensed consolidated financial statements and the accompanying notes. Such reclassifications had no effect on previously reported results of operations or retained earnings. As reflected in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2012 ("2012 Form 10-K"), in connection with the growth of its residential lease program, during the fourth quarter of fiscal 2012 the Company began to separately classify both the cost of the leased assets and related investing cash flows based upon the nature of the lease entered into. The Company has reclassified prior period interim balances to conform to the current period presentation, which resulted in an increase in operating cash flows of $51.4 million for the six months ended July 1, 2012.

Fiscal Years

The Company has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Both fiscal 2013 and 2012 are 52-week fiscal years. The second quarter of fiscal 2013 ended on June 30, 2013, while the second quarter of fiscal 2012 ended on July 1, 2012. The first and second quarters in both fiscal 2013 and fiscal 2012 were 13-week quarters.

Management Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates in these condensed consolidated financial statements include percentage-of-completion for construction projects; allowances for doubtful accounts receivable and sales returns; inventory and project asset write-downs; stock-based compensation; estimates for future cash flows and economic useful lives of property, plant and equipment and other long-term assets; fair value of financial instruments; valuation of certain accrued liabilities including accrued warranty, restructuring, and termination of supply

8


contracts reserves; valuation of debt without the conversion feature; and income taxes and tax valuation allowances. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies

Noncontrolling Interests

Noncontrolling interests represents the portion of net assets in consolidated subsidiaries that are not attributable, directly or indirectly, to the Company. Beginning in the first quarter of fiscal 2013, the Company has entered into facilities with third-party investors under which the investors are determined to hold noncontrolling interests in entities fully consolidated by the Company. The net assets of the shared entities are attributed to the controlling and noncontrolling interests based on the terms of the governing contractual arrangements. The Company further determined the hypothetical liquidation at book value method ("HLBV Method") to be the appropriate method for attributing net assets to the controlling and noncontrolling interests as this method most closely mirrors the economics of the governing contractual arrangements. Under the HLBV Method, the Company allocates recorded income (loss) to each investor based on the change, during the reporting period, of the amount of net assets each investor is entitled to under the governing contractual arrangements in a liquidation scenario.

Other than as described above, there have been no significant changes in the Company's significant accounting policies during the six months ended June 30, 2013, as compared to the significant accounting policies described in the 2012 Form 10-K.

Recent Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board ("FASB") and International Accounting Standards Board ("IASB") issued common disclosure requirements that are intended to enhance comparability between financial statements prepared in accordance with U.S. GAAP and those prepared in accordance with International Financial Reporting Standards ("IFRS"). This new guidance is applicable to companies that have financial instruments or derivatives that are either offset in the balance sheet (presented on a net basis) or subject to an enforceable master netting arrangement or similar arrangement. The requirement does not change the existing offsetting eligibility criteria or the permitted balance sheet presentation for those instruments that meet the eligibility criteria. However, once this disclosure requirement becomes effective, companies will also be required to disclose information about financial instruments and derivatives instruments that have been offset and related arrangements and to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. The disclosure requirement becomes effective retrospectively in the first quarter of the Company's fiscal year 2014. The Company does not expect that the requirement will have a material impact on its condensed consolidated financial statements as it is disclosure only in nature.

In March 2013, the FASB amended its guidance related to foreign currency matters requiring the release of the cumulative translation adjustment into net income when an entity ceases to have a controlling financial interest in a subsidiary or a group of assets within a foreign entity. The amendment will become effective for the Company in the first quarter of fiscal 2014. The Company does not expect that the requirement will have a material impact on its condensed consolidated financial statements.

In February 2013, the FASB amended its disclosure guidance related to the presentation of comprehensive income. The amendment requires reporting of the impact of significant reclassifications out of accumulated other comprehensive income or loss on the line items on the statement of operations, if a reclassification is required in its entirety in one reporting period. The amendment became effective for the Company in the first quarter of fiscal 2013 and did not have a significant impact on its condensed consolidated financial statements.

Other than as described above, there has been no issued accounting guidance not yet adopted by the Company that it believes is material or potentially material to its condensed consolidated financial statements.

Note 2. TRANSACTIONS WITH TOTAL AND TOTAL S.A.

On April 28, 2011, the Company and Total entered into a Tender Offer Agreement (the "Tender Offer Agreement"), pursuant to which, on May 3, 2011, Total commenced a cash tender offer to acquire up to 60% of the Company's outstanding shares of former class A common stock and up to 60% of the Company's outstanding shares of former class B common stock (the "Tender Offer") at a price of $23.25 per share for each class. The offer expired on June 14, 2011 and Total accepted for payment on June 21, 2011 a total of 34,756,682 shares of the Company's former class A common stock and 25,220,000 shares

9


of the Company's former class B common stock, representing 60% of each class of its outstanding common stock as of June 13, 2011, for a total cost of approximately $1.4 billion.

On December 23, 2011, the Company entered into a Stock Purchase Agreement with Total, under which it agreed to acquire 100% of the equity interest of Tenesol S.A. from Total for $165.4 million in cash. The Tenesol acquisition was consummated on January 31, 2012. Contemporaneously with the execution of the Tenesol Stock Purchase Agreement, the Company entered into a Private Placement Agreement with Total, under which Total agreed to purchase, and the Company agreed to issue and sell, 18.6 million shares of the Company's common stock for a purchase price of $8.80 per share, thereby increasing Total's ownership to approximately 66% of the Company's outstanding common stock as of that date. The sale was completed contemporaneously with the closing of the Tenesol acquisition.

Credit Support Agreement

In connection with the Tender Offer, the Company and Total S.A. entered into a Credit Support Agreement (the "Credit Support Agreement") under which Total S.A. agreed to enter into one or more guarantee agreements (each a "Guaranty") with banks providing letter of credit facilities to the Company in support of certain Company businesses and other permitted purposes. Total S.A. will guarantee the payment to the applicable issuing bank of the Company's obligation to reimburse a draw on a letter of credit and pay interest thereon in accordance with the letter of credit facility between such bank and the Company. The Credit Support Agreement became effective on June 28, 2011 (the "CSA Effective Date"). Under the Credit Support Agreement, at any time from the CSA Effective Date until the fifth anniversary of the CSA Effective Date, the Company may request that Total S.A. provide a Guaranty in support of the Company's payment obligations with respect to a letter of credit facility. Total S.A. is required to issue and enter into the Guaranty requested by the Company, subject to certain terms and conditions that may be waived by Total S.A., and subject to certain other conditions.

In consideration for the commitments of Total S.A., under the Credit Support Agreement, the Company is required to pay Total S.A. a guarantee fee for each letter of credit that is the subject of a Guaranty and was outstanding for all or part of the preceding calendar quarter. The Company is also required to reimburse Total S.A. for payments made under any Guaranty and certain expenses of Total S.A., plus interest on both. The Company incurred guaranty fees under the Credit Support Agreement of $1.7 million and $3.5 million in the three and six months ended June 30, 2013, respectively, and $1.8 million and $3.6 million in the three and six months ended July 1, 2012, respectively.

The Company has agreed to undertake certain actions, including, but not limited to, ensuring that the payment obligations of the Company to Total S.A. rank at least equal in right of payment with all of the Company's other present and future indebtedness, other than certain permitted secured indebtedness. The Company has also agreed to refrain from taking certain actions, including refraining from making any equity distributions so long as it has any outstanding repayment obligation to Total S.A. resulting from a draw on a guaranteed letter of credit.

The Credit Support Agreement will terminate following the fifth anniversary of the CSA Effective Date, after the later of the payment in full of all obligations thereunder and the termination or expiration of each Guaranty provided thereunder.

