SPWR_09.30.2012_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 September 30, 2012
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 x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  T

The total number of outstanding shares of the registrant’s common stock as of October 26, 2012 was 119,047,078.

 
 
 
 
 
d




SunPower Corporation

INDEX TO FORM 10-Q


 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 



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PART I. FINANCIAL INFORMATION


ITEM 1: FINANCIAL STATEMENTS

SunPower Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
September 30, 2012
 
January 1, 2012
(1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
377,126

 
$
725,618

Restricted cash and cash equivalents, current portion
11,275

 
52,279

Accounts receivable, net
297,696

 
438,633

Costs and estimated earnings in excess of billings
65,562

 
54,854

Inventories
407,210

 
445,501

Advances to suppliers, current portion
54,937

 
43,143

Project assets - plants and land, current portion
142,771

 
24,243

Prepaid expenses and other current assets (2)
584,669

 
502,879

Total current assets
1,941,246

 
2,287,150

 
 
 
 
Restricted cash and cash equivalents, net of current portion
13,939

 
27,276

Restricted long-term marketable securities
10,764

 
9,145

Property, plant and equipment, net
659,234

 
628,769

Project assets - plants and land, net of current portion
18,720

 
34,614

Goodwill

 
47,077

Other intangible assets, net
1,759

 
23,900

Advances to suppliers, net of current portion
302,577

 
284,378

Other long-term assets (2)
244,823

 
176,821

Total assets
$
3,193,062

 
$
3,519,130

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable (2)
$
417,896

 
$
441,655

Accrued liabilities
160,520

 
249,404

Billings in excess of costs and estimated earnings
139,625

 
170,828

Short-term debt
292,075

 
2,122

Convertible debt, current portion

 
196,710

Customer advances, current portion (2)
29,813

 
48,073

Total current liabilities
1,039,929

 
1,108,792

 
 
 
 
Long-term debt
100,952

 
364,273

Convertible debt, net of current portion
434,415

 
423,268

Customer advances, net of current portion (2)
240,254

 
181,946

Other long-term liabilities
257,236

 
166,126

Total liabilities
2,072,786

 
2,244,405

Commitments and contingencies (Note 8)


 
 
Stockholders' equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both September 30, 2012 and January 1, 2012

 

Common stock, $0.001 par value, 367,500,000 shares authorized; 123,064,117 shares issued, and 119,046,999 outstanding as of September 30, 2012; 101,851,290 shares issued, and 100,475,533 shares outstanding as of January 1, 2012
119

 
100

Additional paid-in capital
1,914,697

 
1,845,964

Accumulated deficit
(757,312
)
 
(550,064
)
Accumulated other comprehensive income (loss)
(3,382
)
 
7,142

Treasury stock, at cost; 4,017,118 shares of common stock as of September 30, 2012; 1,375,757 shares of common stock as of January 1, 2012
(33,846
)
 
(28,417
)
Total stockholders' equity
1,120,276

 
1,274,725

Total liabilities and stockholders' equity
$
3,193,062

 
$
3,519,130


(1)
As adjusted to reflect the balances of Tenesol S.A. ("Tenesol") beginning October 10, 2011, as required under the accounting guidelines for a transfer of an entity under common control (see Note 3).

(2)
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," and "Customer advances, net of current portion" financial statement line items in the Condensed Consolidated Balance Sheets (see Note 5, Note 8, and Note 9).

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

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012

October 2, 2011
 
September 30, 2012
 
October 2, 2011






 
 
 
 
Revenue
$
648,948


$
705,427

 
$
1,738,976

 
$
1,749,100

Cost of revenue
568,175


629,303

 
1,539,455

 
1,565,160

Gross margin
80,773


76,124

 
199,521

 
183,940

Operating expenses:
 
 
 
 
 
 
 
Research and development
14,956

 
12,664

 
45,786

 
41,565

Sales, general and administrative
69,714

 
76,329

 
208,388

 
243,364

Goodwill impairment
46,734

 
309,457

 
46,734

 
309,457

Other intangible asset impairment
12,847

 
40,301

 
12,847

 
40,301

Restructuring charges
10,544

 
637

 
61,189

 
13,945

Total operating expenses
154,795

 
439,388

 
374,944

 
648,632

Operating loss
(74,022
)
 
(363,264
)
 
(175,423
)
 
(464,692
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest income
94

 
206

 
762

 
1,437

Interest expense
(25,834
)
 
(17,096
)
 
(63,935
)
 
(48,414
)
Gain on sale of equity interest in unconsolidated investee

 
10,989

 

 
10,989

Gain on share lending arrangement
50,645

 

 
50,645

 

Other, net
594

 
8,487

 
(4,984
)
 
(10,066
)
Other income (expense), net
25,499

 
2,586

 
(17,512
)
 
(46,054
)
Loss before income taxes and equity in earnings (loss) of unconsolidated investees
(48,523
)
 
(360,678
)
 
(192,935
)
 
(510,746
)
Provision for income taxes
(593
)
 
(11,077
)
 
(12,542
)
 
(17,963
)
Equity in earnings (loss) of unconsolidated investees
578

 
971

 
(1,772
)
 
7,932

Net loss
$
(48,538
)
 
$
(370,784
)
 
$
(207,249
)
 
$
(520,777
)
 
 
 
 
 
 
 
 
Net loss per share of common stock:
 
 
 
 
 
 
 
Basic and diluted
$
(0.41
)
 
$
(3.77
)
 
$
(1.78
)
 
$
(5.34
)
Weighted-average shares:
 
 
 
 
 
 
 
Basic and diluted
118,952

 
98,259

 
116,408

 
97,456


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

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

 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Net loss
 
$
(48,538
)
 
$
(370,784
)
 
