Document
Table of Contents


 
 
 
 
 
 

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 October 2, 2016
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


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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 November 4, 2016 was 138,418,112.

 
 
 
 
 
d


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Table of Contents



TABLE OF CONTENTS
 
 
Page
Part I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
Consolidated Statements of Operations
 
 
 
 
Consolidated Statements of Comprehensive Loss
 
 
 
 
Consolidated Statements of Equity
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II. OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 

2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SunPower Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
October 2, 2016
 
January 3, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
383,868

 
$
954,528

Restricted cash and cash equivalents, current portion
27,476

 
24,488

Accounts receivable, net1
223,836

 
190,448

Costs and estimated earnings in excess of billings1
25,399

 
38,685

Inventories
447,114

 
382,390

Advances to suppliers, current portion
72,968

 
85,012

Project assets - plants and land, current portion1
828,842

 
479,452

Prepaid expenses and other current assets1
336,683

 
359,517

Total current assets
2,346,186

 
2,514,520

 
 
 
 
Restricted cash and cash equivalents, net of current portion
51,615

 
41,748

Restricted long-term marketable securities
—

 
6,475

Property, plant and equipment, net
1,125,014

 
731,230

Solar power systems leased and to be leased, net
618,755

 
531,520

Project assets - plants and land, net of current portion
111,282

 
5,072

Advances to suppliers, net of current portion
241,126

 
274,085

Long-term financing receivables, net
471,334

 
334,791

Goodwill and other intangible assets, net
46,965

 
119,577

Other long-term assets1
84,393

 
297,975

Total assets
$
5,096,670

 
$
4,856,993

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable1
$
515,775

 
$
514,654

Accrued liabilities1
280,032

 
313,497

Billings in excess of costs and estimated earnings
99,465

 
115,739

Short-term debt
535,226

 
21,041

Customer advances, current portion1
12,669

 
33,671

Total current liabilities
1,443,167

 
998,602

 
 
 
 
Long-term debt
455,769

 
478,948

Convertible debt1
1,112,813

 
1,110,960

Customer advances, net of current portion1
296

 
126,183

Other long-term liabilities1
656,013

 
564,557

Total liabilities
3,668,058

 
3,279,250

Commitments and contingencies (Note 9)


 


Redeemable noncontrolling interests in subsidiaries
102,242

 
69,104

Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both October 2, 2016 and January 3, 2016
—

 
—

Common stock, $0.001 par value, 367,500,000 shares authorized; 147,839,311 shares issued, and 138,339,796 outstanding as of October 2, 2016; 145,242,705 shares issued, and 136,712,339 outstanding as of January 3, 2016
138


137

Additional paid-in capital
2,407,764

 
2,359,917

Accumulated deficit
(943,563
)
 
(747,617
)
Accumulated other comprehensive loss
(12,847
)
 
(8,023
)
Treasury stock, at cost; 9,499,515 shares of common stock as of October 2, 2016; 8,530,366 shares of common stock as of January 3, 2016
(176,219
)
 
(155,265
)
Total stockholders' equity
1,275,273

 
1,449,149

Noncontrolling interests in subsidiaries
51,097

 
59,490

Total equity
1,326,370

 
1,508,639

Total liabilities and equity
$
5,096,670

 
$
4,856,993

1 
The Company has related-party balances for transactions made with Total S.A. and its affiliates as well as unconsolidated entities in which the Company has a direct equity investment. These related-party balances are recorded within the "Accounts Receivable, net," "Costs and estimated earnings in excess of billings," "Project assets - plants and land, current portion," "Prepaid expenses and other current assets," "Other long-term assets," "Accounts payable," "Accrued Liabilities," and "Convertible debt, net of current portion," financial statement line items in the Consolidated Balance Sheets (see Note 2, Note 7, Note 10, Note 11, and Note 12).


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

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SunPower Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2, 2016

September 27, 2015
 
October 2, 2016
 
September 27, 2015

 
 
 
 
 
 
 
 
Revenue1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
$
673,538

 
$
330,401

 
$
1,358,249

 
$
1,062,166

Residential leasing
 
55,808

 
49,817

 
176,424

 
139,943


 
$
729,346

 
$
380,218

 
$
1,534,673

 
$
1,202,109

Cost of revenue1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
558,342

 
280,226

 
1,179,777

 
874,022

Residential leasing
 
41,796

 
37,348

 
132,857

 
103,744


 
600,138

 
317,574

 
1,312,634

 
977,766

Gross margin
 
129,208

 
62,644

 
222,039

 
224,343

Operating expenses:
 
 
 
 
 
 
 
 
Research and development1
 
28,153

 
24,973

 
92,270

 
66,701

Sales, general and administrative1
 
80,070

 
81,109

 
262,544

 
239,843

Restructuring charges
 
31,202

 
726

 
31,415

 
6,056

Total operating expenses
 
139,425

 
106,808

 
386,229

 
312,600

Operating loss
 
(10,217
)
 
(44,164
)
 
(164,190
)
 
(88,257
)
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
630

 
448

 
2,133

 
1,498

Interest expense1
 
(15,813
)
 
(8,796
)
 
(42,644
)
 
(32,994
)
Gain on settlement of preexisting relationships in connection with acquisition2
 
203,252

 
—

 
203,252

 
—

Loss on equity method investment in connection with acquisition2
 
(90,946
)
 
—

 
(90,946
)
 
—

Goodwill impairment
 
(147,365
)
 
—

 
(147,365
)
 
—

Other, net
 
(5,169
)
 
(3,601
)
 
(17,223
)
 
8,761

Other expense, net
 
(55,411
)
 
(11,949
)
 
(92,793
)
 
(22,735
)
Loss before income taxes and equity in earnings of unconsolidated investees
 
(65,628
)
 
(56,113
)
 
(256,983
)
 
(110,992
)
 Provision for income taxes
 
(7,049
)
 
(36,224
)
 
(16,878
)
 
(37,916
)
Equity in earnings of unconsolidated investees
 
16,770

 
5,052

 
24,356

 
9,107

Net loss
 
(55,907
)
 
(87,285
)
 
(249,505
)
 
(139,801
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
15,362

 
30,959

 
53,559

 
80,403

Net loss attributable to stockholders
 
$
(40,545
)
 
$
(56,326
)
 
$
(195,946
)
 
$
(59,398
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.29
)
 
$
(0.41
)
 
$
(1.42
)
 
$
(0.44
)
Diluted
 
$
(0.29
)
 
$
(0.41
)
 
$
(1.42
)
 
$
(0.44
)
Weighted-average shares:
 
 
 
 
 
 
 
 
Basic
 
138,209

 
136,473

 
137,832

 
134,294

Diluted
 
138,209

 
136,473

 
137,832

 
134,294

1 
The Company has related-party transactions with Total S.A. and its affiliates as well as unconsolidated entities in which the Company has a direct equity investment. These related-party transactions are recorded within "Revenue: Solar power systems and components," "Cost of revenue: Solar power systems and components," "Operating expenses: Research and development," "Operating expenses: Sales, general and administrative," and "Other income (expense), net: Interest expense" financial statement line items in the Consolidated Statements of Operations (see Note 2 and Note 10).

2 
See Note 3.

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

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Net loss
 
$
(55,907
)
 
$
(87,285
)
 
$
(249,505
)
 
$
(139,801
)
Components of comprehensive loss:
 
 
 
 
 
 
 
 
Translation adjustment
 
(272
)
 
(1,276
)
 
1,285

 
(3,037
)
Net change in derivatives (Note 12)
 
56

 
4,799

 
(6,825
)
 
5,607

Income taxes
 
(30
)
 
(936
)
 
716

 
(479
)
Net change in accumulated other comprehensive income (loss)
 
(246
)
 
2,587

 
(4,824
)
 
2,091

Total comprehensive loss
 
(56,153
)
 
(84,698
)
 
(254,329
)
 
(137,710
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
15,362

 
30,959

 
53,559

 
80,403

Comprehensive loss attributable to stockholders
 
$
(40,791
)
 
$
(53,739
)
 
$
(200,770
)
 
$
(57,307
)

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


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SunPower Corporation
Consolidated Statements of Equity
(In thousands)
(unaudited)

 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interests
 
Shares
 
Value
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
Balances at January 3, 2016
 
$
69,104

 
136,711

 
$
137

 
$
2,359,917

 
$
(155,265
)
 
$
(8,023
)
 
$
(747,617
)
 
$
1,449,149

 
$
59,490

 
$
1,508,639

Net loss
 
(56,282
)
 
—

 
—

 
—

 
—

 
—

 
(195,946
)
 
(195,946
)
 
2,723

 
(193,223
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(4,824
)
 
—

 
(4,824
)
 
—

 
(4,824
)
Issuance of restricted stock to employees, net of cancellations
 
—

 
2,596

 
2

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Stock-based compensation expense
 
—

 
—

 
—

 
45,397

 
—

 
—

 
—

 
45,397

 
—

 
45,397

Tax benefit from convertible debt interest deduction
 
—

 
—

 
—

 
1,228

 
—

 
—

 
—

 
1,228

 

 
1,228

Tax benefit from stock-based compensation
 
—

 
—

 
—

 
1,222

 
—

 
—

 
—

 
1,222

 
—

 
1,222

Contributions from noncontrolling interests
 
93,924

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,201
)
 
(2,201
)
Distributions to noncontrolling interests
 
(4,504
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,915
)
 
(8,915
)
Purchases of treasury stock
 
—

 
(969
)
 
(1
)
 
—

 
(20,954
)
 
—

 
—

 
(20,955
)
 
—

 
(20,955
)
Balances at October 2, 2016
 
$
102,242

 
138,338

 
$
138

 
$
2,407,764

 
$
(176,219
)
 
$
(12,847
)
 
$
(943,563
)
 
$
1,275,273

 
$
51,097

 
$
1,326,370


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

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SunPower Corporation
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
Nine Months Ended
 
 
October 2, 2016
 
September 27, 2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(249,505
)
 
$
(139,801
)
Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisitions:
 
 
 
 
Depreciation and amortization
 
122,842

 
97,369

Stock-based compensation
 
48,902

 
42,484

Non-cash interest expense
 
963

 
5,768

Non-cash restructuring charges
 
17,926

 
—

Gain on settlement of preexisting relationships in connection with acquisition
 
(203,252
)
 
—

Loss on equity method investment in connection with acquisition
 
90,946

 
—

Goodwill impairment
 
147,365

 
—

Equity in earnings of unconsolidated investees
 
(24,356
)
 
(9,107
)
Excess tax benefit from stock-based compensation
 
(1,222
)
 
(25,090
)
Deferred income taxes
 
2,059

 
25,748

Gain on sale of residential lease portfolio to 8point3 Energy Partners LP
 
—

 
(27,915
)
Other, net
 
3,805

 
1,940

Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
 
Accounts receivable
 
(36,563
)
 
292,102

Costs and estimated earnings in excess of billings
 
13,579

 
148,018

Inventories
 
(101,146
)
 
(187,153
)
Project assets
 
(434,645
)
 
(499,847
)
Prepaid expenses and other assets
 
70,025

 
12,640

Long-term financing receivables, net
 
(136,543
)
 
(108,418
)
Advances to suppliers
 
45,003

 
29,800

Accounts payable and other accrued liabilities
 
(144,202
)
 
(62,921
)
Billings in excess of costs and estimated earnings
 
(15,879
)
 
(3,968
)
Customer advances
 
(14,440
)
 
(21,009
)
Net cash used in operating activities
 
(798,338
)
 
(429,360
)
Cash flows from investing activities:
 
 
 
 
Increase in restricted cash and cash equivalents
 
(12,855
)
 
(27,659
)
Purchases of property, plant and equipment
 
(149,475
)
 
(132,352
)
Cash paid for solar power systems, leased and to be leased
 
(64,417
)
 
(64,419
)
Cash paid for solar power systems
 
(2,282
)
 
(10,007
)
Proceeds from sales or maturities of marketable securities
 
6,210

 
—

Proceeds from (payments to) 8point3 Energy Partners LP
 
(9,838
)
 
363,928

Cash paid for acquisitions, net of cash acquired
 
(24,003
)
 
(59,021
)
Cash paid for investments in unconsolidated investees
 
(11,046
)
 
(4,092
)
Cash paid for intangibles
 
—

 
(3,401
)
Net cash provided by (used in) investing activities
 
(267,706
)
 
62,977

Cash flows from financing activities:
 
 
 
 
Cash paid for repurchase of convertible debt
 
—

 
(324,352
)
Proceeds from settlement of 4.50% Bond Hedge
 
—

 
74,628

Payments to settle 4.50% Warrants
 
—

 
(574
)
Repayment of bank loans and other debt
 
(15,572
)
 
(15,857
)
Proceeds from issuance of non-recourse residential financing, net of issuance costs
 
142,862

 
82,664

Repayment of non-recourse residential financing
 
(36,707
)
 
(41,058
)
Contributions from noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
91,723

 
133,732

Distributions to noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
(13,419
)
 
(6,790
)
Proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs
 
602,286

 
229,066

Repayment of non-recourse power plant and commercial financing
 
(257,538
)
 
(226,578
)
Proceeds from 8point3 Energy Partners LP attributable to operating leases and unguaranteed sales-type lease residual values
 
—

 
29,300

Proceeds from exercise of stock options
 
—

 
467

Excess tax benefit from stock-based compensation
 
1,222

 
25,090

Purchases of stock for tax withholding obligations on vested restricted stock
 
(20,953
)
 
(42,407
)
Net cash provided by (used in) financing activities
 
493,904

 
(82,669
)
Effect of exchange rate changes on cash and cash equivalents
 
1,480

 
(4,242
)
Net decrease in cash and cash equivalents
 
(570,660
)
 
(453,294
)
Cash and cash equivalents, beginning of period
 
954,528

 
956,175

Cash and cash equivalents, end of period
 
$
383,868

 
$
502,881

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Assignment of residential lease receivables to third parties
 
$
3,722

 
$
2,742

Costs of solar power systems, leased and to be leased, sourced from existing inventory
 
$
43,983

 
$
47,295

Costs of solar power systems, leased and to be leased, funded by liabilities
 
$
6,226

 
$
8,229

Costs of solar power systems under sale-leaseback financing arrangements, sourced from project assets
 
$
7,375

 
$
6,076

Property, plant and equipment acquisitions funded by liabilities
 
$
85,994

 
$
43,083

Net reclassification of cash proceeds offset by project assets in connection with the deconsolidation of assets sold to the 8point3 Group
 
$
43,588

 
$
5,061

Exchange of receivables for an investment in an unconsolidated investee
 
$
2,890

 
$
—

Sale of residential lease portfolio in exchange for non-controlling equity interests in the 8point3 Group
 
$
—

 
$
68,273

Acquisition of intangible assets funded by liabilities
 
$
—

 
$
6,512

Acquisition funded by liabilities
 
$
100,550

 
$
—


The accompanying notes are an integral part of these 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 leading global energy company that delivers complete solar solutions to residential, commercial, and power plant customers worldwide through an array of hardware, software, and financing options and through utility-scale solar power system construction and development capabilities, operations and maintenance ("O&M") services, and "Smart Energy" solutions. SunPower's Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids—all personalized through easy-to-use customer interfaces. Of all the solar cells commercially available to the mass market, the Company believes its solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. SunPower Corporation is a majority owned subsidiary of Total Energies Nouvelles Activités USA ("Total"), a subsidiary of Total S.A. ("Total S.A.") (see Note 2).
    