Affiliation Agreement

In connection with the Tender Offer, the Company and Total entered into an Affiliation Agreement that governs the relationship between Total and the Company following the close of the Tender Offer (the "Affiliation Agreement"). Until the expiration of a standstill period (the "Standstill Period"), and subject to certain exceptions, Total, Total S.A., any of their respective affiliates and certain other related parties (the "Total Group") may not effect, seek, or enter into discussions with any third-party regarding any transaction that would result in the Total Group beneficially owning shares of the Company in excess of certain thresholds, or request the Company or the Company's independent directors, officers or employees, to amend or waive any of the standstill restrictions applicable to the Total Group. The standstill provisions of the Affiliation Agreement do not apply to securities issued in connection with the Liquidity Support Agreement described below.

The Affiliation Agreement imposes certain limitations on the Total Group's ability to seek to effect a tender offer or merger to acquire 100% of the outstanding voting power of the Company and imposes certain limitations on the Total Group's ability to transfer 40% or more of outstanding shares or voting power of the Company to a single person or group that is not a direct or indirect subsidiary of Total S.A. During the Standstill Period, no member of the Total Group may, among other things, solicit proxies or become a participant in an election contest relating to the election of directors to the Company's Board of Directors.


10


The Affiliation Agreement provides Total with the right to maintain its percentage ownership in connection with any new securities issued by the Company, and Total may also purchase shares on the open market or in private transactions with disinterested stockholders, subject in each case to certain restrictions.

In accordance with the terms of the Affiliation Agreement, on July 1, 2011, the Company's Board of Directors expanded the size of the Board of Directors to eleven members and elected six nominees from Total as directors, following which the Board of Directors was composed of the Chief Executive Officer of the Company (who also serves as the chairman of the Company's Board of Directors), four existing non-Total designated members of the Company's Board of Directors, and six directors designated by Total. Directors designated by Total also serve on certain committees of the Company's Board of Directors. On the first anniversary of the consummation of the Tender Offer on June 21, 2012, the size of the Company's Board of Directors was reduced to nine members and one non-Total designated director and one director designated by Total resigned from the Company's Board of Directors. If the Total Group's ownership percentage of Company common stock declines, the number of members of the Company's Board of Directors that Total is entitled to nominate to the Company's Board of Directors will be further reduced as set forth in the Affiliation Agreement.

The Affiliation Agreement also imposes certain restrictions with respect to the Company's and the Company's Board of Directors' ability to take certain actions, including specifying certain actions that require approval by the directors other than the directors appointed by Total and other actions that require stockholder approval by Total.

Affiliation Agreement Guaranty

Total S.A. has entered into a guaranty (the "Affiliation Agreement Guaranty") pursuant to which Total S.A. unconditionally guarantees the full and prompt payment of Total S.A.'s, Total's and each of Total S.A.'s direct and indirect subsidiaries' payment obligations under the Affiliation Agreement and the full and prompt performance of Total S.A.'s, Total's and each of Total S.A.'s direct and indirect subsidiaries' representations, warranties, covenants, duties, and agreements contained in the Affiliation Agreement.

Research & Collaboration Agreement

In connection with the Tender Offer, Total and the Company have entered into a Research & Collaboration Agreement (the "R&D Agreement") that establishes a framework under which the parties engage in long-term research and development collaboration ("R&D Collaboration"). The R&D Collaboration encompasses a number of different projects ("R&D Projects"), with a focus on advancing technology in the area of photovoltaics. The primary purpose of the R&D Collaboration is to: (i) maintain and expand the Company's technology position in the crystalline silicon domain; (ii) ensure the Company's industrial competitiveness; and (iii) guarantee a sustainable position for both the Company and Total to be best-in-class industry players.

The R&D Agreement enables a joint committee (the "R&D Strategic Committee") to identify, plan and manage the R&D Collaboration. Due to the impracticability of anticipating and establishing all of the legal and business terms that are and will be applicable to the R&D Collaboration or to each R&D Project, the R&D Agreement sets forth broad principles applicable to the parties' potential R&D Collaboration, and the R&D Collaboration Committee establishes the particular terms governing each particular R&D Project consistent with the terms set forth in the R&D Agreement. In the three and six months ended June 30, 2013, the Company received $1.0 million from Total related to projects under the R&D Collaboration agreement. The Company records research and development expense net of funding under collaborative arrangements.

Registration Rights Agreement

In connection with the Tender Offer, Total and the Company entered into a customary registration rights agreement (the "Registration Rights Agreement") related to Total's ownership of Company shares. The Registration Rights Agreement provides Total with shelf registration rights, subject to certain customary exceptions, and up to two demand registration rights in any 12-month period, also subject to certain customary exceptions. Total also has certain rights to participate in any registrations of securities initiated by the Company. The Company will generally pay all costs and expenses incurred by the Company and Total in connection with any shelf or demand registration (other than selling expenses incurred by Total). The Company and Total have also agreed to certain indemnification rights. The Registration Rights Agreement terminates on the first date on which: (i) the shares held by Total constitute less than 5% of the then-outstanding common stock; (ii) all securities held by Total may be immediately resold pursuant to Rule 144 promulgated under the Securities and Exchange Act of 1934 (the "Exchange Act") during any 90-day period without any volume limitation or other restriction; or (iii) the Company ceases to be subject to the reporting requirements of the Exchange Act.

Stockholder Rights Plan

11



On April 28, 2011, prior to the execution of the Tender Offer Agreement, the Company entered into an amendment (the "Rights Agreement Amendment") to the Rights Agreement, dated August 12, 2008, by and between the Company and Computershare Trust Company, N.A., as Rights Agent (the "Rights Agreement"), in order to, among other things, render the rights therein inapplicable to each of: (i) the approval, execution or delivery of the Tender Offer Agreement; (ii) the commencement or consummation of the Tender Offer; (iii) the consummation of the other transactions contemplated by the Tender Offer Agreement and the related agreements; and (iv) the public or other announcement of any of the foregoing.

On June 14, 2011, the Company entered into a second amendment to the Rights Agreement (the "Second Rights Agreement Amendment"), in order to, among other things, exempt Total, Total S.A. and certain of their affiliates and certain members of a group of which they may become members from the definition of "Acquiring Person" such that the rights issuable pursuant to the Rights Agreement will not become issuable in connection with the completion of the Tender Offer.

By-laws Amendment

On June 14, 2011, the Board of Directors approved the amendment of the Company's By-laws (the "By-laws"). The changes are required under the Affiliation Agreement. The amendments: (i) allow any member of the Total Group to call a meeting of stockholders for the sole purpose of considering and voting on a proposal to effect a Terra Merger (as defined in the Affiliation Agreement) or a Transferee Merger (as defined in the Affiliation Agreement); (ii) provide that the number of directors of the Board shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board at any regular or special meeting; (iii) require, prior to the termination of the Affiliation Agreement, a majority of independent directors' approval to amend the By-laws so long as Total, together with Total S.A.'s subsidiaries collectively own at least 30% of the voting securities of the Company as well as require, prior to the termination of the Affiliation Agreement, Total's written consent during the Terra Stockholder Approval Period (as defined in the Affiliation Agreement) to amend the By-laws; and (iv) make certain other conforming changes to the By-laws. In addition, in November 2011, the By-laws were amended to remove restrictions prohibiting stockholder consents in writing.

Liquidity Support Agreement with Total S.A.