$
(207,249
)
 
$
(520,777
)
Components of comprehensive loss:
 
 
 
 
 
 
 
 
Translation adjustment
 
148

 
5,211

 
(1,802
)
 
4,067

Net unrealized gain (loss) on derivatives (Note 11)
 
(2,611
)
 
38,987

 
(10,738
)
 
(2,008
)
Income taxes
 
490

 
(4,483
)
 
2,016

 
3,251

Net change in accumulated other comprehensive income (loss)
 
(1,973
)
 
39,715

 
(10,524
)
 
5,310

Total comprehensive loss
 
$
(50,511
)
 
$
(331,069
)
 
$
(217,773
)
 
$
(515,467
)

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


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SunPower Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Nine Months Ended
 
September 30, 2012
 
October 2, 2011
Cash flows from operating activities:
 
 
 
Net loss
$
(207,249
)
 
$
(520,777
)
Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Stock-based compensation
33,179

 
37,829

Depreciation
82,747

 
83,979

Loss on retirement of property, plant and equipment
56,399

 

Amortization of other intangible assets
8,099

 
20,614

Goodwill impairment
46,734

 
309,457

Other intangible asset impairment
12,847

 
40,301

Loss on sale of investments

 
191

Loss (gain) on mark-to-market derivatives
(4
)
 
(331
)
Non-cash interest expense
29,336

 
21,112

Amortization of debt issuance costs
2,899

 
4,196

Amortization of promissory notes

 
3,486

Gain on change in equity interest in unconsolidated investee

 
(322
)
Third-party inventories write-down
8,869

 
16,399

Gain on sale of equity interest in unconsolidated investee

 
(10,989
)
Project assets write-down related to change in European government incentives

 
16,053

Equity in (earnings) loss of unconsolidated investees
1,772

 
(7,932
)
Gain on share lending arrangement
(50,645
)


Deferred income taxes and other tax liabilities
110

 
(860
)
Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
124,865

 
(48,587
)
Costs and estimated earnings in excess of billings
(10,709
)
 
(3,304
)
Inventories
29,992

 
(120,753
)
Project assets
(101,917
)
 
(43,242
)
Prepaid expenses and other assets
(221,069
)
 
(123,044
)
Advances to suppliers
(29,993
)
 
(9,535
)
Accounts payable and other accrued liabilities
(38,063
)
 
64,432

Billings in excess of costs and estimated earnings
(31,203
)
 
14,345

Customer advances
40,048

 
(1,698
)
Net cash used in operating activities
(212,956
)
 
(258,980
)
Cash flows from investing activities:
 
 
 
Decrease in restricted cash and cash equivalents
54,341

 
29,789

Purchase of property, plant and equipment
(79,033
)
 
(85,528
)
Proceeds from sale of equipment to third-party
419

 
501

Purchase of marketable securities
(1,436
)
 
(8,962
)
Proceeds from sales or maturities of available-for-sale securities

 
43,759

Cash received for sale of investment in unconsolidated investees
17,403

 
24,043

Cash paid for investments in unconsolidated investees
(10,000
)
 
(80,000
)
Net cash used in investing activities
(18,306
)
 
(76,398
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of bank loans, net of issuance costs
125,000

 
489,221

Proceeds from issuance of project loans, net of issuance costs
27,617

 

Proceeds from residential lease financing
26,809

 

Proceeds from recovery of claim in connection with share lending arrangement
50,645

 

Repayment of bank loans and other debt
(126,427
)
 
(377,124
)
Cash paid for repurchase of convertible debt
(198,608
)
 

Proceeds from private offering of common stock, net of issuance costs
163,616

 

Cash distributions to Parent in connection with the transfer of entities under common control
(178,290
)
 

Proceeds from warrant transactions

 
2,261

Proceeds from exercise of stock options
51

 
4,013

Purchases of stock for tax withholding obligations on vested restricted stock
(5,430
)
 
(10,550
)
Net cash provided by (used in) financing activities
(115,017
)
 
107,821

Effect of exchange rate changes on cash and cash equivalents
(2,213
)
 
(3,301
)
Net decrease in cash and cash equivalents
(348,492
)
 
(230,858
)
Cash and cash equivalents at beginning of period
725,618

 
605,420

Cash and cash equivalents, end of period
$
377,126

 
$
374,562

 
 
 
 
Non-cash transactions:
 
 
 
Assignment of residential lease receivables to a third party financial institution
$
10,259

 
$

Property, plant and equipment acquisitions funded by liabilities
13,243

 
11,781

Non-cash interest expense capitalized and added to the cost of qualified assets
1,161

 
2,096

Issuance of warrants in connection with the Liquidity Support Agreement
50,327

 


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

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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 services company that designs, manufactures and delivers high-performance solar electric systems worldwide for residential, commercial, and utility-scale power plant customers.

In December 2011, the Company announced a reorganization to align its business and cost structure with a regional focus in order to support the needs of its customers and improve the speed of decision-making processes. As a result, in the first quarter of fiscal 2012, the Company changed its segment reporting from its Utility and Power Plants ("UPP") Segment and Residential and Commercial ("R&C") Segment to 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. 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 these three regional segments.

Historically, the UPP Segment referred to the Company's large-scale solar products and systems business, which included power plant project development and project sales, turn-key engineering, procurement and construction ("EPC") services for power plant construction, and power plant operations and maintenance ("O&M") services. The UPP Segment also sold components, including large volume sales of solar panels and mounting systems, to third parties, sometimes on a multi-year, firm commitment basis. The Company's former R&C Segment focused on solar equipment sales into the residential and small commercial market through its third-party global dealer network, as well as direct sales and EPC and O&M services in the United States and Europe for rooftop and ground-mounted solar power systems for the new homes, commercial, and public sectors.