The Company's President and Chief Executive Officer, as the chief operating decision maker ("CODM"), has organized the Company, manages resource allocations and measures performance of the Company's activities among three end-customer segments: (i) Residential Segment, (ii) Commercial Segment and (iii) Power Plant Segment. The Residential and Commercial Segments combined are referred to as Distributed Generation.

The Company’s Residential Segment refers to sales of solar energy solutions to residential end customers through a variety of means, including cash sales and long-term leases directly to end customers, sales to resellers, including the Company's third-party global dealer network, and sales of the Company's O&M services.  The Company’s Commercial Segment refers to sales of solar energy solutions to commercial and public entity end customers through a variety of means, including direct sales of turn-key engineering, procurement and construction ("EPC") services, sales to the Company's third-party global dealer network, sales of energy under power purchase agreements ("PPAs"), and sales of the Company's O&M services. The Power Plant Segment refers to the Company's large-scale solar products and systems business, which includes power plant project development and project sales, EPC services for power plant construction, power plant O&M services and component sales for power plants developed by third parties, sometimes on a multi-year, firm commitment basis. 

Basis of Presentation and Preparation
    
Principles of Consolidation

The 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 establishes in connection with certain project financing arrangements for customers are not designed to be available to service the general liabilities and obligations of the Company.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the Company's 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 has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. The current fiscal year, fiscal 2016, is a 52-week fiscal year, while fiscal year 2015 was a 53-week fiscal year and had a 14-week fourth fiscal quarter. The third quarter of fiscal 2016 ended on October 2, 2016, while the third quarter of fiscal 2015 ended on September 27, 2015. The third quarters of fiscal 2016 and fiscal 2015 were both 13-week quarters.

Management Estimates

The preparation of the 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 consolidated financial statements and accompanying notes. Significant estimates in these consolidated financial statements

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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 valuation assumptions including discount rates, future cash flows and economic useful lives of property, plant and equipment, goodwill, valuations for business combinations, other intangible assets, investments, and other long-term assets; the fair value and residual value of solar power systems; fair value of financial instruments; valuation of contingencies and certain accrued liabilities such as accrued warranty; and income taxes and tax valuation allowances and indemnities. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies

Long-Lived Assets

The Company evaluates its long-lived assets, including property, plant and equipment, solar power systems leased and to be leased, and other intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, and significant negative industry or economic trends. The Company's impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If the Company's estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, it records an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analysis.

Project Assets - Plant and Land

Project assets consist primarily of capitalized costs relating to solar power system projects in various stages of development that the Company incurs prior to the sale of the solar power system to a third-party. These costs include costs for land and costs for developing and constructing a solar power system. Development costs can include legal, consulting, permitting, and other similar costs. Once the Company enters into a definitive sales agreement, it reclassifies these project asset costs to deferred project costs within "Prepaid expenses and other current assets" in its Consolidated Balance Sheet until the Company has met the criteria to recognize the sale of the project asset or solar power project as revenue. The Company releases these project costs to cost of revenue as each respective project asset or solar power system is sold to a customer, since the project is constructed for a customer (matching the underlying revenue recognition method).

The Company evaluates the realizability of project assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers the project to be recoverable if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed or if costs incurred to date may be recovered via other means, such as a sale prior to the completion of the development cycle. The Company examines a number of factors to determine if the project will be profitable, including whether there are any environmental, ecological, permitting, or regulatory conditions that have changed for the project since the start of development. In addition, the company must anticipate market conditions, such as the future cost of energy and changes in the factors that its future customers use to value its project assets in sale arrangements, including the internal rate of return that customers expect. Changes in such conditions could cause the cost of the project to increase or the selling price of the project to decrease. Due to the development, construction, and sale timeframe of the Company's larger solar projects, it classifies project assets which are not expected to be sold within the next 12 months as "Project assets - plants and land, net of current portion" on the Consolidated Balance Sheets. Once specific milestones have been achieved, the Company determines if the sale of the project assets will occur within the next 12 months from a given balance sheet date and, if so, it then reclassifies the project assets as current.

Inventories

Inventories are valued at the lower of cost or market value. The Company evaluates the realizability of its inventories, including purchase commitments under fixed-price long-term supply agreements, based on assumptions about expected demand and market conditions. The Company’s assumption of expected demand is developed based on its analysis of bookings, sales backlog, sales pipeline, market forecast, and competitive intelligence. The Company’s assumption of expected demand is compared to available inventory, production capacity, future polysilicon purchase commitments, available third-party inventory, and growth plans. The Company’s factory production plans, which drive materials requirement planning, are established based on its assumptions of expected demand. The Company responds to reductions in expected demand by temporarily reducing manufacturing output and adjusting expected valuation assumptions as necessary. In addition, expected demand by geography has changed historically due to changes in the availability and size of government mandates and economic incentives.

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The Company evaluates the terms of its long-term inventory purchase agreements with suppliers, including joint ventures, for the procurement of polysilicon, ingots, wafers, and solar cells and establishes accruals for estimated losses on adverse purchase commitments as necessary, such as lower of cost or market value adjustments, forfeiture of advanced deposits and liquidated damages. 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 realized because quantities are less than management's expected demand for its solar power products over a period of years; however, if raw materials inventory balances temporarily exceed near-term demand, the Company may elect to sell such inventory to third parties to optimize working capital needs. Other market conditions that could affect the realizable value of the Company's inventories and are periodically evaluated by management include historical inventory turnover ratio, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, the current market price of polysilicon as compared to the price in the Company's fixed-price arrangements, and product merchantability, among other factors. If, based on assumptions about expected demand and market conditions, the Company determines that the cost of inventories exceeds its net realizable value or inventory is excess or obsolete, or the Company enters into arrangements with third parties for the sale of raw materials that do not allow it to recover its current contractually committed price for such raw materials, the Company records a write-down or accrual equal to the difference between the cost of inventories and the estimated net realizable value, which may be material. If actual market conditions are more favorable, the Company may have higher gross margin when products that have been previously written down are sold in the normal course of business.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued an update to the standards to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The new guidance is effective for the Company no later than the first quarter of fiscal 2018. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In June 2016, the FASB issued an update to the standards to amend the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The new guidance is effective for the Company no later than the first quarter of fiscal 2020. Early adoption is permitted beginning in the first quarter of fiscal 2019. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In March 2016, the FASB issued an update to the standards to simplify the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for the Company no later than the first quarter of fiscal 2017. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In February 2016, the FASB issued an update to the standards to require lessees to recognize a lease liability and a right-of-use asset for all leases (lease terms of more than 12 months) at the commencement date. The new guidance is effective for the Company no later than the first quarter of fiscal 2019 and requires a modified retrospective approach to adoption.  Early adoption is permitted.  The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In January 2016, the FASB issued an update to the standards to require equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The new guidance is effective for the Company no later than the first quarter of fiscal 2018 and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In July 2015, the FASB issued an update to the standards to simplify the measurement of inventory.  The updated standard more closely aligns the measurement of inventory with that of International Financial Reporting Standards (“IFRS”) and amends the measurement standard from lower of cost or market to lower of cost or net realizable value.  The new guidance is effective for the Company no later than the first quarter of fiscal 2017 and requires a prospective approach to adoption.  The Company elected early adoption of the updated accounting standard, effective in the second quarter of fiscal 2016. The

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adoption of this updated accounting standard did not result in a significant impact to the Company’s consolidated financial statements.

In April 2015, the FASB issued an update to the standards to provide a practical expedient for the measurement date of defined benefit obligation and plan assets for reporting entities with fiscal year-ends that do not coincide with a month-end. The updated standard allows such entities to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year and to all plans, if an entity has more than one plan. The Company elected early adoption of the updated accounting standard, effective in the fourth quarter of fiscal 2015, and measured its defined benefit plan assets and obligations as of December 31, 2015, the calendar month-end closest to the Company’s fiscal year-end. The adoption of this updated accounting standard did not have a significant impact to the Company’s consolidated financial statements.

In February 2015, the FASB issued a new standard that modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The Company adopted the new accounting standard, effective in the first quarter of fiscal 2016. Adoption of the new accounting standard did not have a material impact to the Company's consolidated financial statements.

In August 2014, the FASB issued an update to the standards to require management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued, and to provide related disclosures. The new guidance is effective for the Company no later than the fourth quarter of fiscal 2016. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In May 2014, the FASB issued a new revenue recognition standard based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  The FASB has issued several updates to the standard which i) clarify the application of the principal versus agent guidance; ii) clarify the guidance relating to performance obligations and licensing; and iii) clarify assessment of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transaction. The new revenue recognition standard, amended by the updates, becomes effective for the Company in the first quarter of fiscal 2018 and is to be applied retrospectively using one of two prescribed methods. Early adoption is permitted. The Company is currently evaluating and considering the possibility of early adoption of the new standard effective January 2, 2017. The Company's ability to early adopt, potentially using the modified retrospective method, is dependent on process, internal control and system readiness and a complete evaluation of all the disclosures required under the new standard. While the Company is continuing to assess all potential impacts of the standard, it currently believes the most significant accounting impact will likely relate to its projects that involve the sale of real estate. Under the new standard the Company is evaluating whether revenue and profit recognition on sales of projects involving real estate would be accelerated, and in certain cases significantly so, as compared to the accounting treatment under existing real estate accounting guidance. However, due to the complexity and various terms that exist within certain of the Company's contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms and may vary from contract to contract. The Company expects revenue related to residential leasing and sales of solar power systems and components not subject to existing real estate accounting guidance to remain substantially unchanged under the new standard.

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

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

In June 2011, Total completed a cash tender offer to acquire 60% of the Company's then outstanding shares of common stock at a price of $23.25 per share, for a total cost of approximately $1.4 billion. In December 2011, the Company entered into a Private Placement Agreement with Total, under which Total purchased, and the Company issued and sold, 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. As of October 2, 2016, through the increase of the Company's total outstanding common stock due to the exercise of warrants and issuance of restricted and performance stock units, Total's ownership of the Company's outstanding common stock has decreased to approximately 57%.

Amended and Restated Credit Support Agreement

In June 2016, the Company and Total S.A. entered into an Amended and Restated Credit Support Agreement (the "Credit Support Agreement") which amended and restated the Credit Support Agreement dated April 28, 2011 by and between the

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Company and Total S.A., as amended. Under the Credit Support Agreement, 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. At any time until December 31, 2018, Total S.A. will, at the Company's request, 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. Such letters of credit must be issued no later than December 31, 2018 and expire no later than March 31, 2020. Total is required to issue and enter into the Guaranty requested by the Company, subject to certain terms and conditions. In addition, Total will not be required to enter into the Guaranty if, after giving effect to the Company’s request for a Guaranty, the sum of (a) the aggregate amount available to be drawn under all guaranteed letter of credit facilities, (b) the amount of letters of credit available to be issued under any guaranteed facility, and (c) the aggregate amount of draws (including accrued but unpaid interest) on any letters of credit issued under any guaranteed facility that have not yet been reimbursed by the Company, would exceed $500 million in the aggregate. Such maximum amounts of credit support available to the Company can be reduced upon the occurrence of specified events.

In consideration for the commitments of Total S.A. pursuant to the Credit Support Agreement, the Company is required to pay Total S.A. a guaranty fee for each letter of credit that is the subject of a Guaranty under the Credit Support Agreement and was outstanding for all or part of the preceding calendar quarter. The Credit Support Agreement will terminate following December 31, 2018, after the later of the satisfaction of all obligations thereunder and the termination or expiration of each Guaranty provided thereunder.

Affiliation Agreement

The Company and Total have entered into an Affiliation Agreement that governs the relationship between Total and the Company (the "Affiliation Agreement"). Until the expiration of a standstill period specified in the Affiliation Agreement (the "Standstill Period"), and subject to certain exceptions, Total, Total S.A., any of their respective affiliates and certain other related parties (collectively 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 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 the 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.

The Affiliation Agreement also imposes certain restrictions with respect to the Company's and its 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.

Research & Collaboration Agreement

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, with a focus on advancing the Company's technology position in the crystalline silicon domain, as well as ensuring the Company's industrial competitiveness. The R&D Agreement enables a joint committee to identify, plan and manage the R&D Collaboration.

Upfront Warrant

In February 2012, the Company issued a warrant (the "Upfront Warrant") to Total S.A. 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. The Upfront Warrant, which is governed by the Private Placement Agreement and a Compensation and Funding Agreement, is exercisable at any time for seven years after its issuance, provided that, so long as at least $25.0 million in aggregate of the Company's convertible debt remains outstanding, such exercise will not cause any "person," including Total

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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 Exchange Act of 1934, as amended), of more than 74.99% of the voting power of the Company's common stock at such time, a circumstance which would trigger the repurchase or conversion of the Company's existing convertible debt.

0.75% Debentures Due 2018

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

0.875% Debentures Due 2021

In June 2014, the Company issued $400.0 million in principal amount of its 0.875% senior convertible debentures due 2021 (the "0.875% debentures due 2021"). An aggregate principal amount of $250.0 million of the 0.875% debentures due 2021 were acquired by Total. The 0.875% debentures due 2021 are convertible into shares of the Company's common stock at any time based on an initial conversion price equal to $48.76 per share, which provides Total the right to acquire up to 5,126,775 shares of the Company's common stock. The applicable conversion rate may adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 0.875% debentures due 2021.

4.00% Debentures Due 2023

In December 2015, the Company issued $425.0 million in principal amount of its 4.00% senior convertible debentures due 2023 (the "4.00% debentures due 2023"). An aggregate principal amount of $100.0 million of the 4.00% debentures due 2023 were acquired by Total. The 4.00% debentures due 2023 are convertible into shares of the Company's common stock at any time based on an initial conversion price equal to $30.53 per share, which provides Total the right to acquire up to 3,275,680 shares of the Company's common stock. The applicable conversion rate may adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 4.00% debentures due 2023.

Joint Projects with Total and its Affiliates:

The Company enters into various EPC and O&M agreements relating to solar projects, including EPC and O&M services agreements relating to projects owned or partially owned by Total and its affiliates. As of October 2, 2016, the Company had $5.7 million of "Costs and estimated earnings in excess of billings" and $0.8 million of "Accounts receivable, net" on its Consolidated Balance Sheets related to projects in which Total and its affiliates have a direct or indirect material interest.

During the third quarter of fiscal 2016, in connection with a co-development project between SunPower and Total, the Company made a $7.0 million payment to Total in exchange for Total's ownership interest in the co-development project.