The Company is party to an agreement with a customer to construct the California Valley Solar Ranch, a solar park. Part of the debt financing necessary for the customer to pay for the construction of this solar park is being provided by the Federal Financing Bank in reliance on a guarantee of repayment provided by the Department of Energy (the "DOE") under a loan guarantee program. On February 28, 2012, the Company entered into a Liquidity Support Agreement with Total S.A. and the DOE, and a series of related agreements with Total S.A. and Total, under which Total S.A. has agreed to provide the Company, or cause to be provided, additional liquidity under certain circumstances to a maximum amount of $600.0 million ("Liquidity Support Facility"). Total S.A. is required to provide liquidity support to the Company under the facility, and the Company is required to accept such liquidity support from Total S.A., if either the Company's actual or projected unrestricted cash, cash equivalents, and unused borrowing capacity are reduced below $100.0 million, or the Company fails to satisfy any financial covenant under its indebtedness. In either such event, subject to a $600.0 million aggregate limit, Total S.A. is required to provide the Company with sufficient liquidity support to increase the amount of its unrestricted cash, cash equivalents and unused borrowing capacity to above $100.0 million, and to restore compliance with its financial covenants. On December 24, 2012, Total S.A. agreed to guarantee the Company's revolving credit facility with Credit Agricole, which reduced the capacity available under the Liquidity Support Facility by $275.0 million. The Liquidity Support Facility is available until the completion of the solar park, expected to be completed before the end of fiscal 2013, and, under certain conditions, up to December 31, 2016, at which time all outstanding guarantees will expire (except for the Total S.A. guarantee of the Credit Agricole facility which extends through maturity) and all outstanding debt under the facility will become due. The use of the Liquidity Support Facility is not limited to direct obligations related to the solar park, and is available for general corporate purposes, but the Company has agreed to conduct its operations, and use any proceeds from such facility, in ways that minimize the likelihood of Total S.A. being required to provide further support. In connection with the Liquidity Support Agreement, the Company also entered into a Compensation and Funding Agreement with Total S.A., and a Private Placement Agreement and a Revolving Credit and Convertible Loan Agreement with Total, which implement the terms of the Liquidity Support Agreement and Compensation Funding Agreement.

Compensation and Funding Agreement

In connection with the Liquidity Support Agreement, on February 28, 2012, the Company entered into a Compensation and Funding Agreement (the "Compensation and Funding Agreement") with Total S.A., pursuant to which, among other things, the Company and Total S.A. established the parameters for the terms of the Liquidity Support Facility and any liquidity injections that may be required to be provided by Total S.A. to the Company pursuant to the Liquidity Support Agreement. The

12


Company has agreed in the Compensation and Funding Agreement to use commercially reasonable efforts to assist Total S.A. in the performance of its obligations under the Liquidity Support Agreement and to conduct, and to act in good faith in conducting, its affairs in a manner such that Total S.A.'s obligation under the Liquidity Support Agreement to provide liquidity injections will not be triggered or, if triggered, will be minimized. The Company has also agreed to use any cash provided under the facility in such a way as to minimize the need for further liquidity support. The Compensation and Funding Agreement required the Company to issue, in consideration for Total S.A.'s agreement to provide the Liquidity Support Facility, a warrant ("the Upfront Warrant") to Total that is exercisable to purchase a number of shares of the Company's common stock equal to $75.0 million, divided by the volume-weighted average price for the Company's common stock for the 30 trading-day period ending on the trading day immediately preceding the date of the calculation. The Upfront Warrant will be exercisable at any time for seven years after its issuance, provided that, so long as at least $25.0 million of the Company's convertible debt remains outstanding, such exercise will not cause "any person," including Total S.A., to, directly or indirectly, including through one or more wholly-owned subsidiaries, become the "beneficial owner" (as such terms are defined in Rule 13d-3 and Rule 13d-5 under the Securities and Exchange Act of 1934, as amended), of more than 74.99% of the voting power of the Company's common stock at such time, a circumstance which would trigger the repurchase or conversion of the Company's existing convertible debt. On February 28, 2012, the Company issued to Total the Upfront Warrant to purchase 9,531,677 shares of the Company's common stock with an exercise price of $7.8685, subject to adjustment for customary anti-dilution and other events.

Liquidity support may be provided by Total S.A. or through its affiliates in the form of revolving non-convertible debt, convertible debt, equity, guarantees of Company indebtedness or other forms of liquidity support agreed to by the Company, depending on the amount outstanding under the facility immediately prior to provision of the applicable support among other factors. The Company is required to compensate Total S.A. for any liquidity support actually provided, and the form and amount of such compensation depends on the form and amount of support provided, with the amount of compensation generally increasing with the amount of support provided over time. Such compensation is to be provided in a variety of forms including guarantee fees, warrants to purchase common stock, interest on amounts borrowed, and discounts on equity issued.

During the term of the Compensation and Funding Agreement, the Company will make certain cash payments to Total S.A. within 30 days after the end of each calendar quarter during for the term of the agreement as follows: (i) quarterly payment of a commitment fee in an amount equal to 0.25% of the unused portion of the $600.0 million Liquidity Support Facility as of the end of such quarter; and (ii) quarterly payment of a guarantee fee in an amount equal to 2.75% per annum of the average amount of the Company's indebtedness that is guaranteed by Total S.A. pursuant to any guaranty issued in accordance with the terms of the Compensation and Funding Agreement during such quarter. Any payment obligations of the Company to Total S.A. under the Compensation and Funding Agreement that are not paid when due shall accrue interest until paid in full at a rate equal to 6-month U.S. LIBOR as in effect from time to time plus 5.00% per annum.

On December 24, 2012, Total S.A. issued a guarantee for the Company's obligations under the revolving credit facility with Credit Agricole. The issuance of the guarantee reduced the capacity available under the Liquidity Support Facility from $600.0 million to $325.0 million. The Company is required to pay Total S.A. an annual guarantee fee of 2.75% of the outstanding amount under the Credit Agricole facility. The guarantee reduced interest rates payable under, and removed certain financial and restrictive covenants in, the Credit Agricole facility (see Note 9).

The Company incurred fees under the Compensation and Funding Agreement of $0.8 million and $2.5 million in the three and six months ended June 30, 2013, respectively, and $1.5 million and $2.1 million in the three and six months ended July 1, 2012, respectively.

Master Agreement

On December 23, 2011, the Company also entered into a Master Agreement with Total, under which the Company and Total agreed to a framework of transactions related to the Tenesol acquisition and Private Placement Agreement. Additionally, Total has agreed to pursue several negotiations on additional agreements related to directly investing in the Company's R&D program over a multi-year period, its purchase of modules and its development of a multi-megawatt project using the Company's products. The Company and Total amended the Master Agreement on February 20, 2013 to clarify that the development of the multi-megawatt project using the Company's products shall mean development of up to 10 C-7 Tracker demonstration projects at a total cost to Total of not more than $2.5 million provided agreements for such projects are entered into before December 31, 2013.

0.75% Debentures Due 2018


13


On May 29, 2013, the Company issued $300.0 million in principal amount of its 0.75% senior convertible debentures due 2018 (the "0.75% debentures due 2018"). $200.0 million in aggregate principal amount of the 0.75% debentures due 2018 were acquired by Total. The 0.75% debentures due 2018 are convertible into shares of the Company's common stock at any time based on an initial conversion price equal to $24.95 per share, which provides Total the right to acquire up to 8,017,420 shares of the Company's common stock. The applicable conversion rate may adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 0.75% debentures due 2018 (see Note 9).


Note 3. OTHER INTANGIBLE ASSETS

The Company's acquired other intangible assets consist of patents, trade names and purchased technology; customer relationships; and purchased in-process research and development. As of June 30, 2013 and December 30, 2012 the Company's other intangible assets, net of accumulated depreciation, totaled $0.6 million and $0.7 million, respectively. All of the Company's acquired other intangible assets are subject to amortization. Aggregate amortization expense for other intangible assets totaled zero and $0.2 million for the three and six months ended June 30, 2013, respectively, and $2.7 million and $5.5 million in the three and six months ended July 1, 2012, respectively.


Note 4. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
June 30, 2013
 
December 30, 2012
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross (1)
 
$
492,704

 
$
429,977

Less: allowance for doubtful accounts
 
(30,763
)
 
(26,773
)
Less: allowance for sales returns
 
(2,568
)
 
(5,054
)
 
 
$
459,373

 
$
398,150


(1)
Includes short-term finance receivables associated with solar power systems leased of $5.5 million and $4.5 million as of June 30, 2013 and December 30, 2012, respectively.

Inventories:
 
 
 
 
Raw materials
 
$
52,178

 
$
89,331

Work-in-process
 
53,130

 
50,627

Finished goods
 
129,848

 
151,428

 
 
$
235,156

 
$
291,386


Prepaid expenses and other current assets:
 
 
 
 
VAT receivables, current portion
 
$
98,080

 
$
97,041

Foreign currency derivatives
 
3,314

 
1,275

Deferred project costs
 
187,938

 
305,980

Deferred costs for solar power systems to be leased
 
24,207

 
31,419

Other receivables (2)
 
92,291

 
104,640

Other prepaid expenses
 
39,395

 
25,230

Other current assets
 
67,883

 
47,468

 
 
$
513,108

 
$
613,053


(2)
Includes tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the suppliers (see Notes 7 and 8).