On June 21, 2011, the Company became a majority owned subsidiary of Total Gas & Power USA, SAS, a French société par actions simplifiée ("Total"), a subsidiary of Total S.A., a French société anonyme ("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 accumulated deficit.

Fiscal Years

The Company reports on a fiscal-year basis and ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Both fiscal 2012 and 2011 consist of 52 weeks. The third quarter of fiscal 2012 ended on September 30, 2012, while the third quarter in fiscal 2011 ended on October 2, 2011.

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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, goodwill, valuations for business combinations, other intangible assets and other long-term assets, asset impairments, fair value of financial instruments, certain accrued liabilities including accrued warranty, restructuring, and termination of supply contracts reserves, valuation of debt without the conversion feature, valuation of share lending arrangements, income taxes, and tax valuation allowances. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies

In May 2011, the Financial Accounting Standards Board ("FASB") amended its fair value principles and disclosure requirements. The amended fair value guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The amendment became effective for the Company on January 2, 2012 and did not have a material impact on its financial statements.

In June 2011, the FASB amended its disclosure guidance related to the presentation of comprehensive income. This amendment eliminates the option to report other comprehensive income and its components in the statement of changes in equity and requires presentation and reclassification adjustments on the face of the income statement. In December, 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised by stakeholders that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The amendment (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) became effective for the Company on January 2, 2012 and did not have any impact on its financial position. However, the Company now reports other comprehensive income and its components in a separate statement of comprehensive income for all presented periods.

In September 2011, the FASB amended its goodwill guidance by providing entities an option to use a qualitative approach to test goodwill for impairment. An entity will be able to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that the fair value is less than the carrying value, it is necessary to perform the currently prescribed two step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendment became effective for the Company on January 2, 2012 and did not have a material impact on its financial statements.

There have been no significant changes in the Company's significant accounting policies for the three and nine months ended September 30, 2012, as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2012 ("2011 Form 10-K"). Further, 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 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 from Total for $165.4 million in cash. The Tenesol acquisition was consummated on January 31, 2012 (see Note 3). 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

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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. In the three and nine months ended September 30, 2012, the Company incurred guaranty fees of $1.7 million and $5.2 million, respectively, to Total S.A.

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"), 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.

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

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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 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.

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

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

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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 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. The Liquidity Support Facility is available until the completion of the solar park, expected to be operational in 2013 and completed before the end of fiscal 2014, and, under certain conditions, up to December 31, 2016, at which time all outstanding guarantees will expire 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 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 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, because “any person” becoming such “beneficial owner” would trigger the

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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 follow: (i) quarterly payment of a commitment fee in an amount equal to 0.25% of the unused portion of the $600 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. In the three and nine months ended September 30, 2012, the Company incurred commitment fees of $1.4 million and $3.5 million, respectively, to Total S.A.

The Liquidity Support Agreement, the Compensation and Funding Agreement, the Private Placement Agreement, and the Revolving Credit and Convertible Loan Agreement are further described in the fiscal 2011 Form 10-K.


Note 3. TRANSFER OF ENTITIES UNDER COMMON CONTROL

Tenesol

On January 31, 2012, the Company completed its acquisition of Tenesol, a global solar provider headquartered in La Tour de Salvagny, France, and formerly wholly-owned subsidiary of Total, for $165.4 million in cash in exchange for 100% of the equity of Tenesol from Total pursuant to a stock purchase agreement entered into on December 23, 2011. Tenesol is engaged in the business of devising, designing, manufacturing, installing, and managing solar power production and consumption systems for farms, industrial and service sector buildings, solar power plants and private homes.

As Tenesol and the Company were under the common control of Total as of the January 31, 2012 acquisition date, the acquisition is treated as a transfer of an entity under common control and represents a change in the reporting entity. As a result, the Company has retrospectively adjusted its historical financial statements to reflect the transfer beginning on October 10, 2011, the first date in which Total had common control of both the Company and Tenesol, and to include the results of operations in the Company's Condensed Consolidated Statement of Operations since October 10, 2011. The Company recorded the transfer of Tenesol's assets and liabilities at their historical carrying value in Total's financial statements in accordance with U.S. GAAP, and the net assets transferred were recorded as an equity contribution from Total to the Company as of October 10, 2011. The subsequent cash payment on January 31, 2012 as described above was treated as a cash distribution to Total. In addition, a transaction between Total and Tenesol on January 23, 2012 resulted in an additional equity contribution from Total to the Company in the fiscal quarter ending January 1, 2012, and an additional cash distribution to Total totaling $12.9 million in the fiscal quarter ending April 1, 2012.

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The Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations of the Company as of and for the twelve months ended January 1, 2012 as reported previously and as adjusted in this report are as follows:
 
As of
 
January 1, 2012
 
As Adjusted for the Change in Reporting Entity
 
As Previously Reported
in the 2011 Annual
Report on Form 10-K
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
725,618

 
$
657,934

Restricted cash and cash equivalents, current portion
52,279

 
52,279

Accounts receivable, net
438,633

 
390,262

Costs and estimated earnings in excess of billings
54,854

 
54,854

Inventories
445,501

 
397,262

Advances to suppliers, current portion
43,143

 
43,143

Project assets - plants and land, current portion
24,243

 
24,243

Prepaid expenses and other current assets
502,879

 
482,691

Total current assets
2,287,150

 
2,102,668

 
 
 
 