Related-Party Transactions with Total and its Affiliates:

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Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Revenue:
 
 
 
 
 
 
 
 
EPC, O&M, and components revenue under joint projects
 
$
1,632

 
$
11,905

 
$
63,161

 
$
14,868

Research and development expense:
 
 
 
 
 
 
 
 
Offsetting contributions received under the R&D Agreement
 
$
(111
)
 
$
(360
)
 
$
(532
)
 
$
(1,177
)
Interest expense:
 
 
 
 
 
 
 
 
Guarantee fees incurred under the Credit Support Agreement
 
$
1,821

 
$
3,479

 
$
5,088

 
$
8,477

Interest expense incurred on the 0.75% debentures due 2018
 
$
375

 
$
375

 
$
1,125

 
$
1,125

Interest expense incurred on the 0.875% debentures due 2021
 
$
547

 
$
547

 
$
1,641

 
$
1,641

Interest expense incurred on the 4.00% debentures due 2023
 
$
1,000

 
n/a

 
$
3,000

 
n/a


Note 3. BUSINESS COMBINATIONS

AUOSP

On September 29, 2016, the Company completed the acquisition of AUO SunPower Sdn. Bhd. (“AUOSP”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) entered into between SunPower Technology, Ltd. (“SPTL”), a wholly-owned subsidiary of the Company, and AU Optronics Singapore Pte. Ltd. (“AUO”). AUOSP was a joint venture of SPTL and AUO for the purpose of manufacturing solar cells. Prior to the acquisition, SPTL and AUO each owned 50% of the shares of AUOSP. Pursuant to the Stock Purchase Agreement, SPTL purchased all of the shares of AUOSP held by AUO for a total purchase price of $170.1 million in cash, payable in installments as set forth in the Stock Purchase Agreement, to obtain 100% of the voting equity interest in AUOSP. As a result, AUOSP became a consolidated subsidiary of the Company and the results of operations of AUOSP have been included in the Consolidated Statement of Operations of the Company since September 29, 2016.

Simultaneously with the entry into the Stock Purchase Agreement, SunPower Systems Sarl (“SPSW”) and AU Optronics Corporation (“AUO Corp”), the ultimate parent of AUO, entered into a Module Supply Agreement whereby AUO Corp agreed to purchase on commercial terms 100MW of SunPower’s E-Series solar modules, with the purchase price having been prepaid in full by AUO Corp prior to the closing of the acquisition. As a result, the Company accounted for its purchase price consideration in accordance with the substance of the combined transactions, which resulted in consideration of $91.1 million in cash to be paid according to the following installment schedule: (i) $30.0 million in cash paid on the closing date; (ii) $1.1 million in cash to be paid on the second anniversary of the closing date; (iii) $30.0 million in cash to be paid on the third anniversary of the closing date; and (iv) $30.0 million in cash to be paid on the fourth anniversary of the closing date, as well as the 100MW of modules to be delivered during fiscal 2017 and 2018. The total purchase price consideration, including the estimated fair value of the modules and discounted to present value as of September 29, 2016, was $130.6 million.

Prior to the acquisition date, the Company accounted for its 50% interest in AUOSP as an equity method investment (see Note 10). The Company engaged a third-party valuation expert to assist in determining the fair value of AUOSP's assets, liabilities, and equity interests. The acquisition-date fair value of the previous equity interest, computed as the Company's 50% interest in the net asset value of AUOSP, as determined using the income approach and with assistance from the third-party valuation expert, was $120.5 million and is included in the measurement of the consideration transferred. The Company recognized a loss of $90.9 million as a result of remeasuring its prior equity interest in AUOSP held before the business combination. The loss is included in the "Other income (expense), net" section of the Consolidated Statements of Operations.

As a result of the acquisition, the Company obtained full control of a solar cell manufacturing facility, from which it expects to achieve significant synergies. Also in connection with the Stock Purchase Agreement and Module Supply Agreement, the Company, SPTL, SunPower Philippines Manufacturing Limited, a wholly owned subsidiary of the Company, and SPSW entered into an agreement (the “Settlement Agreement”) with AUO, AUO Corp, and AUOSP to settle all claims,

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demands, damages, actions, causes of action, or suits between them, including but not limited to the arbitration before the ICC International Court of Arbitration (see Note 9).

Prior to the acquisition, AUOSP sold its solar cells to both SPSW and AUO, with the significant majority of sales to SPSW. Sales to AUO, with the exception of the Module Supply agreement discussed above, ceased in connection with the acquisition. As the sales to SPSW would be intercompany transactions upon consolidation, and the sales to AUO are not continuing business, the Company determined that the pro-forma effects to the Company’s Statements of Operations of consolidating AUOSP from December 29, 2014 were not material.

Preexisting Relationships

Prior to the acquisition, the Company had several preexisting relationships with AUOSP. In connection with the original joint venture agreement, the Company and AUO had also entered into licensing and joint development, supply, and other ancillary transaction agreements. Through the Licensing and Technology Transfer Agreement, the Company and AUO licensed to AUOSP, on a non-exclusive, royalty-free basis, certain background intellectual property related to solar cell manufacturing (in the case of the Company) and manufacturing processes (in the case of AUO). Under the seven-year Supply Agreement with AUOSP, the Company was committed to purchase 80% of AUOSP's total annual output on cost-plus pricing terms, allocated on a monthly basis to the Company. The Company and AUO had the right to reallocate supplies from time to time under a written agreement. In fiscal 2010, the Company and AUOSP entered into an agreement under which the Company would resell to AUOSP, under contractually fixed terms for quantity and price, polysilicon purchased from a third-party supplier. Under the agreement, AUOSP would provide prepayments to the Company related to such polysilicon, which prepayment would then be made by the Company to the third-party supplier.

In connection with the transactions contemplated under the Stock Purchase Agreement, the Company (and certain of its affiliates), AUO (and certain of its affiliates), and AUOSP terminated certain agreements, including (a) the Joint Venture Agreement by and among SPTL, AUO, AUO Corp, and AUOSP, dated as of May 27, 2010 and as amended from time to time, (b) the Supply Agreement for solar cells by and among SPSW, AUO, and AUOSP, dated as of July 5, 2010, and (c) the License and Technology Transfer Agreement by and among SPTL, AUO, and AUOSP, dated as of July 5, 2010.

As a result of the acquisition and the settlement of the preexisting agreements, the Company recognized a net gain of $203.3 million, which was recognized separately from the business combination and is included in the "Other income (expense), net" section of the Consolidated Statements of Operations. The gain was comprised of three primary components: first, a $133.0 million gain related to the elimination of a customer advance liability without return of any proceeds by the Company that was previously recognized in the Company’s books associated with the prepayment by AUOSP under the polysilicon purchase contract with the Company. The fair value of this prepayment on AUOSP’s opening balance sheet was determined to be zero and accordingly the offsetting balance on the Company’s balance sheet was written off. Second, an $87.2 million gain associated with the termination of the polysilicon purchase contract between AUOSP and the Company, as the contract required AUOSP to purchase polysilicon at above-market prices. These amounts were partially offset by a $16.9 million loss associated with the termination of the cell supply contract, as the contract required the Company to purchase cells at above-market prices.

Purchase Price Allocation 

The Company accounted for this acquisition using the acquisition method. The Company preliminarily allocated the purchase price to the acquired assets and liabilities based on their estimated fair values at the acquisition date as summarized in the following table.

(In thousands)
 
 
Net tangible assets acquired
 
$
161,432

Goodwill
 
89,600

Total allocable consideration
 
$
251,032


The fair value of the net tangible assets acquired on September 29, 2016 is presented in the following table:

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(In thousands)
 
 
Cash and cash equivalents
 
$
5,997

Inventories
 
9,072

Prepaid expenses and other current assets:
 


Cell supply agreement*
 
16,928

Related party receivables*
 
22,875

Other receivables
 
23,956

Other prepaid expenses
 
2,711

Property, plant, and equipment
 
285,589

Other long-term assets
 
342

Total assets acquired
 
$
367,470

 
 
 
Accounts payable
 
$
41,186

Accrued liabilities:
 


Polysilicon supply agreement*
 
87,198

Related party payables*
 
14,333

Employee compensation and employee benefits
 
4,017

Other accrued liabilities
 
760

Short-term debt
 
58,248

Other long-term liabilities
 
296

Total liabilities assumed
 
$
206,038

 
 
 
Net assets acquired
 
$
161,432

*Amount eliminated upon consolidation with the Company.

Goodwill 

As noted above, $89.6 million had been allocated to goodwill within all three Segments during the quarter ended October 2, 2016 (see Note 4). Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and other intangible assets and is not deductible for tax purposes. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and other intangible assets was the acquisition of an assembled workforce, synergies in technologies, skill sets, operations, and organizational cultures. In connection with the Company’s overall goodwill impairment evaluation as discussed further in Note 4, this goodwill was subsequently impaired during the quarter ending October 2, 2016, and no further goodwill related to the acquisition remained on the Company’s Consolidated Balance Sheet as of October 2, 2016.

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)
 
Residential
 
Commercial
 
Power Plant
 
Total
As of January 3, 2016
 
$
32,180

 
$
10,314

 
$
15,641

 
$
58,135

Goodwill arising from business combinations
 
17,771

 
23,316

 
48,513

 
89,600

Goodwill impairment
 
(49,951
)
 
(33,260
)
 
(64,154
)
 
(147,365
)
Adjustments to goodwill
 
—

 
(370
)
 
—

 
(370
)
As of October 2, 2016
 
$
—

 
$
—

 
$
—

 
$
—



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Goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. If goodwill is determined more likely than not to be impaired upon an initial assessment of qualitative factors, a two-step valuation and accounting 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 first day of the fourth fiscal quarter of each year, or on an interim basis if circumstances warrant. Impairment of goodwill is tested at the Company's reporting unit level. Management determined that the Residential Segment, the Commercial Segment, and the Power Plant Segment are 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 fair values of the Company's reporting units are also compared to the Company's total external market capitalization to validate the appropriateness of its assumptions and such reporting unit values are adjusted, if appropriate. These assumptions also consider the current industry environment and outlook, and the resulting impact on the Company's expectations for the performance of its business.

Due to market circumstances that occurred during the third quarter of fiscal 2016, including a decline in the Company's stock price which resulted in the market capitalization of the Company being below its book value, the Company determined that an interim goodwill impairment evaluation was necessary. Based on the interim impairment test as of October 2, 2016, the Company determined that the carrying value of all reporting units exceeded their fair value. As a result, the Company performed a preliminary evaluation of the second step of the impairment analysis for the reporting units discussed above, which was not finalized at the time the financial statements were issued. The Company's preliminary 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 preliminarily calculated that the implied fair value of goodwill for all reporting units was zero and therefore preliminarily recorded a goodwill impairment loss of $147.4 million, representing all of the goodwill associated with these reporting units. The Company will finalize its analysis during the fourth quarter of fiscal 2016.

Other Intangible Assets

The following tables present details of the Company's acquired other intangible assets:
(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of October 2, 2016
 
 
 
 
 
 
Patents and purchased technology
 
$
48,619

 
$
(13,087
)
 
$
35,532

Project pipeline assets
 
9,446

 
(1,353
)
 
8,093

Purchased in-process research and development
 
3,700

 
(360
)
 
3,340

Other
 
500

 
(500
)
 
—

 
 
$
62,265

 
$
(15,300
)
 
$
46,965

 
 
 
 
 
 
 
As of January 3, 2016
 
 
 
 
 
 
Patents and purchased technology
 
$
53,499

 
$
(5,328
)
 
$
48,171

Project pipeline assets
 
9,446

 
—

 
9,446

Purchased in-process research and development
 
3,700

 
—

 
3,700

Other
 
500

 
(375
)
 
125

 
 
$
67,145

 
$
(5,703
)
 
$
61,442


During the three and nine months ended October 2, 2016, aggregate amortization expense for intangible assets totaled $3.0 million and $14.4 million, respectively. During the three and nine months ended September 27, 2015, aggregate amortization expense for intangible assets totaled $1.2 million and $2.3 million, respectively.


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As of October 2, 2016, the estimated future amortization expense related to intangible assets with finite useful lives is as follows:
(In thousands)
 
Amount
Fiscal Year
 
 
2016 (remaining three months)
 
$
6,658

2017
 
11,854

2018
 
12,014

2019
 
8,902

2020
 
6,317

 
 
$
45,745


Note 5. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross1,2
 
$
246,090

 
$
207,860

Less: allowance for doubtful accounts
 
(20,446
)
 
(15,505
)
Less: allowance for sales returns
 
(1,808
)
 
(1,907
)
 
 
$
223,836

 
$
190,448

1 
Includes short-term financing receivables associated with solar power systems leased of $17.8 million and $12.5 million as of October 2, 2016 and January 3, 2016, respectively (see Note 6).

2 
Includes short-term retainage of $12.7 million and $11.8 million as of October 2, 2016 and January 3, 2016, respectively. Retainage refers to the earned, but unbilled, portion of a construction and development project for which payment is deferred by the customer until certain contractual milestones are met.



As of
(In thousands)

October 2, 2016

January 3, 2016
Inventories:




Raw materials

$
143,373


$
124,297

Work-in-process

170,499


131,258

Finished goods

133,242


126,835

 

$
447,114


$
382,390


 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Prepaid expenses and other current assets:
 
 
 
 
Deferred project costs
 
$
84,602

 
$
67,479

VAT receivables, current portion
 
13,068

 
14,697

Deferred costs for solar power systems to be leased
 
34,469

 
40,988

Derivative financial instruments
 
2,875

 
8,734

Prepaid inventory
 
—

 
50,615

Other receivables
 
97,646

 
78,824

Prepaid taxes
 
68,997

 
71,529

Other prepaid expenses
 
34,954

 
26,651

Other current assets
 
72

 
—

 
 
$
336,683

 
$
359,517



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As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
921,357

 
$
479,108

Project assets — land
 
18,767

 
5,416

 
 
$
940,124

 
$
484,524

Project assets - plants and land, current portion
 
$
828,842

 
$
479,452

Project assets - plants and land, net of current portion
 
$
111,282

 
$
5,072


 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Property, plant and equipment, net:
 
 
 
 
Manufacturing equipment1
 
$
764,002

 
$
556,963

Land and buildings
 
127,725

 
32,090

Leasehold improvements
 
434,844

 
244,098

Solar power systems2
 
149,518

 
141,075

Computer equipment
 
183,417

 
103,443

Furniture and fixtures
 
12,463

 
10,640

Construction-in-process
 
62,667

 
247,511

 
 
1,734,636

 
1,335,820

Less: accumulated depreciation
 
(609,622
)
 
(604,590
)
 
 
$
1,125,014

 
$
731,230

1 
The Company's mortgage loan agreement with International Finance Corporation ("IFC") is collateralized by certain manufacturing equipment with a net book value of $60.8 million and $85.1 million as of October 2, 2016 and January 3, 2016, respectively.

2 
Includes $120.1 million and $110.4 million of solar power systems associated with sale-leaseback transactions under the financing method as of October 2, 2016 and January 3, 2016, respectively, which are depreciated using the straight-line method to their estimated residual values over the lease terms of up to 20 years (see Note 6).
 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Property, plant and equipment, net by geography1:
 
 
 
 
Philippines
 
$
524,707

 
$
460,420

Malaysia
 
285,589

 
—

United States
 
221,914

 
201,419

Mexico
 
70,648

 
44,164

Europe
 
21,084

 
22,962

Other
 
1,072

 
2,265

 
 
$
1,125,014

 
$
731,230

1 
Property, plant and equipment, net by geography is based on the physical location of the assets.

 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Other long-term assets:
 
 
 
 
Equity method investments1
 
$
(43,664
)
 
$
186,405

Cost method investments
 
48,472

 
36,369

Other
 
79,585

 
75,201

 
 
$
84,393

 
$
297,975

1 
Includes the carrying value of the Company's investment in the 8point3 Group, which had a negative value of $55.2 million and $30.9 million as of October 2, 2016 and January 3, 2016, respectively (see Note 10).