14


 
 
As of
(In thousands)
 
June 30, 2013
 
December 30, 2012
Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
77,259

 
$
61,862

Project assets — land
 
13,406

 
21,645

 
 
$
90,665

 
$
83,507

Project assets - plants and land, current portion
 
$
87,430

 
$
75,911

Project assets - plants and land, net of current portion
 
$
3,235

 
$
7,596


Property, plant and equipment, net:
 
 
 
 
Land and buildings
 
$
26,004

 
$
20,109

Leasehold improvements
 
228,525

 
221,378

Manufacturing equipment (3)
 
546,092

 
531,289

Computer equipment
 
77,226

 
75,438

Furniture and fixtures
 
8,470

 
8,178

Solar power systems (4)
 
51,517

 
12,501

Solar power systems leased
 
254,515

 
163,003

Solar power systems to be leased
 
57,760

 
89,423

Construction-in-process
 
10,363

 
34,110

 
 
1,260,472

 
1,155,429

Less: accumulated depreciation (5)
 
(422,298
)
 
(380,520
)
 
 
$
838,174

 
$
774,909


(3)
The Company's mortgage loan agreement with International Finance Corporation ("IFC") is collateralized by certain manufacturing equipment with a net book value of $161.1 million and $152.9 million as of June 30, 2013 and December 30, 2012, respectively. The Company also provided security for advance payments received from a third party in the form of collateralized manufacturing equipment with a net book value of $18.1 million and $16.5 million as of June 30, 2013 and December 30, 2012, respectively.

(4)
Includes $24.4 million of solar power systems associated with sale-leaseback transactions under the financing method (see Note 7).

(5)
Total depreciation expense was $24.6 million and $48.2 million for the three and six months ended June 30, 2013, respectively and $29.3 million and $58.4 million for the three and six months ended July 1, 2012, respectively.
    
Property, plant and equipment, net by geography (6):
 
 
 
 
Philippines
 
$
347,407

 
$
367,708

United States
 
431,249

 
343,710

Mexico
 
32,994

 
32,409

Europe
 
26,057

 
29,292

Other
 
467

 
1,790

 
 
$
838,174

 
$
774,909


(6)
Property, plant and equipment, net are based on the physical location of the assets.

The below table presents the cash and non-cash interest expense capitalized to property, plant and equipment and project assets during the three and six months ended June 30, 2013 and July 1, 2012, respectively.

15


 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
Interest expense:
 
 
 
 
 
 
 
 
Interest cost incurred
 
$
(25,208
)
 
$
(20,356
)
 
$
(52,752
)
 
$
(39,987
)
Cash interest cost capitalized - property, plant and equipment
 

 
299

 
228

 
587

Non-cash interest cost capitalized - property, plant and equipment
 

 
169

 
57

 
302

Cash interest cost capitalized - project assets - plant and land
 
176

 
271

 
299

 
549

Non-cash interest cost capitalized - project assets - plant and land
 
162

 
217

 
264

 
448

Interest expense
 
$
(24,870
)
 
$
(19,400
)
 
$
(51,904
)
 
$
(38,101
)

 
 
As of
(In thousands)
 
June 30, 2013
 
December 30, 2012
Other long-term assets:
 
 
 
 
Equity method investments
 
$
112,193

 
$
111,516

Bond hedge derivative
 
60,627

 
2,327

Cost method investments
 
12,651

 
14,918

Long-term financing receivables
 
117,234

 
67,742

Long-term debt issuance costs
 
25,380

 
38,185

Other
 
88,061

 
41,375

 
 
$
416,146

 
$
276,063


Accrued liabilities:
 
 
 
 
VAT payables
 
$
3,442

 
$
2,049

Foreign currency derivatives
 
5,115

 
4,891

Short-term warranty reserves
 
9,183

 
9,054

Interest payable
 
9,587

 
9,672

Deferred revenue
 
23,796

 
32,507

Employee compensation and employee benefits
 
41,282

 
40,750

Restructuring reserve
 
17,356

 
29,477

Short-term residential lease financing
 
28,758

 
25,153

Short-term sale-leaseback financing (Note 7)
 
2,530

 

Other
 
112,215

 
93,819

 
 
$
253,264

 
$
247,372



16


 
 
As of
(In thousands)
 
June 30, 2013
 
December 30, 2012
Other long-term liabilities:
 
 

 
 

Embedded conversion option derivatives
 
$
60,655

 
$
2,327

Long-term warranty reserves
 
117,110

 
107,803

Deferred revenue
 
155,929

 
128,936

Unrecognized tax benefits
 
32,975

 
35,022

Long-term residential lease financing
 
21,966

 
11,411

Long-term sale-leaseback financing (Note 7)
 
33,106

 

Other
 
65,455

 
50,120

 
 
$
487,196

 
$
335,619


Accumulated other comprehensive loss:
 
 

 
 

Cumulative translation adjustment
 
$
(6,245
)
 
$
(2,319
)
Net unrealized gain on derivatives
 
1,238

 
(243
)
Unrealized loss on investments
 
(7
)
 

Deferred taxes
 
(238
)
 
41

 
 
$
(5,252
)
 
$
(2,521
)

Solar Power Systems Leased and to be Leased

The Company leases solar systems to residential customers under both operating and sales-type leases. As of June 30, 2013 and December 30, 2012, solar power systems leased out under operating leases, presented in "Property, plant and equipment, net" in the Company's Condensed Consolidated Balance Sheets was $254.5 million and $163.0 million, respectively, and solar power systems to be leased under operating leases, presented in "Property, plant and equipment, net" in the Company's Condensed Consolidated Balance Sheets was $57.8 million and $89.4 million, respectively. As of June 30, 2013, financing receivables for sales-type leases, presented in "Accounts receivable, net" and "Other long-term assets" in the Company's Condensed Consolidated Balance Sheets was $5.5 million and $117.2 million, respectively. As of December 30, 2012, financing receivables for sales-type leases, presented in "Accounts receivable, net" and "Other long-term assets" in the Company's Condensed Consolidated Balance Sheets was $4.5 million and $67.7 million, respectively. Amounts recognized in the Company's Condensed Consolidated Statement of Operations are not significant in any period presented.

The Company has entered into multiple facilities under which solar power systems are financed with third-party investors. Under the terms of certain programs the investors make upfront payments to the Company, which the Company recognizes as a non-recourse liability that will be reduced over the specified term of the program as customer receivables and government incentives are received by the third party investors. As the non-recourse liability is reduced over time, the Company makes a corresponding reduction in customer and government incentive receivables on its balance sheet. Under this approach, for both operating and sales-type leases the Company continues to account for these arrangements with its residential lease customers in the condensed consolidated financial statements.

As of June 30, 2013 and December 30, 2012, the remaining liability to the third-party investors, presented in Accrued liabilities and Other long-term liabilities on the Company's Condensed Consolidated Balance Sheets, was $50.7 million and $36.6 million, respectively. As of June 30, 2013 and December 30, 2012, the Company has pledged solar assets with an aggregate book value of $249.0 million and $280.8 million, respectively, to the third-party investors as security for its obligations under the contractual arrangements.

Beginning in the first quarter of fiscal 2013, the Company has entered into facilities with third-party investors under which the parties will invest in entities which holds SunPower solar power systems and leases with residential customers. The Company was determined to hold controlling interests in these less than wholly owned entities and has fully consolidated these entities as a result. The Company accounts for the portion of net assets in the consolidated entities attributable to the investors as Noncontrolling interests in its condensed consolidated financial statements (see Note 1).