Restricted cash and cash equivalents, net of current portion
27,276

 
27,276

Restricted long-term marketable securities
9,145

 
9,145

Property, plant and equipment, net
628,769

 
607,456

Project assets - plants and land, net of current portion
34,614

 
34,614

Goodwill
47,077

 
35,990

Other intangible assets, net
23,900

 
4,848

Advances to suppliers, net of current portion
284,378

 
278,996

Other long-term assets
176,821

 
174,204

Total assets
$
3,519,130

 
$
3,275,197

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
441,655

 
$
416,615

Accrued liabilities
249,404

 
234,688

Billings in excess of costs and estimated earnings
170,828

 
170,828

Short-term debt
2,122

 

Convertible debt, current portion
196,710

 
196,710

Customer advances, current portion
48,073

 
46,139

Total current liabilities
1,108,792

 
1,064,980

 
 
 
 
Long-term debt
364,273

 
355,000

Convertible debt, net of current portion
423,268

 
423,268

Customer advances, net of current portion
181,946

 
181,947

Other long-term liabilities
166,126

 
152,492

Total liabilities
2,244,405

 
2,177,687

Commitments and contingencies
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of January 1, 2012

 

Common stock, $0.001 par value, 367,500,000 shares authorized; 101,851,290 shares issued, and 100,475,533 shares outstanding as of January 1, 2012
100

 
100

Additional paid-in capital
1,845,964

 
1,657,474

Accumulated deficit
(550,064
)
 
(540,187
)
Accumulated other comprehensive income
7,142

 
8,540

Treasury stock, at cost; 1,375,757 shares of common stock as of January 1, 2012
(28,417
)
 
(28,417
)
Total stockholders' equity
1,274,725

 
1,097,510

Total liabilities and stockholders' equity
$
3,519,130

 
$
3,275,197




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Year Ended
 
January 1, 2012
 
As Adjusted for the Change in Reporting Entity
 
As Previously Reported
in the 2011 Annual
Report on Form 10-K
 
 
 
 
Revenue
$
2,374,376

 
$
2,312,494

Cost of revenue
2,148,157

 
2,084,291

Gross margin
226,219

 
228,203

Operating expenses:
 
 
 
Research and development
57,775

 
57,775

Sales, general and administrative
331,380

 
319,719

Goodwill impairment
309,457

 
309,457

Other intangible asset impairment
40,301

 
40,301

Restructuring charges
21,403

 
21,403

Total operating expenses
760,316

 
748,655

Operating loss
(534,098
)
 
(520,452
)
Other expense, net:
 
 
 
Interest income
2,337

 
2,054

Interest expense
(67,253
)
 
(67,022
)
Gain on change in equity interest in unconsolidated investee
322

 
322

Gain on sale of equity interest in unconsolidated investee
5,937

 
5,937

Gain on mark-to-market derivatives
343

 
343

Other, net
(10,120
)
 
(8,281
)
Other expense, net
(68,434
)
 
(66,647
)
Loss before income taxes and equity in earnings of unconsolidated investees
(602,532
)
 
(587,099
)
Provision for income taxes
(17,208
)
 
(22,099
)
Equity in losses of unconsolidated investees
6,003

 
6,003

Net loss
$
(613,737
)
 
$
(603,195
)
 
 
 
 
Net loss per share of common stock:
 
 
 
Basic and diluted
$
(6.28
)
 
$
(6.18
)
Weighted-average shares:
 
 
 
Basic and diluted
97,724

 
97,724


Note 4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the changes in the carrying amount of goodwill under the Company's reportable business segments:
(In thousands)
 
Americas
 
EMEA
 
APAC
 
Total
As of January 1, 2012 (1)
 
$
35,990

 
$
11,087

 
$

 
$
47,077

Goodwill impairment
 
(35,990
)
 
(10,744
)
 

 
(46,734
)
Translation adjustment
 

 
(343
)
 

 
(343
)
As of September 30, 2012
 
$

 
$

 
$

 
$


(1)
As adjusted to reflect the balances of Tenesol beginning October 10, 2011, as required under the accounting guidelines for a transfer of an entity under common control (see Note 3).

Goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. A two-step process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value, including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to determine the amount of the impairment by comparing the implied fair value of the reporting unit's goodwill with its carrying value.

The Company conducts its annual impairment test of goodwill as of the Sunday closest to the end of the third fiscal quarter of each year. Impairment of goodwill is tested at the Company's reporting unit level. Management determined that the Americas Segment, the EMEA Segment, and the APAC Segment are also the reporting units. In estimating the fair value of the reporting units, the Company makes estimates and judgments about its future cash flows using an income approach defined as Level 3 inputs under fair value measurement standards. The income approach, specifically a discounted cash flow analysis, included assumptions for, among others, forecasted revenue, gross margin, operating income, working capital cash flow, perpetual growth rates and long-term discount rates, all of which require significant judgment by management. The sum of the

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fair values of the Company's reporting units are also compared to its external market capitalization to determine the appropriateness of its assumptions and adjusted, if appropriate. These assumptions took into account the current industry environment and its impact on the Company's business.

Based on the impairment test as of September 30, 2012, the Company determined that the carrying value of the Americas and EMEA reporting units exceeded their fair value. As a result, the Company performed the second step of the impairment analysis for the two reporting units discussed above. The Company's calculation of the implied fair value of goodwill included significant assumptions for, among others, the fair values of recognized assets and liabilities and of unrecognized intangible assets, all of which require significant judgment by management. The Company calculated that the implied fair value of goodwill for the two reporting units was zero and therefore recorded a goodwill impairment loss of $46.7 million, representing all of the goodwill associated with these reporting units. Based on the impairment test performed as of October 2, 2011, the Company recorded a goodwill impairment loss of $309.5 million related to the EMEA reporting unit.