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As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Accrued liabilities:
 
 
 
 
Employee compensation and employee benefits
 
$
50,443

 
$
59,476

Deferred revenue
 
31,730

 
19,887

Short-term residential lease financing
 
23,453

 
7,395

Interest payable
 
11,991

 
8,165

Short-term warranty reserves
 
3,742

 
16,639

Restructuring reserve
 
6,199

 
1,823

VAT payables
 
5,161

 
4,225

Derivative financial instruments
 
8,803

 
2,316

Inventory payable
 
—

 
50,615

Liability due to 8point3 Energy Partners
 
—

 
9,952

Proceeds from 8point3 Energy Partners attributable to projects prior to Commercial Operation Date ("COD")
 
13,997

 
—

Contributions from noncontrolling interests attributable to projects prior to COD
 
2,409

 
—

Taxes payable
 
25,076

 
36,824

Liability due to AU Optronics
 
23,408

 
—

Other
 
73,620

 
96,180

 
 
$
280,032

 
$
313,497


 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Other long-term liabilities:
 
 
 
 

Deferred revenue
 
$
179,022

 
$
179,779

Long-term warranty reserves
 
156,312

 
147,488

Long-term sale-leaseback financing
 
138,864

 
125,286

Long-term residential lease financing with 8point3 Energy Partners
 
29,415

 
29,389

Unrecognized tax benefits
 
44,105

 
43,297

Long-term pension liability
 
14,222

 
12,014

Derivative financial instruments
 
1,780

 
1,033

Long-term liability due to AU Optronics
 
77,142

 
—

Other
 
15,151

 
26,271

 
 
$
656,013

 
$
564,557


 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Accumulated other comprehensive loss:
 
 
 
 

Cumulative translation adjustment
 
$
(9,879
)
 
$
(11,164
)
Net unrealized gain (loss) on derivatives
 
(883
)
 
5,942

Net loss on long-term pension liability adjustment
 
(2,055
)
 
(2,055
)
Deferred taxes
 
(30
)
 
(746
)
 
 
$
(12,847
)
 
$
(8,023
)

Note 6. LEASING

Residential Lease Program

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The Company offers a solar lease program, which provides U.S. residential customers with SunPower systems under 20-year lease agreements that include system maintenance and warranty coverage. Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines.

Operating Leases

The following table summarizes "Solar power systems leased and to be leased, net" under operating leases on the Company's Consolidated Balance Sheets as of October 2, 2016 and January 3, 2016:
 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Solar power systems leased and to be leased, net1,2:
 
 
 
 
Solar power systems leased
 
$
655,352

 
$
543,358

Solar power systems to be leased
 
28,002

 
34,319

 
 
683,354

 
577,677

Less: accumulated depreciation
 
(64,599
)
 
(46,157
)
 
 
$
618,755

 
$
531,520

1 
Solar power systems leased and to be leased, net are physically located exclusively in the United States.

2 
As of October 2, 2016 and January 3, 2016, the Company had pledged solar assets with an aggregate book value of $11.0 million and zero, respectively, to third-party investors as security for the Company's contractual obligations.

The following table presents the Company's minimum future rental receipts on operating leases placed in service as of October 2, 2016:
(In thousands)
 
Fiscal 2016 (remaining three months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Minimum future rentals on operating leases placed in service1
 
$
4,884

 
22,255

 
22,298

 
22,339

 
22,383

 
322,090

 
$
416,249

1 
Minimum future rentals on operating leases placed in service does not include contingent rentals that may be received from customers under agreements that include performance-based incentives nor does it include rent receivables on operating leases sold to the 8point3 Group.

Sales-Type Leases

As of October 2, 2016 and January 3, 2016, the Company's net investment in sales-type leases presented in "Accounts receivable, net" and "Long-term financing receivables, net" on the Company's Consolidated Balance Sheets was as follows:
 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Financing receivables1:
 
 
 
 
Minimum lease payments receivable2
 
$
520,245

 
$
366,759

Unguaranteed residual value
 
66,349

 
50,722

Unearned income
 
(97,499
)
 
(70,155
)
Net financing receivables
 
$
489,095

 
$
347,326

Current
 
$
17,761

 
$
12,535

Long-term
 
$
471,334

 
$
334,791

1 
As of October 2, 2016 and January 3, 2016, the Company had pledged financing receivables of $13.8 million and zero, respectively, to third-party investors as security for the Company's contractual obligations.

2 
Net of allowance for doubtful accounts.

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As of October 2, 2016, future maturities of net financing receivables for sales-type leases are as follows:
(In thousands)
 
Fiscal 2016 (remaining three months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Scheduled maturities of minimum lease payments receivable1
 
$
7,089

 
25,946

 
26,168

 
26,391

 
26,621

 
408,030

 
$
520,245

1 
Minimum future rentals on sales-type leases placed in service does not include contingent rentals that may be received from customers under agreements that include performance-based incentives.

Sale-Leaseback Arrangements

The Company enters into sale-leaseback arrangements under which solar power systems are sold to third parties and subsequently leased back by the Company over minimum lease terms of up to 25 years. Separately, the Company enters into PPAs with end customers, who host the leased solar power systems and buy the electricity directly from the Company under PPAs with terms of up to 25 years. At the end of the lease term, the Company has the option to purchase the systems at fair value or may be required to remove the systems and return them to the third parties.

The Company has classified its sale-leaseback arrangements of solar power systems not involving integral equipment as operating leases. The deferred profit on the sale of these systems is recognized over the term of the lease. As of October 2, 2016, future minimum lease obligations associated with these systems were $80.3 million, which will be recognized over the minimum lease terms. Future minimum payments to be received from customers under PPAs associated with the solar power systems under sale-leaseback arrangements classified as operating leases will be recognized over the lease terms of up to 20 years and are contingent upon the amounts of energy produced by the solar power systems.

The Company enters into certain sale-leaseback arrangements under which the systems subject to the sale-leaseback arrangements have been determined to be integral equipment as defined under the accounting guidance for such transactions. The Company has continuing involvement with the solar power systems throughout the lease due to purchase option rights in the arrangements. As a result of such continuing involvement, the Company accounts for each of these transactions as a financing. Under the financing method, the proceeds received from the sale of the solar power systems are recorded by the Company as financing liabilities. The financing liabilities are subsequently reduced by the Company's payments to lease back the solar power systems, less interest expense calculated based on the Company's incremental borrowing rate adjusted to the rate required to prevent negative amortization. The solar power systems under the sale-leaseback arrangements remain on the Company's balance sheet and are classified within "Property, plant and equipment, net" (see Note 5). As of October 2, 2016, future minimum lease obligations for the sale-leaseback arrangements accounted for under the financing method were $111.4 million, which will be recognized over the lease terms of up to 25 years. During the three and nine months ended October 2, 2016, the Company had net financing proceeds (repayments) of $(3.3) million and $12.4 million, respectively, in connection with these sale-leaseback arrangements. During the three and nine months ended September 27, 2015, the Company had net financing proceeds of zero and $15.0 million, respectively, in connection with these sale-leaseback arrangements. As of October 2, 2016 and January 3, 2016, the carrying amount of the sale-leaseback financing liabilities, presented in "Other long-term liabilities" on the Company's Consolidated Balance Sheets, was $138.9 million and $125.3 million, respectively (see Note 5).

Note 7. 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.


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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 any presented period. The Company did not have any assets or liabilities measured at fair value on a recurring basis requiring Level 3 inputs as of October 2, 2016 or January 3, 2016.

The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of October 2, 2016 and January 3, 2016:
 
 
October 2, 2016
 
January 3, 2016
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
3,002

 
$
3,002

 
$
—

 
$
540,000

 
$
540,000

 
$
—

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
 
2,875

 
—

 
2,875

 
8,734

 
—

 
8,734

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
 
356

 
—

 
356

 
—

 
—

 
—

Total assets
 
$
6,233

 
$
3,002

 
$
3,231

 
$
548,734

 
$
540,000


$
8,734

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
 
8,803

 
—

 
8,803

 
2,316

 
—

 
2,316

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
 
1,780

 
—

 
1,780

 
1,033

 
—

 
1,033

Total liabilities
 
$
10,583

 
$
—

 
$
10,583

 
$
3,349

 
$
—

 
$
3,349

1 
The Company's cash equivalents consist of money market fund instruments and commercial paper that are classified as available-for-sale and are highly liquid investments with original maturities of 90 days or less. The Company's money market fund instruments are categorized 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.

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

The Company measures certain investments and non-financial assets (including 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. As of October 2, 2016 and January 3, 2016, there were no such items recorded at fair value.

Held-to-Maturity Debt Securities

The Company's debt securities, classified as held-to-maturity, are Philippine government bonds that the Company maintains as collateral for business transactions within the Philippines. These bonds have various maturity dates and are classified as "Restricted long-term marketable securities" on the Company's Consolidated Balance Sheets. As of October 2, 2016 and January 3, 2016 these bonds had a carrying value of zero and $6.5 million, respectively. The Company records such held-to-maturity investments at amortized cost based on its ability and intent to hold the securities until maturity. The Company monitors for changes in circumstances and events that would affect its ability and intent to hold such securities until the recorded amortized costs are recovered. No other-than-temporary impairment loss was incurred during any presented period. The held-to-maturity debt securities were categorized in Level 2 of the fair value hierarchy.


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Table of Contents


Equity and Cost Method Investments

The Company holds equity investments in non-consolidated entities that are accounted for under both the equity and cost method. The Company monitors these investments, which are included in "Other long-term assets" in its 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 and Level 3 measurements such as the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices, and declines in the results of operations of the issuer.

As of October 2, 2016 and January 3, 2016, the Company had $(43.7) million and $186.4 million, respectively, in investments accounted for under the equity method (see Note 10). As of October 2, 2016 and January 3, 2016, the Company had $48.5 million and $36.4 million respectively, in investments accounted for under the cost method.

Note 8. RESTRUCTURING

August 2016 Restructuring Plan

On August 9, 2016, the Company adopted and began implementing initiatives to realign the Company’s downstream investments, optimize the Company’s supply chain and reduce operating expenses, in response to expected near-term challenges primarily relating to the Company’s Power Plant Segment. In connection with the realignment, which is expected to be completed by the end of fiscal 2017, the Company expects approximately 1,200 employees to be affected, primarily in the Philippines, representing approximately 15% of the Company’s global workforce. The Company expects to incur restructuring charges totaling approximately $30 million to $45 million, consisting primarily of severance benefits, asset impairments, lease and related termination costs, and other associated costs. The Company expects more than 50% of total charges to be cash. The actual timing and costs of the plan may differ from the Company’s current expectations and estimates due to a number of factors, including uncertainties related to required consultations with employee representatives as well as other local labor law requirements and mandatory processes in the relevant jurisdictions.

Legacy Restructuring Plans

During fiscal 2011, 2012 and 2014, the Company implemented approved restructuring plans, related to all segments, to align with changes in the global solar market which included the consolidation of the Company's Philippine manufacturing operations as well as actions to accelerate operating cost reduction and improve overall operating efficiency. These restructuring activities were substantially complete as of October 2, 2016; however, the Company expects to continue to incur costs as it finalizes previous estimates and actions in connection with these plans, primarily due to other costs, such as legal services.

The following table summarizes the restructuring charges recognized in the Company's Consolidated Statements of Operations:
 
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
Cumulative To Date
August 2016 Plan:
 
 
 
 
 
 
Non-cash impairment charges
 
$
17,926

 
$
—

 
$
17,926

Severance and benefits
 
12,624

 
—

 
12,624

Lease and related termination costs
 
557

 
—

 
557

Other costs1
 
$
85

 
$
—

 
85

 
 
$
31,192

 
$
—

 
$
31,192

Legacy Restructuring Plans:
 
 
 
 
 
 
Non-cash impairment charges
 
$
—

 
$
5

 
$
61,320

Severance and benefits
 
350

 
3,319

 
61,949

Lease and related termination costs
 
(214
)
 
—

 
6,770

Other costs1
 
87

 
2,732

 
13,624

 
 
$
223

 
$
6,056

 
$
143,663

Total restructuring charges
 
$
31,415

 
$
6,056

 
$
174,855


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1Other costs primarily represent associated legal services and costs of relocating employees.

The following table summarizes the restructuring reserve activity during the nine months ended October 2, 2016:
 
 
Nine Months Ended
(In thousands)
 
January 3, 2016
 
Charges (Benefits)
 
Payments
 
October 2, 2016
August 2016 Plan:
 
 
 
 
 
 
 
 
Non-cash impairment charges
 
$
—

 
$
17,926

 
$
—

 
$
—

Severance and benefits
 
—

 
12,624

 
(7,580
)
 
5,044

Lease and related termination costs
 
—

 
557

 
(3
)
 
554

Other costs1
 
—

 
85

 
(85
)
 
—

 
 
$
—

 
31,192

 
$
(7,668
)
 
5,598

Legacy Restructuring Plans:
 
 
 
 
 
 
 
 
Non-cash impairment charges
 
$
—

 
$
—

 
$
—

 
$
—

Severance and benefits
 
395

 
350

 
(426
)
 
319

Lease and related termination costs
 
743

 
(214
)
 
(361
)
 
168

Other costs1
 
685

 
87

 
(658
)
 
114

 
 
1,823

 
223

 
(1,445
)
 
601

Total restructuring liability
 
$
1,823

 
$
31,415

 
$
(9,113
)
 
$
6,199

1 
Other costs primarily represent associated legal services and costs of relocating employees.

Note 9. COMMITMENTS AND CONTINGENCIES

Facility and Equipment Lease Commitments

The Company leases certain facilities under non-cancellable operating leases from unaffiliated third parties. As of October 2, 2016, future minimum lease payments for facilities under operating leases were $43.1 million, to be paid over the remaining contractual terms of up to 8 years. The Company also leases certain buildings, machinery and equipment under non-cancellable capital leases. As of October 2, 2016, future minimum lease payments for assets under capital leases were $5.1 million, to be paid over the remaining contractual terms of up to 7 years.

Purchase Commitments
 
The Company purchases raw materials for inventory and manufacturing equipment from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based on specifications defined by the Company, or that establish parameters defining the Company's requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company's requirements based on its business needs before firm orders are placed. Consequently, not all of the Company's disclosed purchase commitments arising from these agreements are firm, non-cancellable, and unconditional commitments.

The Company also has agreements with several suppliers, including some of its non-consolidated investees, for the procurement of polysilicon, ingots, wafers, and Solar Renewable Energy Credits, among others, which specify future quantities and pricing of products to be supplied by the vendors for periods up to 8 years and provide for certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that the Company terminates the arrangements.

Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of October 2, 2016 are as follows:

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(In thousands)
 
Fiscal 2016 (remaining three months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total1
Future purchase obligations
 
$
493,549

 
355,511

 
200,348

 
175,694

 
161,847

 
3,000

 
$
1,389,949

1 
Total future purchase obligations were composed of $218.8 million related to non-cancellable purchase orders and $1.2 billion related to long-term supply agreements.