Note 5. FAIR VALUE MEASUREMENTS


17


Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement (observable inputs are the preferred basis of valuation):

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.
Level 3 — Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during the three and six months ended June 30, 2013 or July 1, 2012. The Company did not have any assets or liabilities measured at fair value on a recurring basis requiring Level 3 inputs as of June 30, 2013 or December 30, 2012.

The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of June 30, 2013 and December 30, 2012, respectively:
 
 
June 30, 2013
 
December 30, 2012
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
313,001

 
$
313,001

 
$

 
$
117,254

 
$
117,254

 
$

Short-term marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government bonds
 
99,921

 

 
99,921

 

 

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 10)
 
3,314

 

 
3,314

 
1,275

 

 
1,275

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 9)
 
60,627

 

 
60,627

 
2,327

 

 
2,327

Total assets
 
$
476,863

 
$
313,001


$
163,862


$
120,856

 
$
117,254

 
$
3,602

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 10)
 
$
5,115

 
$

 
$
5,115

 
$
4,891

 
$

 
$
4,891

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 9)
 
60,655

 

 
60,655

 
2,327

 

 
2,327

Total liabilities
 
$
65,770

 
$

 
$
65,770

 
$
7,218

 
$

 
$
7,218


(1)
The Company's cash equivalents consist of money market fund instruments which are classified as available-for-sale and within Level 1 of the fair value hierarchy because they are valued using quoted market prices for identical instruments in active markets.

Other financial instruments, including the Company's accounts receivable, accounts payable and accrued liabilities, are carried at cost, which generally approximates fair value due to the short-term nature of these instruments.

Available-for-Sale Debt Securities

The Company's debt securities, classified as available-for-sale, consist of U.S. government bonds which were purchased in the second quarter of fiscal 2013. These bonds have maturity dates of less than 1 year and are classified as "Short-term marketable securities" on the Company's Condensed Consolidated Balance Sheets. As of June 30, 2013, these bonds had a fair value of $99.9 million. The Company based its valuation of these bonds on movements of U.S. Treasury bond rates, which are

18


observable at commonly quoted intervals, since the time of purchase. Accordingly, the available-for-sale debt securities were categorized in Level 2 of the fair value hierarchy. No other-than-temporary impairment loss was incurred during the three and six months ended June 30, 2013.

Debt Derivatives

The 4.50% Bond Hedge (as defined in Note 9) and the embedded cash conversion option within the 4.50% debentures (as defined in Note 9) are classified as derivative instruments that require mark-to-market treatment with changes in fair value reported in the Company's Condensed Consolidated Statements of Operations. The fair values of these derivative instruments were determined utilizing the following Level 1 and Level 2 inputs:
 
As of (1)
 
June 30, 2013
 
December 30, 2012
Stock price
$
20.70

 
$
5.49

Exercise price
$
22.53

 
$
22.53

Interest rate
0.46
%
 
0.40
%
Stock volatility
58.2
%
 
59.9
%
Credit risk adjustment
1.28
%
 
1.07
%
Maturity date
February 18, 2015

 
February 18, 2015


(1)
The valuation model utilizes these inputs to value the right but not the obligation to purchase one share at $22.53. The Company utilized a Black-Scholes valuation model to value the 4.50% Bond Hedge and embedded cash conversion option. The underlying input assumptions were determined as follows:
(i)
Stock price. The closing price of the Company's common stock on the last trading day of the quarter.
(ii)
Exercise price. The exercise price of the 4.50% Bond Hedge and the embedded cash conversion option.
(iii)
Interest rate. The Treasury Strip rate associated with the life of the 4.50% Bond Hedge and the embedded cash conversion option.
(iv)
Stock volatility. The volatility of the Company's common stock over the life of the 4.50% Bond Hedge and the embedded cash conversion option.
(v)
Credit risk adjustment. Represents the weighted average of the credit default swap rate of the counterparties.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures certain investments and non-financial assets (including project assets, property, plant and equipment, and other intangible assets) at fair value on a non-recurring basis in periods after initial measurement in circumstances when the fair value of such asset is impaired below its recorded cost. Information regarding the Company's other intangible asset balances are disclosed in Note 3.

Held-to-Maturity Debt Securities

The Company's debt securities, classified as held-to-maturity, consist of Philippine government bonds which are maintained as collateral for present and future business transactions within the country. These bonds have maturity dates of up to 5 years and are classified as "Restricted long-term marketable securities" on the Company's Condensed Consolidated Balance Sheets. As of June 30, 2013 and December 30, 2012, these bonds had a carrying value of $10.2 million and $10.9 million respectively. The Company records such held-to-maturity investments at amortized cost based on its ability and intent to hold the securities until maturity. The Company monitors for changes in circumstances and events that would impact its ability and intent to hold such securities until the recorded amortized costs are recovered. No other-than-temporary impairment loss was incurred during the three and six months ended June 30, 2013 or July 1, 2012. The held-to-maturity debt securities were categorized in Level 2 of the fair value hierarchy.

Equity and Cost Method Investments

The Company's equity and cost method investments in non-consolidated entities are comprised of convertible promissory notes, common and preferred stock. The Company monitors these investments, which are included in "Other long-term assets" in its Condensed Consolidated Balance Sheets, for impairment and records reductions in the carrying values when

19


necessary. Circumstances that indicate an other-than-temporary decline include Level 2 and Level 3 measurements such as the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices, and declines in operations of the issuer.

As of June 30, 2013 and December 30, 2012, the Company had $12.7 million and $14.9 million, respectively, in investments accounted for under the cost method. As of June 30, 2013 and December 30, 2012, $0.4 million and $0.7 million, respectively, remained due and payable to cost method investees. Further, as of June 30, 2013 outstanding long-term note receivables provided to cost method investees totaled $1.7 million.

As of June 30, 2013 and December 30, 2012, the Company had $112.2 million and $111.5 million, respectively, in investments accounted for under the equity method (see Note 8).

Note 6. RESTRUCTURING

October 2012 Restructuring Plan

On October 12, 2012, the Company's Board of Directors approved a reorganization (the "October 2012 Plan") to accelerate operating cost reduction and improve overall operating efficiency. In connection with the October 2012 Plan, which is expected to be completed within the twelve months following approval, the Company expects to eliminate approximately 900 positions primarily in the Philippines, representing approximately 15% of the Company's global workforce. As a result, the Company expects to record restructuring charges totaling $30.0 million to $35.0 million, related to all segments. Such charges are composed of severance benefits, lease and related termination costs, and other associated costs. The Company expects greater than 90% of these charges to be cash.

Legacy Restructuring Plans

During fiscal 2012 and 2011, the Company implemented approved restructuring plans, related to all segments, to align with changes in the global solar market which included the consolidation of the Company's Philippine manufacturing operations as well as actions to accelerate operating cost reduction and improve overall operating efficiency. These restructuring activities were substantially complete as of June 30, 2013, as the remaining accrual is primarily attributable to ongoing facility lease obligations. The Company expects to continue to incur restructuring costs as it revises previous estimates in connection with these plans. Revisions to estimates will primarily be due to changes in assumptions associated with lease and related termination costs.