Intangible Assets

The following tables present details of the Company's acquired other intangible assets:
(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of September 30, 2012
 
 
 
 
 
 
Patents, trade names and purchased technology
 
$
49,892

 
$
(49,892
)
 
$

Purchased in-process research and development
 
1,000

 
(319
)
 
681

Customer relationships and other
 
28,376

 
(27,298
)
 
1,078

 
 
$
79,268

 
$
(77,509
)
 
$
1,759

 
 
 

 
 

 
 

As of January 1, 2012 (1)
 
 

 
 

 
 

Patents, trade names and purchased technology
 
$
52,992

 
$
(50,280
)
 
$
2,712

Purchased in-process research and development
 
1,000

 
(195
)
 
805

Customer relationships and other
 
45,910

 
(25,527
)
 
20,383

 
 
$
99,902

 
$
(76,002
)
 
$
23,900


(1)
As adjusted to reflect the balances of Tenesol beginning October 10, 2011, as required under the accounting guidelines for a transfer of an entity under common control (see Note 3).

All of the Company's acquired other intangible assets are subject to amortization. Aggregate amortization expense for other intangible assets totaled $2.6 million and $8.1 million in the three and nine months ended September 30, 2012, respectively, and $6.7 million and $20.6 million in the three and nine months ended October 2, 2011, respectively.

The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. During the third quarter of fiscal 2012, the Company determined that the carrying value of certain intangible assets in Europe were no longer recoverable based on a discrete evaluation of the nature of the intangible assets, incorporating the effect of declines in regional operating results. As a result, the Company recognized an impairment loss of $12.8 million on its Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012.

During the third quarter of fiscal 2011, the Company determined the carrying value of certain intangible assets related to strategic acquisitions of EPC and O&M project pipelines in Europe were no longer recoverable and recognized an impairment loss of $40.3 million on its Condensed Consolidated Statement of Operations for the three and nine months ended October 2, 2011. The Company determined that the carrying value of the intangible assets was not recoverable as the carrying value of the asset group which contained the intangible assets exceeded the undiscounted cash flows of the asset group for a period of time commensurate with the remaining useful life of the primary asset of the group plus a salvage value of the asset group at the end of this period. The impairment loss was calculated by comparing the fair value of the intangible assets to their carrying value. In calculating the fair value of the intangible assets, the Company utilized discounted cash flow assumptions related to the acquired EPC and O&M project pipelines in Europe. The significant decline in fair value of the intangible assets was primarily attributable to the change in government incentives in Europe.

As of September 30, 2012, the estimated future amortization expense related to other intangible assets is as follows:

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Table of Contents

(In thousands)
 
Amount
Year
 
 
2012 (remaining three months)
 
$
1,015

2013
 
272

2014
 
167

2015
 
166

2016
 
139

 
 
$
1,759


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Note 5. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
September 30, 2012
 
January 1, 2012
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross
 
$
326,011

 
$
468,320

Less: allowance for doubtful accounts
 
(22,687
)
 
(21,039
)
Less: allowance for sales returns
 
(5,628
)
 
(8,648
)
 
 
$
297,696

 
$
438,633

Inventories:
 
 
 
 
Raw materials
 
$
75,118

 
$
78,050

Work-in-process
 
74,621

 
79,397

Finished goods
 
257,471

 
288,054

 
 
$
407,210

 
$
445,501

Prepaid expenses and other current assets:
 
 
 
 
VAT receivables, current portion
 
$
98,918

 
$
68,993

Foreign currency derivatives
 
4,325

 
34,422

Income tax receivable
 
4,383

 
19,541

Deferred project costs
 
325,804

 
183,789

Other current assets
 
30,930

 
20,006

Other receivables (1)
 
86,435

 
146,135

Other prepaid expenses
 
33,874

 
29,993

 
 
$
584,669

 
$
502,879


(1)
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 8 and 9).

Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
112,135

 
$
31,469

Project assets — land
 
49,356

 
27,388

 
 
$
161,491

 
$
58,857

Project assets - plants and land, current portion
 
$
142,771

 
$
24,243

Project assets - plants and land, net of current portion
 
$
18,720

 
$
34,614


Property, plant and equipment, net:
 
 
 
 
Land and buildings
 
$
20,082

 
$
13,912

Leasehold improvements
 
211,802

 
244,913

Manufacturing equipment (2)
 
568,765

 
625,019

Computer equipment
 
75,098

 
69,694

Solar power systems
 
119,534

 
18,631

Furniture and fixtures
 
7,569

 
7,172

Construction-in-process
 
25,307

 
46,762

 
 
1,028,157

 
1,026,103

Less: accumulated depreciation (3)
 
(368,923
)
 
(397,334
)
 
 
$
659,234

 
$
628,769


(2)
The Company's mortgage loan agreement with International Finance Corporation ("IFC") is collateralized by certain manufacturing equipment with a net book value of $168.9 million and $196.6 million as of September 30, 2012 and January 1, 2012, respectively. The Company also provided security for advance payments received from a third party in fiscal 2008 in the form of collateralized manufacturing equipment with a net book value of $17.6 million and $21.1 million as of September 30, 2012 and January 1, 2012, respectively.

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(3)
Total depreciation expense was $24.4 million and $82.7 million for the three and nine months ended September 30, 2012, respectively and $30.3 million and $84.0 million for the three and nine months ended October 2, 2011, respectively.
    