The Company expects that all obligations related to non-cancellable purchase orders for manufacturing equipment will be recovered through future cash flows of the solar cell manufacturing lines and solar panel assembly lines when such long-lived assets are placed in service. Factors considered important that could result in an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, and significant negative industry or economic trends. Obligations related to non-cancellable purchase orders for inventories match current and forecasted sales orders that will consume these ordered materials and actual consumption of these ordered materials are compared to expected demand regularly. The Company anticipates total obligations related to long-term supply agreements for inventories will be recovered because quantities are less than management's expected demand for its solar power products. The terms of the long-term supply agreements are reviewed by management and the Company assesses the need for any accruals for estimated losses on adverse purchase commitments, such as lower of cost or market value adjustments that will not be recovered by future sales prices, forfeiture of advanced deposits and liquidated damages, as necessary.

Advances to Suppliers

As noted above, the Company has entered into agreements with various vendors, some of which are structured as "take or pay" contracts, that specify future quantities and pricing of products to be supplied. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements. Under certain agreements, the Company was required to make prepayments to the vendors over the terms of the arrangements. As of October 2, 2016 and January 3, 2016, advances to suppliers totaled $314.1 million and $359.1 million, respectively, of which $73.0 million and $85.0 million, respectively, is classified as short-term in the Company's Consolidated Balance Sheets. Two suppliers accounted for 86% and 14% of total advances to suppliers, respectively, as of October 2, 2016, and 82% and 16%, respectively, as of January 3, 2016.

Advances from Customers

The Company has entered into other agreements with customers who have made advance payments for solar power products and systems. These advances will be applied as shipments of product occur or upon completion of certain project milestones. The estimated utilization of advances from customers as of October 2, 2016 is as follows:
(In thousands)
 
Fiscal 2016 (remaining three months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Estimated utilization of advances from customers
 
$
1,791

 
11,174

 
—

 
—

 
—

 
—

 
$
12,965


In fiscal 2010, the Company and its then joint venture, AUO SunPower Sdn. Bhd. ("AUOSP"), entered into an agreement under which the Company resold to AUOSP polysilicon purchased from a third-party supplier. In the third quarter of fiscal 2016, the Company terminated this agreement in connection with its acquisition and subsequent consolidation of AUOSP (See Note 3). Prior to the termination of the agreement, advance payments provided by AUOSP related to such polysilicon were then made by the Company to the third-party supplier. These advance payments were applied as a credit against AUOSP’s polysilicon purchases from the Company. Such polysilicon was used by AUOSP to manufacture solar cells that were sold to the Company on a "cost-plus" basis. The outstanding advance payments received from AUOSP are no longer included in the table above as the amounts are now eliminated as intercompany transactions in the purchase accounting for the acquisition and accordingly, as of October 2, 2016, the Company did not have a balance for advance payments received from AUOSP on its Consolidated Balance Sheets. As of January 3, 2016, advance payments received from AUOSP totaled $148.9 million, of which $22.7 million was classified as short-term in the Company's Consolidated Balance Sheets, based on projected product shipment dates.

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Product Warranties

The following table summarizes accrued warranty activity for the three and nine months ended October 2, 2016 and September 27, 2015, respectively:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Balance at the beginning of the period
 
$
164,784

 
$
156,531

 
$
164,127

 
$
154,648

Accruals for warranties issued during the period
 
(1,776
)
 
6,716

 
7,338

 
19,058

Settlements and adjustments during the period
 
(2,954
)
 
(1,608
)
 
(11,411
)
 
(12,067
)
Balance at the end of the period
 
$
160,054

 
$
161,639

 
$
160,054

 
$
161,639


Contingent Obligations

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

Future Financing Commitments

The Company is required to provide certain funding under agreements with unconsolidated investees, subject to certain conditions (see Note 10). As of October 2, 2016, the Company's financing obligations related to these agreements are as follows:
(In thousands)
 
Amount
Year
 
 
  2016 (remaining three months)
 
$
7,488

  2017
 
1,561

 
 
$
9,049


Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $44.1 million and $43.3 million as of October 2, 2016 and January 3, 2016, respectively. These amounts are included in "Other long-term liabilities" in the Company's Consolidated Balance Sheets in their respective periods as they are not expected to be paid within the next 12 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.

Indemnifications
 
The Company is a party to a variety of agreements under which it may be obligated to indemnify the counterparty with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights, and certain tax related matters including indemnification to customers under §48(c) solar commercial investment tax credit ("ITC") and U.S. Treasury Department ("Treasury Department") grant payments under Section 1603 of the American Recovery and Reinvestment Act (each a "Cash Grant"). In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company that is contemplated by and valid under the indemnification provisions of the particular contract, which provisions are typically contract-specific, as well as bringing the claim under the procedures specified in the particular contract. These

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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.

In certain circumstances, the Company has provided indemnification to customers and investors under which the Company is contractually obligated to compensate these parties for losses they may suffer as a result of reductions in benefits received under ITC and Treasury Cash Grant programs. The Company applies for ITC and Cash Grant incentives based on guidance provided by the Internal Revenue Service ("IRS") and the Treasury Department, which include assumptions regarding the fair value of the qualified solar power systems, among others.  Certain of the Company’s development agreements, sale-leaseback arrangements, and financing arrangements with tax equity investors, incorporate assumptions regarding the future level of incentives to be received, which in some instances may be claimed directly by the Company's customers and investors. Generally, such obligations would arise as a result of reductions to the value of the underlying solar power systems as assessed by the IRS. At each balance sheet date, the Company assesses and recognizes, when applicable, the potential exposure from these obligations based on all the information available at that time, including any audits undertaken by the IRS. The maximum potential future payments that the Company could have to make under this obligation would depend on the difference between the eligible basis claimed on the tax filing for the solar energy systems sold or transferred to indemnified parties and the values that the IRS may redetermine as the eligible basis for the systems for purposes of claiming ITCs or U.S. Treasury grants. The Company uses the eligible basis for tax filing purposes determined with the assistance of independent third-party appraisals to determine the ITCs that are passed-through to and claimed by the indemnified parties. Since the Company cannot determine future revisions to Treasury Department guidelines governing system values, how the IRS will evaluate system values used in claiming ITCs, or U.S. Treasury grants, or how its customers and investors have utilized or will utilize these benefits in their own filings, the Company is unable to reliably estimate the maximum potential future payments that it could have to make under the Company’s contractual investor obligation as of each reporting date.

Defined Benefit Pension Plans

The Company maintains defined benefit pension plans for the majority of its non-U.S. employees. Benefits under these plans are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. The funded status of the pension plans, which represents the difference between the benefit obligation and fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each fiscal year. The Company recognizes the overfunded or underfunded status of its pension plans as an asset or liability on its Consolidated Balance Sheets. As of October 2, 2016 and January 3, 2016, the underfunded status of the Company’s pension plans, presented in "Other long-term liabilities" on the Company’s Consolidated Balance Sheets, was $14.2 million and $12.0 million, respectively. The impact of transition assets and obligations and actuarial gains and losses are recorded in "Accumulated other comprehensive loss", and are generally amortized as a component of net periodic cost over the average remaining service period of participating employees. Total other comprehensive gain related to the Company’s benefit plans was zero for the three and nine months ended October 2, 2016.

Legal Matters

Tax Benefit Indemnification Litigation

On March 19, 2014, a lawsuit was filed by NRG Solar LLC, now known as NRG Renew LLC (“NRG”), against SunPower Corporation, Systems, a wholly-owned subsidiary of the Company (“SunPower Systems”), in the Superior Court of Contra Costa County, California.  The complaint asserts that, according to the indemnification provisions in the contract pertaining to SunPower Systems’ sale of a large California solar project to NRG, SunPower Systems owes NRG $75.0 million in connection with certain tax benefits associated with the project that were approved by the Treasury Department for an amount that was less than expected. The Company does not believe that the facts support NRG’s claim under the operative indemnification provisions and is vigorously contesting the claim.  Additionally, SunPower Systems filed a cross-complaint against NRG seeking damages in excess of $7.5 million for breach of contract and related claims arising from NRG’s failure to fulfill its obligations under the contract, including its obligation to take “reasonable, available steps” to engage the Treasury Department.  The Company is currently unable to determine if the resolution of this matter will have a material effect on the Company's consolidated financial statements. 

First Philec Arbitration

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On January 28, 2015, an arbitral tribunal of the International Court of Arbitration of the International Chamber of Commerce issued a first partial award in the matter of an arbitration between First Philippine Electric Corporation ("FPEC") and First Philippine Solar Corporation ("FPSC") against SunPower Philippines Manufacturing, Ltd. ("SPML"), our wholly-owned subsidiary. FPSC was a joint venture of FPEC and SPML for the purpose of slicing silicon wafers from ingots. The tribunal found SPML in breach of its obligations under its supply agreement with FPSC, and in breach of its joint venture agreement with FPEC. In its first partial award, the tribunal ordered that (i) SPML must purchase FPEC’s interests in FPSC for an aggregate of $30.3 million, and (ii) after completing the purchase of FPEC’s controlling interest in FPSC, SPML must pay FPSC damages in the amount of $25.2 million. The arbitral tribunal issued its second partial award dated July 14, 2015, which ordered that (i) the price payable by SPML to FPEC for its interests in FPSC be reduced from $30.3 million to $23.2 million, (ii) FPEC’s request for interest is refused, and (iii) the payment and transfer of shares between FPEC and SPML is to take place in accordance with the procedure agreed between the parties. The tribunal issued its final award dated September 30, 2015, which ordered that (i) each side should bear its own costs and attorneys' fees, and (ii) the arbitration costs should be split between the parties evenly.

SPML had filed a challenge to both the first and second partial awards, as well as the final award, with the High Court in Hong Kong. SPML had also filed applications to the Court in the Philippines to: (i) prevent FPSC or FPEC from enforcing the awards pending the outcome of the challenge in Hong Kong; and (ii) gain access to FPSC’s books and records. The application for access was granted, and the application to prevent enforcement of the award had not been ruled on as of the time the proceedings were discontinued as a result of the settlement described below.

On July 22, 2016, SPML entered into an agreement (the “Compromise Agreement”) with FPEC and FPSC to settle all claims, counterclaims, disputes, and proceedings between FPEC and FPSC on the one hand, and SPML on the other hand. All legal proceedings that are pending between the parties in Hong Kong and in the Philippines have been discontinued, terminated and dismissed. Pursuant to the terms of the Compromise Agreement, on July 22, 2016, SPML paid a total of $50.5 million to FPSC and FPEC in settlement of all claims between the parties. Also pursuant to the Compromise Agreement, SPML transferred all of its shares in FPSC to FPEC.

AUO Arbitration

On April 17, 2015, SunPower Technology Ltd. ("SPTL"), a wholly-owned subsidiary, commenced an arbitration before the ICC International Court of Arbitration against AUO and AU Optronics Corporation, the ultimate parent company of AUO ("AUO Corp.," and together with AUO, the “AUO Group”), for breaches of the AUOSP Joint Venture Agreement and associated agreements (the "JVA").  SPTL’s claim alleged that, among other things, the AUO Group had sold solar modules containing cells manufactured by AUOSP in violation of provisions in the JVA that set geographical restrictions on sales activities as well as provisions that restrict each party’s use of the other’s confidential information. SPTL sought approximately $23.0 million in damages, as well as the right to purchase AUO's shares in AUOSP at 70% of “fair market value” determined as provided under the JVA.

On June 23, 2015, the AUO Group filed and served its formal Memorial of Claim and Counterclaims against SPTL and the Company (collectively, the "SunPower Group").  In its counterclaim, the AUO Group alleged breach of contract, breach of covenant of good faith and fair dealing, several tort causes of action, and improper use of the AUO Group’s proprietary manufacturing expertise.  The AUO Group sought $20.0 million in lost profits and $48.0 million in disgorgement from the SunPower Group, and an order requiring SPTL to purchase AUO’s shares in AUOSP at 150% of “fair market value” determined as provided under the JVA.

On September 19, 2016, the SunPower Group entered into a full and final settlement agreement (the “Settlement Agreement”) with the AUO Group to settle all claims, demands, damages, actions, causes of action, or suits between them, including but not limited to the arbitration before the ICC International Court of Arbitration. Pursuant to the Settlement Agreement, SunPower acquired AUO's shares in AUOSP on September 29, 2016 in accordance with the Stock Purchase Agreement (see Note 3). No monetary amounts specifically related to the arbitration were exchanged between the parties as a result of the Settlement Agreement.

Class Action and Derivative Suits

On August 16, 2016 and August 26, 2016, two securities class action lawsuits were filed against the Company and certain of its officers and directors (the "Defendants") 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 February 17, 2016 through August 9, 2016 (the "Class Period"). The substantially identical complaints allege violations of Sections 10(b) and 20(a) of the Exchange Act,

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15 U.S.C. §§78j(b) and 78t(a) and SEC Rule 10b-5, 17 C.F.R. §240.10b-5. The complaints were filed following the issuance of the Company's August 9, 2016 earnings release and revised guidance and generally allege that throughout the Class Period, Defendants made materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects. On October 17, 2016, five motions to be appointed lead plaintiff were filed. The court has scheduled a hearing on the motions on December 8, 2016.

Three shareholder derivative actions have been filed in federal court, purporting to be brought on the Company's behalf against certain 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 Company is named as a nominal defendant. These derivative actions were filed on September 16, 2016, September 20, 2016, and October 17, 2016, respectively. The plaintiffs assert claims for alleged breaches of fiduciary duties, unjust enrichment, and waste of corporate assets for the period February 2016 through the present and generally allege that the defendants made or caused the Company to make materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects. The plaintiffs also claim that the alleged conduct is a breach of the Company's Code of Business Conduct and Ethics, and that defendants, including members of the Company's Audit Committee, breached their fiduciary duties by failing to ensure the adequacy of the Company's internal controls, and by causing or allowing the Company to disseminate false and misleading statements in the Company’s SEC filings and other disclosures. On October 27, 2016, two shareholder derivative actions purporting to be brought on the Company’s behalf were brought in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors based on the same events alleged in the securities class action and federal derivative lawsuits described above, and alleging breaches of fiduciary duties.

The two securities class action lawsuits and the federal derivative actions filed on September 16, 2016 and September 20, 2016 have all been related by the Court and assigned to one judge. The Company anticipates that the October 17, 2016 derivative action will also be deemed related to the other four actions. The Company is currently unable to determine if the resolution of these matters will have a material adverse effect on the Company's financial position, liquidity, or results of operations.

Other Litigation

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

Note 10. EQUITY METHOD INVESTMENTS

As of October 2, 2016 and January 3, 2016, the Company's carrying value of its equity method investments totaled $(43.7) million and $186.4 million, respectively, and is classified as "Other long-term assets" in its Consolidated Balance Sheets. These balances include the carrying value of the Company's investment in the 8point3 Group, which had a negative value of $55.2 million and $30.9 million as of October 2, 2016 and January 3, 2016, respectively (see below). The Company's share of its earnings (loss) from equity method investments is reflected as "Equity in earnings of unconsolidated investees" in its Consolidated Statements of Operations.

Equity Investment and Joint Venture with AUOSP

In fiscal 2010, the Company, AUO and AUO Corp. formed the joint venture AUOSP. On September 29, 2016, the Company completed its acquisition of AUOSP pursuant to the Stock Purchase agreement, under which the Company acquired 100% of the voting equity interest in AUOSP (see Note 3). Prior to the acquisition, the Company and AUO each owned 50% of the equity in AUOSP. AUOSP owns a solar cell manufacturing facility in Malaysia and manufactures solar cells and, prior to the acquisition, sold them on a "cost-plus" basis to the Company and AUO.