The following table summarizes the restructuring charges recognized in the Company's Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Six Months Ended
 
Cumulative To Date
 
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
 
October 2012 Plan:
 
 
 
 
 
 
 
 
 
 
Severance and benefits
 
$
(738
)
 
$

 
$
(1,821
)
 
$

 
$
27,232

Lease and related termination costs
 
3

 

 
73

 

 
787

Other costs
 
480

 

 
915

 

 
1,375

 
 
(255
)
 

 
(833
)
 

 
29,394

Legacy Restructuring Plans:
 
 
 
 
 
 
 
 
 
 
Non-cash impairment charges
 

 
43,406

 

 
43,406

 
60,153

Severance and benefits
 

 
511

 

 
1,455

 
19,836

Lease and related termination costs
 
1,120

 
2,560

 
1,337

 
4,330

 
5,543

Other costs
 
63

 
1,122

 
87

 
1,454

 
7,891

 
 
1,183

 
47,599

 
1,424

 
50,645

 
93,423

Total restructuring charges
 
$
928

 
$
47,599

 
$
591

 
$
50,645

 
$
122,817


The following table summarizes the restructuring reserve activity during the six months ended June 30, 2013:

20


 
 
Six Months Ended
(In thousands)
 
December 30, 2012
 
Charges (Benefits)
 
Payments
 
June 30, 2013
October 2012 Plan:
 
 
 
 
 
 
 
 
Severance and benefits
 
$
24,439

 
$
(1,821
)
 
$
(9,590
)
 
$
13,028

Lease and related termination costs
 
714

 
73

 
(239
)
 
548

Other costs (1)
 
358

 
915

 
(994
)
 
279

Legacy Restructuring Plans:
 
 
 
 
 
 
 
 
Severance and benefits
 
60

 

 
(41
)
 
19

Lease and related termination costs
 
2,436

 
1,337

 
(1,034
)
 
2,739

Other costs (1)
 
1,470

 
87

 
(814
)
 
743

Total restructuring liabilities
 
$
29,477

 
$
591

 
$
(12,712
)
 
$
17,356


(1)
Other costs primarily represent associated legal services and costs associated with the decommissioning of Fab 1 assets.

Note 7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of June 30, 2013, future minimum obligations under non-cancellable capital and operating leases are as follows:
 
 
Capital Lease
 
Operating Lease
(In thousands)
 
Amount
 
Amount
Year
 
 
 
 
2013 (remaining six months)
 
$
709

 
$
8,294

2014
 
1,101

 
15,373

2015
 
1,199

 
14,435

2016
 
954

 
13,884

2017
 
910

 
12,283

Thereafter
 
2,350

 
85,386

 
 
$
7,223

 
$
149,655


Facilities and Equipment

The Company leases certain facilities under non-cancellable operating leases from unaffiliated third parties. The Company additionally leases certain buildings, machinery and equipment under non-cancelable capital leases.

Sale-Leaseback Arrangements

The Company enters into sale-leaseback arrangements under which solar power systems are sold to third parties and subsequently leased back over minimum lease terms of up to 20 years. Separately, the Company enters into power purchase agreements ("PPAs") with end customers, who host the leased solar power systems and buy the electricity directly from the Company under PPAs with durations of up to 20 years. At the end of the lease term, the Company has the option to purchase the systems at fair value or may be required to remove the systems and return them to the third parties.

The Company has classified its sale-leaseback arrangements of solar power systems not involving integral equipment as operating leases. The deferred profit on the sale of these systems is recognized over the term of the lease. Future minimum lease obligations associated with these systems is included in the table above. As of June 30, 2013, future minimum payments to be received from customers under PPAs associated with the solar power systems under sale-leaseback arrangements classified as operating leases was $78.8 million, which will be recognized over the lease term of up to 20 years.

Beginning in the first quarter of fiscal 2013, the Company entered into sale-leaseback arrangements under which the systems under the sale-leaseback arrangements have been determined to be integral equipment as defined under the accounting guidance for such transactions. The Company was further determined to have continuing involvement with the solar power systems throughout the lease due to purchase option rights. As a result of such continuing involvement, the Company accounts for each transaction as a financing. Under the financing method, the proceeds received from the sale of the solar power

21


systems are recorded by the Company as financing liabilities and presented within "Accrued liabilities" and "Other long-term liabilities" within the Company's Condensed Consolidated Balance Sheets (see Note 4). The financing liabilities are subsequently reduced by the Company's payments to lease back the solar power systems, less interest expense calculated based on the Company's incremental borrowing rate adjusted to the rate required to prevent negative amortization. The solar power systems under the sale-leaseback arrangements remains on the Company's balance sheet and are classified within "Property, plant and equipment, net" (see Note 4). As of June 30, 2013, future minimum lease obligations for the sale-leaseback arrangements accounted for under the financing method were $39.3 million, which will be recognized over the lease term of up to 20 years.

Purchase Commitments
 
The Company purchases raw materials for inventory 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 on 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-cancellable, and unconditional commitments.

The Company also has agreements with several suppliers, including some of its non-consolidated investees, for the procurement of polysilicon, ingots, wafers, solar cells, solar panels, and Solar Renewable Energy Credits ("SRECs") which specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 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.

Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of June 30, 2013 are as follows:
(In thousands)
 
Amount
(1)(2)
Year
 
 
2013 (remaining six months)
 
$
762,889

2014
 
454,215

2015
 
363,311

2016
 
328,865

2017
 
194,928

Thereafter
 
517,095

 
 
$
2,621,303

Non-cancellable purchase orders
 
$
251,431

Long-term supply agreements
 
$
2,369,872


(1)
Total future purchase obligations as of June 30, 2013 include $154.7 million to related parties.

(2)
The Company has tolling arrangements and firm sales commitments with certain suppliers. Annual future purchase commitments in the table above are calculated using the gross future purchase obligations of the Company and are not reduced by tolling arrangements and firm sales commitments, including non-cancellable SREC sales arrangements. Total future purchase commitments as of June 30, 2013 would be reduced by $237.6 million had the Company's obligations under such agreements been disclosed using net cash outflows.

The Company expects that all obligations related to non-cancellable purchase orders for manufacturing equipment will be recovered through future cash flows of the solar cell manufacturing lines and solar panel assembly lines when such long-lived assets are placed in service. Factors considered important that could result in an impairment review include significant under-performance 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. Obligations related to non-cancellable purchase orders for inventories match current and forecasted sales orders that will consume these ordered materials and actual consumption of these ordered materials are compared to expected demand regularly. The Company anticipates total obligations related to long-term supply agreements for inventories will be recovered because quantities are less than management's expected demand for

22


its solar power products. The terms of the long-term supply agreements are reviewed by management and the Company assesses the need for any accruals for estimated losses on adverse purchase commitments, such as lower of cost or market value adjustments that will not be recovered by future sales prices, forfeiture of advanced deposits and liquidated damages, as necessary.

Advances to Suppliers

As noted above, the Company has entered into agreements with various vendors that specify future quantities and pricing of products to be supplied. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements. Under certain agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. During the three and six months ended June 30, 2013, the Company made additional advance payments totaling $7.1 million and $15.5 million, respectively, in accordance with the terms of existing long-term supply agreements. As of June 30, 2013 and December 30, 2012, advances to suppliers totaled $359.2 million and $351.4 million, respectively, of which $78.4 million and $50.3 million, respectively, is classified as short-term in the Company's Condensed Consolidated Balance Sheets. Two suppliers accounted for 74% and 26% of total advances to suppliers as of June 30, 2013, and 76% and 23% as of December 30, 2012.

The Company's future prepayment obligations related to these agreements as of June 30, 2013 are as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining six months)
 
$
65,791

2014
 
65,791

 
 
$
131,582


Advances from Customers

The Company has entered into other agreements with customers who have made advance payments for solar power products. These advances will be applied as shipments of product occur or upon completion of certain project milestones. The estimated utilization of advances from customers as of June 30, 2013 is as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining six months)
 
$
31,786

2014
 
33,988

2015
 
26,386

2016
 
30,713

2017
 
35,039

Thereafter
 
115,144

 
 
$
273,056


In fiscal 2010, the Company and its joint venture, AUO SunPower Sdn. Bhd. ("AUOSP") entered into an agreement under which the Company will resell to AUOSP polysilicon purchased from a third-party supplier. Advance payments provided by AUSOP related to such polysilicon will then be made by the Company to the third-party supplier. These advance payments will be applied as a credit against AUOSP’s polysilicon purchases from the Company. Such polysilicon is used by AUOSP to manufacture solar cells which are sold to the Company on a "cost-plus" basis. As of June 30, 2013 and December 30, 2012, outstanding advance payments received from AUOSP totaled $185.3 million and $190.1 million, respectively, of which $11.0 million and $8.8 million, respectively, is classified as short-term in the Company's Condensed Consolidated Balance Sheets, based on projected product shipment dates.