 
 
As of
(In thousands)
 
September 30, 2012
 
January 1, 2012
Property, plant and equipment, net by geography (4):
 
 
 
 
Philippines
 
$
401,027

 
$
490,074

United States
 
191,448

 
93,436

Mexico
 
34,452

 
21,686

Europe
 
30,070

 
20,830

Other
 
2,237

 
2,743

 
 
$
659,234

 
$
628,769


(4)
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 nine months ended September 30, 2012 and October 2, 2011, respectively.
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Interest expense:
 
 
 
 
 
 
 
 
Interest cost incurred
 
$
(26,912
)
 
$
(18,729
)
 
$
(66,899
)
 
$
(52,832
)
Cash interest cost capitalized - property, plant and equipment
 
272

 
297

 
859

 
1,182

Non-cash interest cost capitalized - property, plant and equipment
 
142

 
113

 
444

 
834

Cash interest cost capitalized - project assets - plant and land
 
395

 
534

 
944

 
1,140

Non-cash interest cost capitalized - project assets - plant and land
 
269

 
689

 
717

 
1,262

Interest expense
 
$
(25,834
)
 
$
(17,096
)
 
$
(63,935
)
 
$
(48,414
)

 
 
As of
(In thousands)
 
September 30, 2012
 
January 1, 2012
Other long-term assets:
 
 
 
 
Equity method investments
 
$
107,280

 
$
129,929

Bond hedge derivative
 
1,563

 
840

Cost method investments
 
14,918

 
4,918

VAT receivables, net of current portion
 

 
6,020

Long-term debt issuance costs
 
43,766

 
10,734

Other
 
77,296

 
24,380

 
 
$
244,823

 
$
176,821



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As of
(In thousands)
 
September 30, 2012
 
January 1, 2012
Accrued liabilities:
 
 
 
 
VAT payables
 
$
3,333

 
$
47,034

Foreign currency derivatives
 
3,494

 
14,935

Short-term warranty reserves
 
10,751

 
15,034

Interest payable
 
8,933

 
7,288

Deferred revenue
 
13,005

 
48,115

Employee compensation and employee benefits
 
36,836

 
35,375

Other
 
84,168

 
81,623

 
 
$
160,520

 
$
249,404

 
 
 

 
 

Other long-term liabilities:
 
 

 
 

Embedded conversion option derivatives
 
$
1,563

 
$
844

Long-term warranty reserves
 
98,901

 
79,289

Deferred revenue
 
84,825

 
31,988

Unrecognized tax benefits
 
29,756

 
29,256

Other
 
42,191

 
24,749

 
 
$
257,236

 
$
166,126


Accumulated other comprehensive income (loss):
 
 

 
 

Cumulative translation adjustment
 
$
(3,162
)
 
$
(1,360
)
Net unrealized gain on derivatives
 
(265
)
 
10,473

Deferred taxes
 
45

 
(1,971
)
 
 
$
(3,382
)
 
$
7,142


Note 6. FAIR VALUE MEASUREMENTS

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 nine months ended September 30, 2012 or October 2, 2011, respectively. The Company did not have any assets or liabilities measured at fair value on a recurring basis requiring Level 3 inputs as of September 30, 2012 or January 1, 2012.

The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 2012 and January 1, 2012, respectively:

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September 30, 2012
 
January 1, 2012
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
160,000

 
$
160,000

 
$

 
$
187,538

 
$
187,538

 
$

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 11)
 
4,325

 

 
4,325

 
34,422

 

 
34,422

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 10)
 
1,563

 

 
1,563

 
840

 

 
840

Total assets
 
$
165,888

 
$
160,000


$
5,888


$
222,800


$
187,538


$
35,262

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 11)
 
$
3,494

 
$

 
$
3,494

 
$
14,935

 
$

 
$
14,935

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 10)
 
1,563

 

 
1,563

 
844

 

 
844

Total liabilities
 
$
5,057

 
$

 
$
5,057

 
$
15,779

 
$

 
$
15,779


(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.

Debt Derivatives

The 4.50% Bond Hedge and the embedded cash conversion option within 4.50% debentures (as defined in Note 10) 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 value of these derivative instruments were determined utilizing the following Level 2 inputs:
 
As of (1)
 
September 30, 2012
 
January 1, 2012
Stock price
$
4.51

 
$
6.23

Exercise price
$
22.53

 
$
22.53

Interest rate
0.39
%
 
0.84
%
Stock volatility
59.50
%
 
44.00
%
Credit risk adjustment
1.58
%
 
1.93
%
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.

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(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 goodwill and other intangible asset balances are disclosed in Note 4.

Debt Securities

The Company's debt securities consist of Philippine government bonds, classified as held-to-maturity, which are maintained as collateral for present and future business transactions within the country. These bonds have maturity dates of up to 5 years with a carrying value of $10.8 million as of September 30, 2012 and $9.1 million as of January 1, 2012, which are classified as "Restricted long-term marketable securities" on the Company's Condensed Consolidated Balance Sheets. 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. The Company incurred no other-than-temporary impairment loss in the three and nine months ended September 30, 2012. The debt securities were categorized in Level 1 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" within its Condensed Consolidated Balance Sheets, for impairment and records reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include Level 2 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 September 30, 2012 and January 1, 2012, the Company had $107.3 million and $129.9 million, respectively, in investments accounted for under the equity method and $14.9 million and $4.9 million, respectively, in investments accounted for under the cost method (see Note 9).


Note 7. RESTRUCTURING

April 2012 Restructuring Plan

As a result of the Company's continued cost reduction progress at its Fab 2 and its joint venture Fab 3 manufacturing facilities, on April 13, 2012, the Company's Board of Directors approved a restructuring plan (the "April 2012 Plan") to consolidate the Company's Philippine manufacturing operations into Fab 2 and begin repurposing Fab 1 in the second quarter of 2012. The Company expects to recognize restructuring charges up to $69.0 million, related to all segments, in the twelve months following the approval and implementation of the April 2012 Plan. Total restructuring charges are expected to primarily be composed of non-cash charges of up to $54.0 million, and other cash-based associated costs of up to $15.0 million, for the closure of Fab 1.