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

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would provide prepayments to the Company related to such polysilicon, which prepayment would then be made by the Company to the third-party supplier. In connection with the transactions contemplated under the Stock Purchase Agreement, the Company and AUOSP terminated certain agreements, including the agreements described in this paragraph (see Note 3).

Prior to the acquisition, the Company had concluded that it was not the primary beneficiary of AUOSP since, although the Company and AUO were both obligated to absorb losses or had the right to receive benefits, the Company alone did not have the power to direct the activities of AUOSP that most significantly impacted its economic performance. In making this determination, the Company considered the shared power arrangement, including equal board governance for significant decisions, elective appointment, and the fact that both parties contributed to the activities that most significantly impacted the joint venture's economic performance. Prior to the acquisition, the Company accounted for its investment in AUOSP using the equity method as a result of the shared power arrangement. As a result of the acquisition, AUOSP became a consolidated subsidiary of the Company and the results of operations of AUOSP have been included in the Consolidated Statement of Operations of the Company since September 29, 2016. Up until the acquisition date of September 29, 2016, the Company's maximum exposure to loss as a result of its equity investment in AUOSP was limited to the carrying value of the investment. As of October 2, 2016 and January 3, 2016, the Company's investment in AUOSP had a carrying value of zero and $202.3 million, respectively.

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

In December 2012, the Company entered into an agreement with Tianjin Zhonghuan Semiconductor Co. Ltd., Inner Mongolia Power Group Co. Ltd. and Hohhot Jinqiao City Development Company Co., Ltd. to form CCPV, a jointly owned entity to manufacture and deploy the Company's LCPV concentrator technology in Inner Mongolia and other regions in China. CCPV is based in Hohhot, Inner Mongolia. The establishment of the entity was subject to approval of the Chinese government, which was received in the fourth quarter of fiscal 2013. In December 2013, the Company made a $16.4 million equity investment in CCPV, for a 25% equity ownership.

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

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

In October 2012, the Company made a $3.0 million equity investment in Diamond Energy, an alternative energy project developer and clean electricity retailer headquartered in Melbourne, Australia, in exchange for a 25% equity ownership.

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

Equity Investment in 8point3 Energy Partners

In June 2015, 8point3 Energy Partners, a joint YieldCo vehicle formed by the Company and First Solar, Inc. ("First Solar" and, together with the Company, the "Sponsors") to own, operate and acquire solar energy generation assets, consummated its initial public offering ("IPO") and its Class A shares are now listed on the NASDAQ Global Select Market under the trading symbol “CAFD”.

Immediately after the IPO, the Company contributed a portfolio of solar generation assets (the "SPWR Projects") to 8point3 Operating Company, LLC ("OpCo"), 8point3 Energy Partners' primary operating subsidiary. In exchange for the SPWR Projects, the Company received cash proceeds of $371 million as well as equity interests in several 8point3 Energy Partners affiliated entities: primarily common and subordinated units representing a 40.7% stake in OpCo (since reduced to 36.5% via a secondary issuance of shares in fiscal 2016) and a 50.0% economic and management stake in 8point3 Holding Company, LLC (“Holdings”), the parent company of the general partner of 8point3 Energy Partners and the owner of incentive distribution rights (“IDRs”) in OpCo. Holdings, OpCo, 8point3 Energy Partners and their respective subsidiaries are referred to herein as the “8point3 Group.” Additionally, pursuant to a Right of First Offer Agreement between the Company and OpCo, the 8point3 Group has rights of first offer on interests in an additional portfolio of the Company’s solar energy projects that are currently contracted or are expected to be contracted before being sold by the Company to other parties (the “ROFO Projects”).

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In connection with the IPO, the Company also entered into O&M, asset management and management services agreements with the 8point3 Group. The services the Company provides under these agreements are priced consistently with market rates for such services and the agreements are terminable by the 8point3 Group for convenience.

The Company has concluded that it is not the primary beneficiary of the 8point3 Group or any of its individual subsidiaries since, although the Sponsors are both obligated to absorb losses or have the right to receive benefits, the Company alone does not have the power to direct the activities of the 8point3 Group that most significantly impact its economic performance. In making this determination the Company considered, among other factors, the equal division between the Sponsors of management rights in the 8point3 Group and the corresponding equal influence over its significant decisions, the role and influence of the independent directors on the board of directors of the general partner of 8point3 Energy Partners, and how both Sponsors contribute to the activities that most significantly impact the 8point3 Group's economic performance. The Company accounts for its investment in the 8point3 Group using the equity method because the Company determined that, notwithstanding the division of management and ownership interests between the Sponsors, the Company exercises significant influence over the operations of the 8point3 Group.

Future quarterly distributions from OpCo are subject to certain forbearance and subordination periods. During the forbearance period, the Sponsors have agreed to forego any distributions declared on their common and subordinated units. The forbearance period will end when, on or after March 1, 2016, the board of directors of the general partner of 8point3 Energy Partners, with the concurrence of its conflicts committee, determines that OpCo will be able to earn and pay at least the minimum quarterly distribution on each of its outstanding common and subordinated units for such quarter and the successive quarter. As of October 2, 2016, the forbearance period was no longer in effect and the OpCo units held by the Company were entitled to distributions beginning in the fourth fiscal quarter of 2016.

During the subordination period, holders of the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages in the payment of minimum distributions from prior quarters. Approximately 70% of the Company’s OpCo units are subject to subordination. The subordination period will end after OpCo has earned and paid minimum quarterly distributions for three years ending on or after August 31, 2018 and there are no outstanding arrearages on common units. Notwithstanding the foregoing, the subordination period could end after OpCo has earned and paid 150% of minimum quarterly distributions, plus the related distribution on the incentive distribution rights, for one year ending on or after August 31, 2016 and there are no outstanding arrearages on common units. At the end of the subordination period, all subordinated units will convert to common units on a one-for-one basis. The Company also, through its interests in Holdings, holds IDRs in OpCo, which represent rights to incremental distributions after certain distribution thresholds are met.

In June 2015, OpCo entered into a $525.0 million senior secured credit facility, consisting of a $300.0 million term loan facility, a $25.0 million delayed draw term loan facility, and a $200.0 million revolving credit facility (the “8point3 Credit Facility”). Proceeds from the term loan were used to make initial distributions to the Sponsors. The 8point3 Credit Facility is secured by a pledge of the Sponsors’ equity interests in OpCo.

Under relevant guidance for leasing transactions, the Company treated the portion of the sale of the residential lease portfolio originally sold to the 8point3 Group in connection with the IPO transaction, composed of operating leases and unguaranteed sales-type lease residual values, as a borrowing and reflected the cash proceeds attributable to this portion of the residential lease portfolio as liabilities recorded within “Accrued liabilities” and “Other long-term liabilities” in the Consolidated Balance Sheets (see Note 5). As of October 2, 2016 and January 3, 2016 the operating leases and the unguaranteed sales-type lease residual values which were sold to the 8point3 Group had an aggregate carrying value of $75 million and $78 million, respectively, on the Company's Consolidated Balance Sheets.

During fiscal 2016, the Company sold several ROFO Projects to 8point3 Energy Partners, including a noncontrolling interest in the 128 MW Henrietta utility-scale power plant in California (the "Henrietta Project") and controlling interests in the 60 MW Hooper utility-scale power plant in Colorado and several commercial projects. The Company accounted for these sales as partial sales of real estate and recognized revenue equal to total project costs when such projects reached their commercial operation date. No profit on these sales was recognized, as unconditional cash proceeds did not exceed total project costs, and such derecognition resulted in a net $43.6 million reduction in the carrying value of the Company’s investments in the 8point3 Group. Some of the commercial projects have not yet reached their commercial operation date and therefore, the Company continues to record these projects on its Consolidated Balance Sheet as of October 2, 2016. Please refer to the treatment outlined in "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 for further information related to the Company's accounting for transactions with the 8point3 Group. The net cash proceeds from the sales of these projects to the 8point3 Group as well as related proceeds from tax equity investors were classified as operating cash inflows in the Consolidated

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Statement of Cash Flows. In addition to the treatment above with respect to the transactions with the 8point3 Group, the sale of the controlling interest in the Henrietta project in the third quarter of fiscal 2016 was accounted for as a partial sale of real estate pursuant to which the Company recognized revenue equal to the sales value.

As of October 2, 2016 and January 3, 2016, the Company's investment in the 8point3 Group had a negative carrying value of $55.2 million and $30.9 million, respectively, resulting from the continued deferral of profit recognition for projects sold to the 8point3 Group that included the sale or lease of real estate.
 
Related-Party Transactions with Investees:
 
 
As of
(In thousands)
 
October 2, 2016
 
January 3, 2016
Accounts receivable
 
$
—

 
$
32,389

Other long-term assets
 
$
1,533

 
$
1,455

Accounts payable
 
$
—

 
$
42,080

Accrued liabilities
 
$
13,997

 
$
9,952

Customer advances
 
$
3,392

 
$
710

Other long-term liabilities
 
$
29,415

 
$
29,389

 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Payments made to investees for products/services
 
$
98,322

 
$
100,129

 
$
337,831

 
$
328,159

Revenues and fees received from investees for products/services1
 
$
139,485

 
$
9,162

 
$
271,534

 
$
35,964

1 
Includes a portion of proceeds received from tax equity investors in connection with 8point3 transactions.

Cost Method Investment in Tendril Networks, Inc.

In November 2014, the Company purchased $20.0 million of preferred stock constituting a minority stake in Tendril Networks, Inc. ("Tendril"), accounted for under the cost method because the preferred stock was deemed not to be in-substance common stock. In connection with the investment, the Company acquired warrants to purchase up to approximately 14 million shares of Tendril common stock exercisable through November 23, 2024. The number of shares of Tendril common stock that may be purchased pursuant to the warrants is subject to the Company's and Tendril's achievement of certain financial and operational milestones and other conditions.

In connection with the initial investment in Tendril, the Company also entered into commercial agreements with Tendril under a Master Services Agreement and related Statements of Work. Under these commercial agreements, Tendril will use up to $13.0 million of the Company's initial investment to develop, jointly with the Company, certain solar software solution products.


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Note 11. DEBT AND CREDIT SOURCES

The following table summarizes the Company's outstanding debt on its Consolidated Balance Sheets:
 
 
October 2, 2016
 
January 3, 2016
(In thousands)
 
Face Value
 
Short-term
 
Long-term
 
Total
 
Face Value
 
Short-term
 
Long-term
 
Total
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.00% debentures due 2023
 
$
425,000

 
$
—

 
$
417,162

 
$
417,162

 
$
425,000

 
$
—

 
$
416,369

 
$
416,369

0.875% debentures due 2021
 
400,000

 
—

 
396,914

 
396,914

 
400,000

 
—

 
396,424

 
396,424

0.75% debentures due 2018
 
300,000

 
—

 
298,737

 
298,737

 
300,000

 
—

 
298,167

 
298,167

IFC mortgage loan
 
17,500

 
14,993

 
2,040

 
17,033

 
32,500

 
14,994

 
16,778

 
31,772

CEDA loan
 
30,000

 
—

 
28,105

 
28,105

 
30,000

 
—

 
27,778

 
27,778

Non-recourse financing and other debt1
 
948,001

 
517,193

 
423,580

 
940,773

 
435,963

 
4,642

 
429,981

 
434,623

 
 
$
2,120,501

 
$
532,186

 
$
1,566,538

 
$
2,098,724

 
$
1,623,463

 
$
19,636

 
$
1,585,497

 
$
1,605,133

1 
Other debt excludes payments related to capital leases, which are disclosed in Note 9.

As of October 2, 2016, the aggregate future contractual maturities of the Company's outstanding debt, at face value, were as follows:
(In thousands)
 
Fiscal 2016 (remaining three months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Aggregate future maturities of outstanding debt
 
$
311,022

 
226,013

 
328,925

 
14,532

 
18,759

 
1,221,250

 
$
2,120,501


Convertible Debt

The following table summarizes the Company's outstanding convertible debt:
 
 
October 2, 2016
 
January 3, 2016
(In thousands)
 
Carrying Value
 
Face Value
 
Fair Value1
 
Carrying Value
 
Face Value
 
Fair Value1
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
4.00% debentures due 2023
 
$
417,162

 
$
425,000

 
$
324,037

 
$
416,369

 
$
425,000

 
$
515,903

0.875% debentures due 2021
 
396,914

 
400,000

 
300,600

 
396,424

 
400,000

 
340,500

0.75% debentures due 2018
 
298,737

 
300,000

 
273,384

 
298,167

 
300,000

 
396,792

 
 
$
1,112,813

 
$
1,125,000

 
$
898,021

 
$
1,110,960

 
$
1,125,000

 
$
1,253,195

1 
The fair value of the convertible debt was determined using Level 2 inputs based on quarterly market prices as reported by an independent pricing source.

The Company's outstanding convertible debentures are senior, unsecured obligations of the Company, ranking equally with all existing and future senior unsecured indebtedness of the Company.

4.00% Debentures Due 2023


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In December 2015, the Company issued $425.0 million in principal amount of its 4.00% debentures due 2023. Interest is payable semi-annually, beginning on July 15, 2016. Holders may exercise their right to convert the debentures at any time into shares of the Company's common stock at an initial conversion price approximately equal to $30.53 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 4.00% debentures due 2023 mature on January 15, 2023.

0.875% Debentures Due 2021

In June 2014, the Company issued $400.0 million in principal amount of its 0.875% debentures due 2021. Interest is payable semi-annually, beginning on December 1, 2014. Holders may exercise their right to convert the debentures at any time into shares of the Company's common stock at an initial conversion price approximately equal to $48.76 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 0.875% debentures due 2021 mature on June 1, 2021.

0.75% Debentures Due 2018

In May 2013, the Company issued $300.0 million in principal amount of its 0.75% debentures due 2018. Interest is payable semi-annually, beginning on December 1, 2013. Holders may exercise their right to convert the debentures at any time into shares of the Company's common stock at an initial conversion price approximately equal to $24.95 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 0.75% debentures due 2018 mature on June 1, 2018.

4.50% Debentures Due 2015

In 2010, the Company issued $250.0 million in principal amount of its 4.50% senior cash convertible debentures ("4.50% debentures due 2015"). Interest was payable semi-annually, beginning on September 15, 2010. The 4.50% debentures due 2015 were convertible only into cash, and not into shares of the Company's common stock (or any other securities) at a conversion price of $22.53 per share. The 4.50% debentures due 2015 matured on March 15, 2015. During March 2015, the Company paid holders an aggregate of $324.3 million in cash in connection with the settlement of the outstanding 4.50% debentures due 2015. No 4.50% debentures due 2015 remained outstanding after the maturity date.

The embedded cash conversion option was a derivative instrument (derivative liability) that was required to be separated from the 4.50% debentures due 2015. The fair value of the derivative liability is classified within "Other long-term liabilities" on the Company's Consolidated Balance Sheets. Changes in the fair value of the derivative liability were reported in the Company's Consolidated Statements of Operations until the 4.50% debentures due 2015 matured in March 2015.