In fiscal 2007, the Company entered into an agreement with a third-party under which the Company will resell polysilicon procured from third-party suppliers. Such polysilicon is used by the third-party to manufacture ingots and wafers, which can be sold to the Company or other customers. As of June 30, 2013 and December 30, 2012, outstanding advance payments received by the Company under this agreement totaled $52.4 million and $56.1 million, respectively, of which $8.4 million and $8.1 million, respectively, is classified as short-term in the Company's Condensed Consolidated Balance Sheets. These advance payments are applied as a credit against the third-party's polysilicon purchases from the Company. As of June 30, 2013 and December 30, 2012, the outstanding advances under this agreement were fully collateralized by letters of

23


credit totaling $17.0 million and $32.0 million, respectively; accounts receivable of $17.3 million and $7.6 million, respectively; and manufacturing equipment with a net book value of $18.1 million and $16.5 million, respectively. The above letters of credit were issued under the Company's letter of credit facility with Deutsche Bank, which is fully guaranteed by Total S.A.

Product Warranties

The Company generally warrants or guarantees the performance of the solar panels that it manufactures at certain levels of power output for 25 years. In addition, the Company passes through to customers long-term warranties from OEMs of certain system components, such as inverters. Warranties of 25 years from solar panels suppliers are standard in the solar industry, while inverters typically carry warranty periods ranging from 5 to 10 years. In addition, the Company generally warrants its workmanship on installed systems for periods ranging up to 10 years. The Company maintains reserves to cover the expected costs that could result from these warranties. The Company's expected costs are generally in the form of product replacement or repair. Warranty reserves are based on the Company's best estimate of such costs and are recognized as a cost of revenue. The Company continuously monitors product returns for warranty failures and maintains a reserve for the related warranty expenses based on various factors including historical warranty claims, results of accelerated lab testing, field monitoring, vendor reliability estimates, and data on industry averages for similar products. Historically, warranty costs have been within management's expectations.

The following table summarizes accrued warranty activity for the three and six months ended June 30, 2013 and July 1, 2012, respectively:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
Balance at the beginning of the period
 
$
119,549

 
$
102,839

 
$
117,172

 
$
94,323

Accruals for warranties issued during the period
 
7,897

 
3,857

 
12,352

 
13,305

Settlements made during the period
 
(1,153
)
 
(2,257
)
 
(3,231
)
 
(3,189
)
Balance at the end of the period
 
$
126,293

 
$
104,439

 
$
126,293

 
$
104,439


Contingent Obligations

Projects often require the Company to undertake obligations including: (i) system output performance guarantees; (ii) system maintenance; (iii) penalty payments or customer termination rights if the system the Company is constructing is not commissioned within specified timeframes or other milestones are not achieved; and (iv) system put-rights whereby the Company could be required to buy-back a customer's system at fair value on specified future dates if certain minimum performance thresholds are not met for periods of up to two years. Historically the systems have performed significantly above the performance guarantee thresholds, and there have been no cases in which the Company had to buy back a system.

Future Financing Commitments

The Company is required to provide certain funding under the joint venture agreement with AU Optronics Singapore Pte. Ltd. ("AUO") and another unconsolidated investee, subject to certain conditions (see Note 8).

The Company's future financing obligations related to these agreements as of June 30, 2013 are as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining six months)
 
$
147,120

2014
 
96,770

 
 
$
243,890


Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $33.0 million and $35.0 million as of June 30, 2013 and December 30, 2012, respectively, 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, if any, would be made for its liabilities associated with uncertain tax positions in other long-term liabilities.

24



Indemnifications
 
The Company is a party to a variety of agreements under 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 including indemnification to customers under §48(c) solar commercial investment tax credit and Treasury Grant payments under Section 1603 of the American Recovery and Reinvestment Act. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company under 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

Three securities class action lawsuits were filed against the Company and certain of its current and former officers and directors in the United States District Court for the Northern District of California on behalf of a class consisting of those who acquired the Company's securities from April 17, 2008 through November 16, 2009. The cases were consolidated as In re SunPower Securities Litigation, Case No. CV-09-5473-RS (N.D. Cal.), and lead plaintiffs and lead counsel were appointed on March 5, 2010. Lead plaintiffs filed a consolidated complaint on May 28, 2010. The actions arise from the Audit Committee's investigation announcement on November 16, 2009 regarding certain unsubstantiated accounting entries. The consolidated complaint alleges that the defendants made material misstatements and omissions concerning the Company's financial results for 2008 and 2009, seeks an unspecified amount of damages, and alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sections 11 and 15 of the Securities Act of 1933. The court held a hearing on the defendants' motions to dismiss the consolidated complaint on November 4, 2010. The court dismissed the consolidated complaint with leave to amend on March 1, 2011. An amended complaint was filed on April 18, 2011. The amended complaint added two former employees of the Company as defendants. Defendants filed motions to dismiss the amended complaint on May 23, 2011. The motions to dismiss the amended complaint were heard by the court on August 11, 2011. On December 19, 2011, the court granted in part and denied in part the motions to dismiss, dismissing the claims brought pursuant to sections 11 and 15 of the Securities Act of 1933 and the claims brought against the two newly added former employees. On December 14, 2012, the Company announced that it reached an agreement in principle to settle the consolidated securities class action lawsuit for $19.7 million. The Company recorded a charge in its fiscal fourth quarter of 2012 in the same amount which is further classified within "Accrued liabilities" on the Company's Condensed Consolidated Balance Sheets as of December 30, 2012. On July 3, 2013, the court granted final approval of the settlement and entered an order of final judgment and dismissal with prejudice.

Derivative actions purporting to be brought on the Company's behalf have also been filed in state and federal courts against several of the Company's current and former officers and directors based on the same events alleged in the securities class action lawsuits described above. The California state derivative cases were consolidated as In re SunPower Corp. S'holder Derivative Litig., Lead Case No. 1-09-CV-158522 (Santa Clara Sup. Ct.), and co-lead counsel for plaintiffs have been appointed. The complaints assert state-law claims for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement, and waste of corporate assets. Plaintiffs filed a consolidated amended complaint on March 5, 2012. The federal derivative complaints were consolidated as In re SunPower Corp. S'holder Derivative Litig., Master File No. CV-09-05731-RS (N.D. Cal.), and lead plaintiffs and co-lead counsel were appointed on January 4, 2010. The federal complaints assert state-law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment, and seek an unspecified amount of damages. Plaintiffs filed a consolidated complaint on May 13, 2011. A Delaware state derivative case, Brenner v. Albrecht, et al., C.A. No. 6514-VCP (Del Ch.), was filed on May 23, 2011 in the Delaware Court of Chancery. The complaint asserts state-law claims for breach of fiduciary duty and contribution and indemnification, and seeks an unspecified amount of damages. On June 29, 2013, the parties to each of the derivative actions entered into an agreement in principle to settle all the derivative actions.  The terms of the settlement in principle include that the Company institute certain specified corporate governance measures, that all claims against all defendants will be released and dismissed with prejudice, and that the Company will not oppose a request by the plaintiffs' counsel for an award of attorneys' fees up to $1 million, one half of which will be paid from the proceeds of directors and officers liability insurance.  The settlement in principle is subject to final documentation and to court approval. 


25


The Company is also a party to various other litigation matters and claims that arise from time to time in the ordinary course of its business. While the Company believes that the ultimate outcome of such matters will not have a material adverse effect on the Company, their outcomes are not determinable and negative outcomes may adversely affect the Company's financial position, liquidity or results of operations.

Note 8. EQUITY METHOD INVESTMENTS

The Company accounts for its equity interests in its unconsolidated investees described below under the equity method of accounting as it has the ability to exercise significant influence, but does not own a majority equity interest in, or otherwise control, the investees. As of June 30, 2013 and December 30, 2012, the Company's carrying value of its equity method investments totaled $112.2 million and $111.5 million, respectively, and is classified as “Other long-term assets” in its Condensed Consolidated Balance Sheets. The Company's share of its earnings (loss) from equity method investments is reflected as "Equity in loss of unconsolidated investees" in its Condensed Consolidated Statement of Operations.