December 2011 Restructuring Plan

To accelerate operating cost reduction and improve overall operating efficiency, in December 2011, the Company implemented a company-wide restructuring program (the "December 2011 Plan"). The December 2011 Plan eliminated approximately 2% of the Company's global workforce. The Company expects to recognize restructuring charges up to $17.0 million, related to all segments, in the twelve months following the approval and implementation of the December 2011 Plan. The Company expects greater than 80% of these charges to be cash.

June 2011 Restructuring Plan

In response to reductions in European government incentives, which had a significant impact on the global solar market, on June 13, 2011, the Company's Board of Directors approved a restructuring plan (the "June 2011 Plan") to realign the Company's resources. The June 2011 Plan eliminated approximately 2% of the Company's global workforce, in addition to the consolidation or closure of certain facilities in Europe. Restructuring activities associated with the June 2011 Plan were

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substantially completed as of September 30, 2012.

The following table summarizes the restructuring charges recognized in the Company's Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative To Date
 
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
 
April 2012 Plan:
 
 
 
 
 
 
 
 
 
 
Non-cash impairment charges
 
$
6,155

 
$

 
$
49,561

 
$

 
$
49,561

Other costs
 
2,066

 

 
3,232

 

 
3,232

 
 
8,221

 

 
52,793

 

 
52,793

December 2011 Plan:
 
 
 
 
 
 
 
 
 
 
Non-cash impairment charges
 
3,810

 

 
3,810

 

 
3,810

Severance and benefits
 
(110
)
 

 
1,505

 

 
8,810

Lease and related termination costs
 
(1,671
)
 

 
2,402

 

 
2,402

Other costs
 
70

 

 
369

 

 
541

 
 
2,099

 

 
8,086

 

 
15,563

June 2011 Plan:
 
 
 
 
 
 
 
 
 
 
Severance and benefits
 

 

 
(160
)
 
12,275

 
11,026

Lease and related termination costs
 
190

 

 
447

 
713

 
1,135

Other costs
 
34

 
637

 
23

 
957

 
2,075

 
 
224

 
637

 
310

 
13,945

 
14,236

Total restructuring charges
 
$
10,544

 
$
637

 
$
61,189

 
$
13,945

 
$
82,592


The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2012:
 
 
Nine Months Ended
(In thousands)
 
January 1, 2012
 
Charges (Benefits)
 
Payments
 
September 30, 2012
April 2012 Plan:
 
 
 
 
 
 
 
 
Other costs (1) (2)
 

 
3,232

 
(3,091
)
 
141

December 2011 Plan:
 
 
 
 
 
 
 
 
Severance and benefits
 
3,344

 
1,505

 
(4,789
)
 
60

Lease and related termination costs
 

 
2,402

 
(452
)
 
1,950

Other costs (1) (2)
 
24

 
369

 
(265
)
 
128

June 2011 Plan:
 
 
 
 
 
 
 
 
Severance and benefits (3)
 
2,204

 
(160
)
 
(2,044
)
 

Lease and related termination costs
 
688

 
447

 
(347
)
 
788

Other costs (1)
 
64

 
23

 
(87
)
 

Total restructuring liabilities
 
$
6,324

 
$
7,818

 
$
(11,075
)
 
$
3,067


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

(2)
The reserve balance excludes non-cash impairment charges incurred in connection with the April 2012 Plan and December 2011 Plan during the nine months ended September 30, 2012.

(3)
The June 2011 Plan reserve balance as of January 1, 2012 excludes $1.4 million of charges associated with the accelerated vesting of promissory notes, in accordance with the terms of each agreement, previously issued as consideration for an acquisition completed in the first quarter of fiscal 2010. The $1.4 million charge is separately recorded in "Accrued liabilities" on the Company's Condensed Consolidated Balance Sheet as of January 1, 2012, and was fully paid during the three months ended April 1, 2012.


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Note 8. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its corporate headquarters in San Jose, California and its Richmond, California facility under non-cancellable operating leases from unaffiliated third parties. The Company also has various other lease arrangements, including its European headquarters located in Geneva, Switzerland as well as sales and support offices throughout the United States and Europe. In August 2011, the Company entered into a non-cancellable operating lease agreement for its solar module facility in Mexicali, Mexico from an unaffiliated third party.

The Company has additionally entered into sale-leaseback arrangements under which nine solar power systems have been sold to unaffiliated third parties and subsequently leased back under operating leases over minimum lease terms of up to 20 years. Separately, the Company entered 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 a duration of up to 20 years. At the end of each lease term, the Company has the option to purchase the systems at fair value or remove the systems. The deferred profit on the sale of the systems is recognized over the minimum term of the lease.

The Company additionally leases certain buildings, machinery and equipment under capital leases for terms up to 12 years.

Future minimum obligations under all non-cancellable leases as of September 30, 2012 are as follows:
 
 
Capital Lease
 
Operating Lease
(In thousands)
 
Amount
 
Amount
Year
 
 
 
 
2012 (remaining three months)
 
$
477

 
$
5,434

2013
 
2,043

 
16,116

2014
 
1,387

 
14,025

2015
 
1,196

 
12,835

2016
 
951

 
11,738

Thereafter
 
3,252

 
55,905

 
 
$
9,306

 
$
116,053


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 joint ventures, 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. Where pricing is specified for future periods, with two of our ingot/wafer suppliers, the Company may reduce its purchase commitment under the contract if the Company obtains a bona fide third party offer at a price that is a certain percentage lower than the applicable purchase price in the existing contract. If market prices decrease, the Company intends to use such provisions to either move its purchasing to another supplier or to seek to force the initial supplier to reduce its price to remain competitive with market pricing. These two contracts constitute approximately 1% of the aggregate purchase commitments shown.