During the three and nine months ended September 27, 2015, the Company recognized a non-cash loss of zero and $52.0 million, respectively, recorded in "Other, net" in the Company's Consolidated Statements of Operations to recognize the change in fair value prior to the expiration of the embedded cash conversion option.

Call Spread Overlay with Respect to 4.50% Debentures

Concurrently with the issuance of the 4.50% debentures due 2015, the Company entered into privately-negotiated convertible debenture hedge transactions (collectively, the "4.50% Bond Hedge") and warrant transactions (collectively, the "4.50% Warrants" and together with the 4.50% Bond Hedge, the “CSO2015” transactions), with certain of the initial purchasers of the 4.50% debentures due 2015 or their affiliates. The CSO2015 transactions represented a call spread overlay with respect to the 4.50% debentures due 2015, whereby the cost of the 4.50% Bond Hedge purchased by the Company to cover the cash outlay upon conversion of the debentures was reduced by the sales prices of the 4.50% Warrants. The transactions effectively reduced the Company's potential payout over the principal amount on the 4.50% debentures due 2015 upon conversion of the 4.50% debentures due 2015.

Under the terms of the 4.50% Bond Hedge, the Company bought options to acquire, at an exercise price of $22.53 per share, subject to customary adjustments for anti-dilution and other events, cash in an amount equal to the market value of up to 11.1 million shares of the Company's common stock.

Each 4.50% Bond Hedge was a separate transaction, entered into by the Company with each counterparty, and was not part of the terms of the 4.50% debentures due 2015. The 4.50% Bond Hedge, which was indexed to the Company's common stock, was a derivative instrument that required mark-to-market accounting treatment due to the cash settlement features until

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the 4.50% Bond Hedge settled in March 2015. During March 2015, the Company exercised its rights under the 4.50% Bond Hedge, resulting in a payment to the Company of $74.6 million.

During the three and nine months ended September 27, 2015, the Company recognized a non-cash gain of zero and $52.0 million, respectively, recorded in "Other, net" in the Company's Consolidated Statements of Operations related to recognize the change in fair value before settlement of the 4.50% Bond Hedge.

In connection with the 4.50% Warrants, the Company entered into warrant confirmations (collectively, and as amended from time to time, the “2015 Warrant Confirms”) with Deutsche Bank AG, London Branch, Bank of America, N.A., Barclays Bank PLC and Credit Suisse International providing for the acquisition, subject to anti-dilution adjustments, of up to approximately 11.1 million shares of the Company's common stock via net share settlement. Each 4.50% Warrant transaction was a separate transaction, entered into by the Company with each counterparty, and was not part of the terms of the 4.50% debentures due 2015.

During the second quarter of fiscal 2015, the Company entered into separate partial unwind agreements with each of Deutsche Bank AG, London Branch; Bank of America, N.A.; Barclays Bank PLC; and Credit Suisse International in order to reduce the number of warrants issued pursuant to the 2015 Warrant Confirms. Pursuant to the terms of these partial unwind agreements, the Company issued an aggregate of approximately 3.0 million shares of common stock to settle all of the warrants under the 2015 Warrant Confirms. Accordingly, as of October 2, 2016, no 4.50% Warrants remained outstanding.

Other Debt and Credit Sources

Mortgage Loan Agreement with IFC

In May 2010, the Company entered into a mortgage loan agreement with IFC. Under the loan agreement, the Company borrowed $75.0 million and is required to repay the amount borrowed starting two years after the date of borrowing, in 10 equal semi-annual installments. The Company is required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. The Company may prepay all or a part of the outstanding principal, subject to a 1% prepayment premium. The Company has pledged certain assets as collateral supporting its repayment obligations (see Note 5). As of both October 2, 2016 and January 3, 2016, the Company had restricted cash and cash equivalents of $9.2 million related to the IFC debt service reserve, which is the amount, as determined by IFC, equal to the aggregate principal and interest due on the next succeeding interest payment date.

Loan Agreement with California Enterprise Development Authority ("CEDA")

In 2010, the Company borrowed the proceeds of the $30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation - Headquarters Project) Series 2010 (the "Bonds") maturing April 1, 2031 under a loan agreement with CEDA. The Bonds mature on April 1, 2031, bear interest at a fixed rate of 8.50% through maturity, and include customary covenants and other restrictions on the Company.

Revolving Credit Facility with Credit Agricole

In July 2013, the Company entered into a revolving credit facility with Credit Agricole, as administrative agent, and certain financial institutions, under which the Company may borrow up to $250.0 million. On August 26, 2014, the Company entered into an amendment to the revolving credit facility that, among other things, extends the maturity date of the facility from July 3, 2016 to August 26, 2019 (the "Maturity Date"). Amounts borrowed may be repaid and reborrowed until the Maturity Date. On February 17, 2016, the Company entered into an amendment to the credit agreement, expanding the available borrowings under the revolving credit facility to $300.0 million and adding a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. The revolving credit facility includes representations, covenants, and events of default customary for financing transactions of this type.

The revolving credit facility was entered into in conjunction with the delivery by Total S.A. of a guarantee of the Company's obligations under the related facility. On January 31, 2014, as contemplated by the facility, (i) the Company's obligations under the facility became secured by a pledge of certain accounts receivable and inventory; (ii) certain of the Company's subsidiaries entered into guarantees of the facility; and (iii) Total S.A.'s guarantee of the Company's obligations under the facility expired.


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After January 31, 2014, the Company is required to pay interest on outstanding borrowings and fees of (a) with respect to any LIBOR rate loan, an amount ranging from 1.50% to 2.00% (depending on the Company's leverage ratio from time to time) plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; (b) with respect to any alternate base rate loan, an amount ranging from 0.50% to 1.00% (depending on the Company's leverage ratio from time to time) plus the greater of (1) the prime rate, (2) the Federal Funds rate plus 0.50%, and (3) the one-month LIBOR rate plus 1%; and (c) a commitment fee ranging from 0.25% to 0.35% (depending on the Company's leverage ratio from time to time) per annum on funds available for borrowing and not borrowed. The Company will be required to pay interest on letters of credit under the agreement of (a) with respect to any performance letter of credit, an amount ranging from 0.90% to 1.20% (depending on the Company’s leverage ratio from time to time); and (b) with respect to any other letter of credit, an amount ranging from 1.50% to 2.00% (depending on the Company’s leverage ratio from time to time).

As of October 2, 2016, the Company had $4.7 million of outstanding borrowings under the revolving credit facility, all of which were related to letters of credit. The Company had no outstanding borrowings under the revolving credit facility as of January 3, 2016.

August 2016 Letter of Credit Facility Agreement

In August 2016, the Company entered into a letter of credit facility with Banco Santander, S.A. which provides for the issuance, upon request by the Company, of letters of credit to support obligations of the Company in an aggregate amount not to exceed $85 million. As of October 2, 2016 and January 3, 2016, letters of credit issued and outstanding under the facility with Banco Santander, S.A. totaled $43.8 million and zero, respectively.

2016 Letter of Credit Facility Agreements

In June 2016, the Company entered into a Continuing Agreement for Standby Letters of Credit and Demand Guarantees with Deutsche Bank and Deutsche Bank Trust (the “2016 Non-Guaranteed LC Facility”) which provides for the issuance, upon request by the Company, of letters of credit to support the Company’s obligations in an aggregate amount not to exceed $50.0 million. The 2016 Non-Guaranteed LC Facility will terminate on June 29, 2018. As of October 2, 2016 and January 3, 2016, letters of credit issued and outstanding under the 2016 Non-Guaranteed LC Facility totaled $46.0 million and zero, respectively.

In June 2016, the Company entered into bilateral letter of credit facility agreements (the “2016 Guaranteed LC Facilities”) with The Bank of Tokyo-Mitsubishi UFJ, Credit Agricole, and HSBC. Each letter of credit facility agreement provides for the issuance, upon the Company’s request, of letters of credit by the issuing bank thereunder in order to support certain of the Company’s obligations until December 31, 2018. Payment of obligations under each of the letter of credit facilities are guaranteed by Total S.A. pursuant to the Credit Support Agreement. Aggregate letter of credit amounts may be increased upon the agreement of the respective parties but, otherwise, may not exceed $75.0 million with The Bank of Tokyo-Mitsubishi UFJ, $75.0 million with Credit Agricole and $175.0 million with HSBC. Each letter of credit issued under one of the letter of credit facilities generally must have an expiration date, subject to certain exceptions, no later than the earlier of (a) two years from completion of the applicable project and (b) March 31, 2020.

In June 2016, in connection with the 2016 Guaranteed LC Facilities, the Company entered into a transfer agreement to transfer to the 2016 Guaranteed LC Facilities all existing outstanding letters of credit issued under the Company’s letter of credit facility agreement with Deutsche Bank, as administrative agent, and certain financial institutions, entered into in August 2011 and amended from time to time. In connection with the transfer of the existing outstanding letters of credit, the aggregate commitment amount under the August 2011 letter of credit facility was permanently reduced to zero on June 29, 2016. As of October 2, 2016 and January 3, 2016, letters of credit issued and outstanding under the August 2011 letter of credit facility with Deutsche Bank totaled zero and $294.5 million, respectively. As of October 2, 2016 and January 3, 2016, letters of credit issued and outstanding under the 2016 Guaranteed LC Facilities totaled $250.6 million and zero, respectively.

September 2011 Letter of Credit Facility with Deutsche Bank and Deutsche Bank Trust Company Americas (together, "Deutsche Bank Trust")

In September 2011, the Company entered into a letter of credit facility with Deutsche Bank Trust which provides for the issuance, upon request by the Company, of letters of credit to support obligations of the Company in an aggregate amount not to exceed $200.0 million. Each letter of credit issued under the facility is fully cash-collateralized and the Company has entered into a security agreement with Deutsche Bank Trust, granting them a security interest in a cash collateral account established for this purpose.


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As of October 2, 2016 and January 3, 2016, letters of credit issued and outstanding under the Deutsche Bank Trust facility totaled $3.6 million and $8.6 million, respectively, which were fully collateralized with restricted cash on the Consolidated Balance Sheets.

Revolving Credit Facility with Mizuho and Goldman Sachs

On May 4, 2016, the Company entered into a revolving credit facility (the “Construction Revolver”) with Mizuho Bank Ltd., as administrative agent, and Goldman Sachs Bank USA, under which the Company may borrow up to $200 million.  The Construction Revolver also includes a $100 million accordion feature.  Amounts borrowed under the facility may be repaid and reborrowed in support of the Company’s commercial and small scale utility projects in the United States until the May 4, 2021 maturity date. The facility includes representations, covenants, and events of default customary for financing transactions of this type.

Borrowings under the Construction Revolver bear interest at the applicable LIBOR rate plus 1.50% for the first two years, with the final year at LIBOR plus 1.75%. All outstanding indebtedness under the facility may be voluntarily prepaid in whole or in part without premium or penalty (with certain limitations to partial repayments), other than customary breakage costs. The facility is secured by the assets of, and equity in, the various project companies to which the borrowings relate, but is otherwise non-recourse to the Company and its other affiliates.

As of October 2, 2016 and January 3, 2016, the aggregate carrying value of the Construction Revolver totaled $57.7 million and zero, respectively.

Non-recourse Financing and Other Debt

In order to facilitate the construction, sale or ongoing operation of certain solar projects, including the Company's residential leasing program, the Company regularly obtains project-level financing. These financings are secured either by the assets of the specific project being financed or by the Company's equity in the relevant project entity and the lenders do not have recourse to the general assets of the Company for repayment of such debt obligations, and hence the financings are referred to as non-recourse. Non-recourse financing is typically in the form of loans from third-party financial institutions, but also takes other forms, including "partnership flip" structures, sale-leaseback arrangements, or other forms commonly used in the solar or similar industries. The Company may seek non-recourse financing covering solely the construction period of the solar project or may also seek financing covering part or all of the operating life of the solar project. The Company classifies non-recourse financings in the Consolidated Balance Sheets in accordance with their terms; however, in certain circumstances, the Company may repay or refinance these financings prior to stated maturity dates in connection with the sale of the related project or similar such circumstances. In addition, in certain instances, the customer may assume the loans at the time that the project entity is sold to the customer. In these instances, subsequent debt assumption is reflected as a financing outflow and operating inflow in the Consolidated Statements of Cash Flows to reflect the substance of the assumption as a facilitation of customer financing from a third party.

The following presents a summary of the Company's non-recourse financing arrangements, including arrangements that are not classified as debt:

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Aggregate Carrying Value
 
 
(In thousands)
 
October 2, 2016
 
January 3, 2016
 
Balance Sheet Classification
Residential Lease Program
 
 
 
 
 
 
Bridge loans
 
$
4,450

 
$
—

 
Long-term debt
Long-term loans
 
254,775

 
171,752

 
Short-term debt and Long-term debt
Financing arrangements with third parties
 
52,868

 
36,784

 
Accrued liabilities and Other long-term liabilities
Tax equity partnership flip facilities
 
153,339

 
128,594

 
Redeemable non-controlling interests in subsidiaries and non-controlling interests in subsidiaries
 
 
 
 
 
 
 
Power Plant and Commercial Projects
 
 
 
 
 
 
Stanford and Turlock credit facility
 
$
201,563

 
$
—

 
Short-term debt and Long-term debt
Henrietta credit facility
 
—

 
216,691

 
Short-term debt and Long-term debt
Boulder I credit facility
 
154,309

 
—

 
Short-term debt and Long-term debt
Rio Bravo credit facility
 
112,586

 
—

 
Short-term debt
Wildwood credit facility
 
41,588

 
—

 
Short-term debt
El Pelicano credit facility
 
47,026

 
—

 
Long-term debt
Hooper credit facility
 
—

 
37,269

 
Short-term debt and Long-term debt
Construction Revolver
 
57,662

 
—

 
Short-term debt and Long-term debt
Arizona loan
 
7,820

 
8,113

 
Short-term debt and Long-term debt

For the Company’s residential lease program, non-recourse financing is typically accomplished by aggregating an agreed-upon volume of solar power systems and leases with residential customers into a specific project entity. The Company has entered into the following non-recourse financings with respect to its residential lease program:

In fiscal 2016, the Company entered into bridge loans to finance solar power systems and leases under its residential lease program. The loans are repaid over terms ranging from two to seven years. Some loans may be prepaid without penalties at the Company's option at any time, while other loans may be prepaid, subject to a prepayment fee, after one year. During the three and nine months ended October 2, 2016, the Company had net proceeds (repayments) of $(30.6) million and $3.5 million, respectively, in connection with these loans. As of October 2, 2016, the aggregate carrying amount of these loans, presented in "Long-term debt" on the Company's Consolidated Balance Sheets, was $4.5 million.

The Company enters into long-term loans to finance solar power systems and leases under its residential lease program. The loans are repaid over their terms of between 17 and 18 years, and may be prepaid without penalty at the Company’s option beginning seven years after the original issuance of the loan. During the three and nine months ended October 2, 2016, the Company had net proceeds of $80.8 million and $82.9 million, respectively, in connection with these loans. During the three and nine months ended September 27, 2015, the Company had net proceeds of $25.4 million and $79.4 million, respectively, in connection with these loans. As of October 2, 2016, and January 3, 2016, the aggregate carrying amount of these loans, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $254.8 million and $171.8 million, respectively.