Related Party Transactions with Equity Method Investees:
 
 
As of
(In thousands)
 
June 30, 2013
 
December 30, 2012
Accounts receivable
 
$
12,056

 
$
17,847

Accounts payable
 
52,090

 
63,469

Other long-term assets:
 
 
 
 
Long-term note receivable
 
1,824

 
1,040

 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
Payments made to equity method investees for products/services
 
$
107,136

 
$
149,279

 
$
226,079

 
$
329,267


Equity Investment in Huaxia CPV (Inner Mongolia) Power Co., Ltd. ("CCPV")

In December 2012, the Company entered into an agreement with Tianjin Zhonghuan Semiconductor Co. Ltd. ("TZS"), Inner Mongolia Power Group Co. Ltd. ("IMP") and Hohhot Jinqiao City Development Company Co., Ltd. ("HJCD") to form CCPV, a jointly owned entity to manufacture and deploy the Company's C-7 Tracker concentrator technology in Inner Mongolia and other regions in China. Huaxia CPV will be based in Hohhot, Inner Mongolia. Under the terms of the agreement, the Company will invest RMB 100,000,000 (or approximately $16.2 million based on the exchange rate as of June 30, 2013), for a 25% equity ownership in CCPV, with the investment to be made over a period of two years subsequent to the establishment of the entity. The establishment of the entity is subject to approval of the Chinese government. No contributions have been made to date.

Equity Investment in Diamond Energy Pty Ltd. ("Diamond Energy")

In October 2012, the Company made a $3.0 million equity investment in Diamond Energy, an alternative energy project developer and clean electricity retailer headquartered in Melbourne, Australia, in exchange for a 25% equity ownership. The Company additionally provided Diamond Energy AUD 2.0 million (or $1.8 million based on the exchange rate as of June 30, 2013) under a five year convertible note agreement and will receive interest of 1% per annum on the amounts lent to Diamond Energy, to be paid upon conversion or maturity.

The Company has concluded that it is not the primary beneficiary of Diamond Energy since, although the Company is obligated to absorb losses and has the right to receive benefits, the Company alone does not have the power to direct the activities of Diamond that most significantly impact its economic performance. The Company accounts for its investment in Diamond using the equity method since the Company is able to exercise significant influence over Diamond due to its board position.

Equity Investment and Joint Venture with AUOSP


26


In fiscal 2010, the Company, AUO and AU Optronics Corporation, the ultimate parent company of AUO ("AUO Taiwan") formed the joint venture AUOSP. The Company and AUO each own 50% of the joint venture AUOSP. AUOSP owns a solar cell manufacturing facility ("FAB 3") in Malaysia and manufactures solar cells and sells them on a "cost-plus" basis to the Company and AUO.

In connection with the joint venture agreement, the Company and AUO also entered into licensing and joint development, supply, and other ancillary transaction agreements. Through the licensing agreement, the Company and AUO licensed to AUOSP, on a non-exclusive, royalty-free basis, certain background intellectual property related to solar cell manufacturing (in the case of the Company), and manufacturing processes (in the case of AUO). Under the seven-year supply agreement with AUOSP, renewable by the Company for one-year periods thereafter, the Company is committed to purchase 80% of AUOSP's total annual output allocated on a monthly basis to the Company, in fiscal year 2013 and thereafter. The Company and AUO have the right to reallocate supplies from time to time under a written agreement. As required under the joint venture agreement, in fiscal 2010, the Company and AUOSP entered into an agreement under which the Company will resell to AUOSP polysilicon purchased from a third-party supplier and AUOSP will provide prepayments to the Company related to such polysilicon, which prepayment will then be made by the Company to the third-party supplier.

The Company and AUO are not permitted to transfer any of AUOSP's shares held by them, except to each other and to their direct or indirect wholly-owned subsidiaries. In the joint venture agreement, the Company and AUO agreed to each contribute additional amounts through 2014 amounting to $241.0 million, or such lesser amount as the parties may mutually agree. In addition, if AUOSP, the Company or AUO requests additional equity financing to AUOSP, then the Company and AUO will each be required to make additional cash contributions of up to $50.0 million in the aggregate (See Note 7).

The Company has concluded that it is not the primary beneficiary of AUOSP since, although the Company and AUO are both obligated to absorb losses or have the right to receive benefits, the Company alone does not have the power to direct the activities of AUOSP that most significantly impact its economic performance. In making this determination the Company considered the shared power arrangement, including equal board governance for significant decisions, elective appointment, and the fact that both parties contribute to the activities that most significantly impact the joint venture's economic performance. The Company accounts for its investment in AUOSP using the equity method as a result of the shared power arrangement. As of June 30, 2013, the Company's maximum exposure to loss as a result of its involvement with AUOSP is limited to the carrying value of its investment.

Equity Investment in First Philec Solar Corporation ("First Philec Solar")

In fiscal 2007, the Company and First Philippine Electric Corporation ("First Philec") formed First Philec Solar, a jointly owned entity to provide wafer slicing services of silicon ingots to the Company in the Philippines. The Company supplied to First Philec Solar silicon ingots and technology required for slicing silicon. Once manufactured, the Company purchased the completed silicon wafers from First Philec Solar under a six-year wafering supply and sales agreement, which the Company terminated in the third quarter of fiscal 2012. There is no obligation or expectation for the Company to provide additional funding to First Philec Solar.

The Company has concluded that it is not the primary beneficiary of First Philec Solar since, although the Company and First Philec are both obligated to absorb losses or have the right to receive benefits from First Philec Solar, such variable interests held by the Company do not empower it to direct the activities that most significantly impact First Philec Solar's economic performance. In reaching this determination, the Company considered the significant control exercised by First Philec over the joint venture's Board of Directors, management and daily operations. The Company accounts for its investment in First Philec Solar using the equity method since the Company is able to exercise significant influence over First Philec Solar due to its board positions.

Equity Investment in Woongjin Energy Co., Ltd ("Woongjin Energy")

In fiscal 2006, the Company and Woongjin Holdings Co., Ltd. ("Woongjin") formed Woongjin Energy, a jointly owned entity to manufacture monocrystalline silicon ingots in Korea. The Company may supply polysilicon, services, and technical support required for silicon ingot manufacturing to Woongjin Energy. Once manufactured, the Company may purchase the silicon ingots from Woongjin Energy under a nine-year agreement through 2016. There is no obligation or expectation for the Company to provide additional funding to Woongjin Energy.

During fiscal 2010, Woongjin Energy completed its initial public offering ("IPO") and the sale of 15.9 million new shares of common stock. As a result of the IPO, the Company concluded that Woongjin Energy was no longer a variable interest entity. During fiscal 2011, the Company sold 15.5 million shares of Woongjin Energy on the open market, reducing the

27


Company's percentage equity ownership in Woongjin Energy from 31% to 6%. During the first quarter of fiscal 2012, the Company sold its remaining shares of Woongjin Energy on the open market for total proceeds which equaled the remaining investment carrying balance. As a result, the Company's percentage equity ownership and investment carrying balance was reduced to zero.

The Company accounted for its former investment in Woongjin Energy using the equity method as the Company was able to exercise significant influence over Woongjin Energy due to its board position and its consumption of a significant portion of their output.

Note 9. DEBT AND CREDIT SOURCES

The following table summarizes the Company's outstanding debt as of June 30, 2013 and the related maturity dates:
 
 
 
 
Payments Due by Period
(In thousands)
 
Face Value
 
2013 (remaining six months)
 
2014
 
2015
 
2016
 
2017
 
Beyond 2017
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.75% debentures due 2018
 
$
300,000

 
$

 
$

 
$

 
$

 
$

 
$
300,000

4.50% debentures due 2015
 
250,000

 

 

 
250,000

 

 

 

4.75% debentures due 2014
 
230,000

 

 
230,000

 

 

 

 

0.75% debentures due 2015
 
79

 

 

 
79

 

 

 

IFC mortgage loan
 
70,000

 
7,500

 
15,000

 
15,000

 
15,000

 
15,000

 
2,500