As of September 30, 2012, total obligations related to non-cancellable purchase orders totaled $0.2 billion and long-term supply agreements with suppliers totaled $2.2 billion. Of the total future purchase commitments of $2.4 billion as of

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September 30, 2012, $90.8 million are for commitments to related parties. Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of September 30, 2012 are as follows:
(In thousands)
 
Amount
Year
 
 
2012 (remaining three months)
 
$
466,497

2013
 
170,661

2014
 
359,228

2015
 
361,218

2016
 
327,268

Thereafter
 
711,412

 
 
$
2,396,284


The Company has tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the supplier. Annual future purchase commitments in the table above are calculated using the gross future purchase obligations of the Company and are not reduced by tolling agreements and non-cancellable SREC sales arrangements. Total future purchase commitments as of September 30, 2012 would be reduced by $43.8 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 underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, and significant negative industry or economic trends. 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 its solar power products. However, 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 polysilicon, ingot, wafer, solar cell, and solar panel vendors that specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 years. 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 nine months ended September 30, 2012, the Company paid advances totaling $15.4 million and $42.5 million, respectively, in accordance with the terms of existing long-term supply agreements. As of September 30, 2012 and January 1, 2012, advances to suppliers totaled $357.5 million and $327.5 million, respectively, the current portion of which is $54.9 million and $43.1 million, respectively. Two suppliers accounted for 74% and 23% of total advances to suppliers as of September 30, 2012, and 74% and 20% as of January 1, 2012.

The Company's future prepayment obligations related to these agreements as of September 30, 2012 are as follows:
(In thousands)
 
Amount
Year
 
 
2012 (remaining three months)
 
$
9,648

2013
 
72,839

2014
 
65,791

 
 
$
148,278


Product Warranties
 
The Company generally warrants or guarantees the performance of the solar panels that it manufactures at certain levels

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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.

Provisions for warranty reserves charged to cost of revenue were $7.4 million and $20.7 million in the three and nine months ended September 30, 2012, respectively, and $6.4 million and $24.8 million in the three and nine months ended October 2, 2011, respectively:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Balance at the beginning of the period (1)
 
$
104,439

 
$
79,261

 
$
94,323

 
$
63,562

Accruals for warranties issued during the period
 
7,387

 
6,435

 
20,692

 
24,803

Settlements made during the period
 
(2,174
)
 
(2,031
)
 
(5,363
)
 
(4,700
)
Balance at the end of the period
 
$
109,652

 
$
83,665

 
$
109,652

 
$
83,665


(1)
As adjusted to reflect the balances of Tenesol beginning October 10, 2011, as required under the accounting guidelines for a transfer of an entity under common control (see Note 3).

Contingent Obligations

Projects often require the Company to undertake customer 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; (iv) guarantees of certain minimum residual value of the system at specified future dates; and (v) 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 financing agreement with a third party, subject to certain conditions (see Note 9).

The Company's future financing obligations related to these agreements as of September 30, 2012 are as follows:
(In thousands)
 
Amount
Year
 
 
2012 (remaining three months)
 
$
47,770

2013
 
101,400

2014
 
96,770

 
 
$
245,940


Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $29.8 million and $29.3 million as of September 30, 2012 and January 1, 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 (see Note 12).

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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. 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 Company believes it has meritorious defenses to these allegations and will vigorously defend itself in these matters. 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 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. The Company is currently unable to determine if the resolution of these matters will have an adverse effect on the Company's financial position, liquidity or results of operations.

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. The Company intends to oppose all the derivative plaintiffs' efforts to pursue this litigation on the Company's behalf. Defendants moved to stay or dismiss the Delaware derivative action on July 5, 2011. The motion to stay was heard by the court on October 27, 2011, and on January 27, 2012 the court granted the Company's motion and stayed the case indefinitely subject to plaintiff seeking to lift the stay under specified conditions. The Company is currently unable to determine if the resolution of these matters will have an adverse effect on the Company's financial position, liquidity or results of operations.

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.

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Note 9. EQUITY METHOD INVESTMENTS

The Company accounts for its equity interests in the below unconsolidated investees 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 September 30, 2012 and January 1, 2012, the Company's carrying value of its equity method investments totaled $107.3 million and $129.9 million, respectively, and is classified as “Other long-term assets” in its Condensed Consolidated Balance Sheets. The Company's share of the investees' results totaled earnings of $0.6 million and losses of $1.8 million in the three and nine months ended September 30, 2012, respectively, and earnings of $1.0 million and $7.9 million in the three and nine months ended October 2, 2011, respectively, which are included in “Equity in earnings (loss) of unconsolidated investees” in its Condensed Consolidated Statements of Operations.

The Company reviews its equity investments for events or other factors which may indicate an other-than-temporary decline in value. During the second quarter of fiscal 2012 the Company recorded a $6.9 million impairment charge to "Other, net" in the Condensed Consolidated Statement of Operations as it determined current market and operating conditions indicated an inability to recover the carrying amount of one of its investments.

Related Party Transactions with Equity Method Investees:
 
 
As of
(In thousands)
 
September 30, 2012
 
January 1, 2012
Accounts receivable
 
$
18,748

 
$
74,396

Accounts payable
 
35,995

 
109,700

 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Payments made to equity method investees for products/services
 
$
123,112

 
$
81,798

 
$
452,379

 
$
216,925


Equity Investment and Joint Venture with AUOSP

The Company, through its subsidiary SunPower Technology, Ltd. ("SPTL") formed the joint venture AUOSP with AUO and AU Optronics Corporation, the ultimate parent company of AUO ("AUO Taiwan") in the third quarter of fiscal 2010. 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, SPTL 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 SPTL), and manufacturing processes (in the case of AUO). Under the seven-year supply agreement with AUOSP, renewable by the Company for o