The Company has entered into multiple arrangements under which solar power systems are financed by third-party investors or customers, including by a legal sale of the underlying asset that is accounted for as a borrowing under relevant accounting guidelines as the requirements to recognize the transfer of the asset were not met. Under the terms of these arrangements, the third parties make an upfront payment to the Company, which the Company recognizes as a liability that will be reduced over the term of the arrangement as lease receivables and government incentives are received by the third party. As the liability is reduced, the Company makes a corresponding reduction in receivables. During the three and nine months ended October 2, 2016, the Company had net proceeds of $4.9 million and $19.8 million, respectively, in connection with these facilities. During the three and nine months ended September 27, 2015, the Company had net proceeds (repayments) of $2.2 million and $(37.8) million, respectively. As of October 2, 2016, and January 3, 2016, the aggregate carrying amount of these facilities, presented in "Accrued liabilities" and "Other long-term liabilities" on the Company's Consolidated Balance Sheets, was $52.9 million and $36.8 million, respectively (see Note 5).


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The Company also enters into facilities with third-party tax equity investors under which the investors invest in a structure known as a partnership flip. The Company holds controlling interests in these less-than-wholly-owned entities and therefore fully consolidates these entities. The Company accounts for the portion of net assets in the consolidated entities attributable to the investors as noncontrolling interests in its consolidated financial statements. Noncontrolling interests in subsidiaries that are redeemable at the option of the noncontrolling interest holder are classified accordingly as redeemable, between liabilities and equity on the Company's Consolidated Balance Sheets. During the three and nine months ended October 2, 2016, the Company had net contributions of $28.0 million and $78.3 million, respectively, under these facilities and attributed losses of $18.7 million and $55.6 million, respectively, to the non-controlling interests corresponding principally to certain assets, including tax credits, that were allocated to the non-controlling interests during the periods. During the three and nine months ended September 27, 2015, the Company had net contributions of $39.6 million and $126.9 million, respectively, under these facilities and attributed losses of $31.1 million and $80.9 million, respectively, to the non-controlling interests corresponding principally to certain assets, including tax credits, that were allocated to the non-controlling interests during the periods. As of October 2, 2016 and January 3, 2016, the aggregate carrying amount of these facilities, presented in “Redeemable non-controlling interests in subsidiaries” and “Non-controlling interests in subsidiaries” on the Company’s Consolidated Balance Sheets, was $153.3 million and $128.6 million, respectively.

For the Company’s power plant and commercial solar projects, non-recourse financing is typically accomplished using an individual solar power system or a series of solar power systems with a common end customer, in each case owned by a specific project entity. The Company has entered into the following non-recourse financings with respect to its power plant and commercial projects:

In fiscal 2016, the Company entered into the Construction Revolver credit facility to support the construction of the Company’s commercial and small scale utility projects in the United States. During the three and nine months ended October 2, 2016, we had net proceeds of $44.9 million and $57.2 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of the Construction Revolver, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $57.7 million.

In fiscal 2016, the Company entered into a long-term credit facility to finance the 125 MW utility-scale Boulder power plant project in Nevada. During the three and nine months ended October 2, 2016, the Company had net proceeds of $36.5 million and $147.4 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $154.3 million.

In fiscal 2016, the Company entered into a short-term credit facility to finance the utility-scale Rio Bravo power plant projects in California, with an aggregate size of approximately 50 MW. During the three and nine months ended October 2, 2016, the Company had net proceeds of $32.5 million and $109.8 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" on the Company's Consolidated Balance Sheets, was $112.6 million.

In fiscal 2016, the Company entered into a short-term credit facility to finance the 20 MW utility-scale Wildwood power plant project in California. During the three and nine months ended October 2, 2016, the Company had net proceeds of $13.5 million and $38.5 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" on the Company's Consolidated Balance Sheets, was $41.6 million.

In fiscal 2016, the Company entered into a long-term credit facility to finance several related utility-scale power plant projects in California, including the Stanford and Turlock projects, with an aggregate size of approximately 350 MW. During the three and nine months ended October 2, 2016, the Company had net proceeds of zero and $192.2 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $201.6 million.

In fiscal 2016, the Company entered into a long-term credit facility to finance the 111 MW utility-scale El Pelicano power plant project in Chile. During both the three and nine months ended October 2, 2016, the Company had net proceeds of $41.4 million in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Long-term debt" on the Company's Consolidated Balance Sheets, was $47.0 million.

In fiscal 2015, the Company entered into a long-term credit facility to finance the 128 MW utility-scale Henrietta power plant in California. During the three months ended October 2, 2016, in connection with the sale of the project, the Company repaid the full amount outstanding, and as a result, during both the three and nine months ended October 2, 2016, the Company had net repayments of $216.7 million in connection with the facility. As of January 3, 2016, the aggregate carrying amount of

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this loan, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $216.7 million.

In fiscal 2015, the Company entered into a long-term credit facility to finance the 60 MW Hooper utility-scale power plant in Colorado. In the first quarter of fiscal 2016, the Company repaid the full amount outstanding. During the nine months ended October 2, 2016, the Company had net repayments of $37.3 million, in connection with the facility. As of January 3, 2016, the carrying amount of this facility, presented in "Long-term debt" on the Company's Consolidated Balance Sheets, was $37.3 million.

In fiscal 2013, the Company entered into a long-term loan agreement to finance a 5.4 MW utility and power plant operating in Arizona. As of both October 2, 2016, and January 3, 2016, the aggregate carrying amount under this loan, presented in "Short-term debt" and "Long-term debt" on the Company's Consolidated Balance Sheets, was $7.8 million.

Other debt is further composed of non-recourse project loans in EMEA, which are scheduled to mature through 2028.

See Note 6 for discussion of the Company’s sale-leaseback arrangements accounted for under the financing method.

Note 12. DERIVATIVE FINANCIAL INSTRUMENTS

The following tables present information about the Company's hedge instruments measured at fair value on a recurring basis as of October 2, 2016 and January 3, 2016, all of which utilize Level 2 inputs under the fair value hierarchy:

(In thousands)
 
Balance Sheet Classification
 
October 2, 2016
 
January 3, 2016
Assets:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 Prepaid expenses and other current assets
 
$
425

 
$
—

Foreign currency forward exchange contracts
 
 Prepaid expenses and other current assets
 
4

 
—

Foreign currency option contracts
 
Other long-term assets
 
356

 
—

 
 
 
 
$
785

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 Prepaid expenses and other current assets
 
$
46

 
$
—

Foreign currency forward exchange contracts
 
 Prepaid expenses and other current assets
 
2,400

 
8,734

 
 
 
 
$
2,446

 
$
8,734

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
Accrued liabilities
 
$
880

 
$
—

Foreign currency forward exchange contracts
 
Accrued liabilities
 
—

 
141

Foreign currency option contracts
 
Other long-term liabilities
 
535

 
—

Interest rate contracts
 
Other long-term liabilities
 
792

 
583

 
 
 
 
$
2,207

 
$
724

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
Accrued liabilities
 
$
120

 
$
—

Foreign currency forward exchange contracts
 
Accrued liabilities
 
7,803

 
2,175

Interest rate contracts
 
Other long-term liabilities
 
453

 
450

 
 
 
 
$
8,376

 
$
2,625


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October 2, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Rights to Offset
 
 
(In thousands)
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral
 
Net Amounts
Derivative assets
 
$
3,231

 
$
—

 
$
3,231

 
$
3,231

 
$
—

 
$
—

Derivative liabilities
 
$
10,583

 
$
—

 
$
10,583

 
$
3,231

 
$
—

 
$
7,352


 
 
January 3, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Rights to Offset
 
 
(In thousands)
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral
 
Net Amounts
Derivative assets
 
$
8,734

 
$
—

 
$
8,734

 
$
2,316

 
$
—

 
$
6,418

Derivative liabilities
 
$
3,349

 
$
—

 
$
3,349

 
$
2,316

 
$
—

 
$
1,033


The following table summarizes the pre-tax amount of unrealized gain or loss recognized in "Accumulated other comprehensive income" ("OCI") in "Stockholders' equity" in the Consolidated Balance Sheets:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) in OCI at the beginning of the period
 
$
(939
)
 
$
(635
)
 
$
5,942

 
$
(1,443
)
Unrealized gain (loss) recognized in OCI (effective portion)
 
(39
)
 
4,704

 
(50
)
 
9,339

Less: Loss (gain) reclassified from OCI to revenue (effective portion)
 
95

 
95

 
(6,775
)
 
(3,732
)
Net change in derivatives
 
$
56

 
$
4,799

 
$
(6,825
)
 
$
5,607

Gain (loss) in OCI at the end of the period
 
$
(883
)
 
$
4,164

 
$
(883
)
 
$
4,164


The following table summarizes the amount of gain or loss recognized in "Other, net" in the Consolidated Statements of Operations in the three and nine months ended October 2, 2016, and September 27, 2015:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Loss recognized in "Other, net" on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
$
(117
)
 
$
(666
)
 
$
(1,788
)
 
$
(1,289
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Gain (loss) recognized in "Other, net"
 
$
(6,090
)
 
$
(39
)
 
$
(17,799
)
 
$
1,112



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Foreign Currency Exchange Risk

Designated Derivatives Hedging Cash Flow Exposure

The Company's cash flow exposure primarily relates to anticipated third-party foreign currency revenues and expenses and interest rate fluctuations. To protect financial performance, the Company enters into foreign currency forward and option contracts designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than their functional currencies.
 
As of October 2, 2016, the Company had designated outstanding cash flow hedge option contracts and forward contracts with an aggregate notional value of $53.3 million, and $7.0 million, respectively. As of January 3, 2016, the Company had designated outstanding cash flow hedge forward contracts with an aggregate notional value of $23.6 million. The Company designates either gross external or intercompany revenue up to its net economic exposure. These derivatives have a maturity of 12 months or less and consist of foreign currency option and forward contracts. The effective portion of these cash flow hedges is reclassified into revenue when third-party revenue is recognized in the Consolidated Statements of Operations.

Non-Designated Derivatives Hedging Transaction Exposure

Derivatives not designated as hedging instruments consist of forward and option contracts used to hedge re-measurement of foreign currency denominated monetary assets and liabilities primarily for intercompany transactions, receivables from customers, and payables to third parties. Changes in exchange rates between the Company's subsidiaries' functional currencies and the currencies in which these assets and liabilities are denominated can create fluctuations in the Company's reported consolidated financial position, results of operations and cash flows. As of October 2, 2016, to hedge balance sheet exposure, the Company held options contracts and forward contracts with an aggregate notional value of $23.5 million and $55.3 million, respectively. The maturity dates of these contracts range from October 2016 to January 2017. As of January 3, 2016, to hedge balance sheet exposure, the Company held forward contracts with an aggregate notional value of $12.1 million. The maturity dates of these contracts ranged from December 2015 to April 2016.

Interest Rate Risk

The Company also enters into interest rate swap agreements to reduce the impact of changes in interest rates on its project specific non-recourse floating rate debt. As of both October 2, 2016 and January 3, 2016, the Company had interest rate swap agreements designated as cash flow hedges with an aggregate notional value of $7.8 million and interest rate swap agreements not designated as cash flow hedges with an aggregate notional value of $64.3 million. These swap agreements allow the Company to effectively convert floating-rate payments into fixed rate payments periodically over the life of the agreements. These derivatives have a maturity of more than 12 months. The effective portion of these swap agreements designated as cash flow hedges is reclassified into interest expense when the hedged transactions are recognized in the Consolidated Statements of Operations. The Company analyzes its designated interest rate swaps quarterly to determine if the hedge transaction remains effective or ineffective. The Company may discontinue hedge accounting for interest rate swaps prospectively if certain criteria are no longer met, the interest rate swap is terminated or exercised, or if the Company elects to remove the cash flow hedge designation. If hedge accounting is discontinued, and the forecasted hedged transaction is considered possible to occur, the previously recognized gain or loss on the interest rate swaps will remain in accumulated other comprehensive loss and will be reclassified into earnings during the same period the forecasted hedged transaction affects earnings or is otherwise deemed improbable to occur. All changes in the fair value of non-designated interest rate swap agreements are recognized immediately in current period earnings.

Credit Risk

The Company's option and forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counterparties to these option and forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any single counterparty. In addition, the Company continuously evaluates the credit standing of its counterparties.
 
Note 13. INCOME TAXES

In the three and nine months ended October 2, 2016, the Company's income tax provision of $7.0 million and $16.9 million on a loss before income taxes and equity in earnings of unconsolidated investees of $65.6 million and $257.0 million, respectively, was primarily due to projected tax expense in profitable jurisdictions, the recognition of U.S. prepaid income tax

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due to intercompany transactions, settlement of certain foreign audits, and provision-to-return adjustments in U.S. and foreign jurisdictions. In the three and nine months ended September 27, 2015, the Company's income tax provision of $36.2 million and income tax provision of $37.9 million, respectively, on a loss before income taxes and equity in earnings of unconsolidated investees of $56.1 million and $111.0 million, respectively, was primarily due to projected tax expense resulting from forecasted taxable income for fiscal 2015, primarily driven by transactions with the 8point3 Group, the geographic mix of jurisdictions with profit before tax, book to tax differences, and accruals of unrecognized tax benefits in the current period, partially offset by the utilization of net operating loss and credit carryforwards. For the reporting period ended October 2, 2016, in accordance with FASB guidance for interim reporting of income tax, the Company has computed its provision for income taxes based on a projected annual effective tax rate while excluding loss jurisdictions which cannot be benefitted.

Note 14. NET INCOME (LOSS) PER SHARE
 
The Company calculates net income (loss) per share by dividing earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted weighted average shares is computed using basic weighted average shares plus any potentially dilutive securities outstanding during the period using the treasury-stock-type method and the if-converted method, except when their effect is anti-dilutive. Potentially dilutive securities include stock options, restricted stock units, the Upfront Warrants held by Total, warrants associated with the CSO2015, and the outstanding senior convertible debentures.


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The following table presents the calculation of basic and diluted net income (loss) per share:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
(40,545
)
 
$
(56,326
)
 
$
(195,946
)
 
$
(59,398
)
Denominator
 
 
 
 
 
 
 
 
Basic weighted-average common shares
 
138,209

 
136,473

 
137,832

 
134,294

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
(0.29
)
 
$
(0.41
)
 
$
(1.42
)
 
$
(0.44
)
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
(40,545
)
 
$
(56,326
)
 
$
(195,946
)
 
$
(59,398
)
Add: Interest expense incurred on the 4.00% debentures due 2023, net of tax
 
—

 
n/a

 
—

 
n/a

Add: Interest expense incurred on the 0.75% debentures due 2018, net of tax
 
—

 
—

 
—

 
—

Add: Interest expense incurred on the 0.875% debentures due 2021, net of tax
 
—

 
—

 
—

 
—

Net income (loss) available to common stockholders
 
$
(40,545
)
 
$
(56,326
)
 
$
(195,946
)
 
$
(59,398
)
Denominator
 
 
 
 
 
 
 
 
Basic weighted-average common shares
 
138,209

 
136,473

 
137,832

 
134,294

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
—

 
—

 
—

 
—

Restricted stock units
 
—

 
—

 
—

 
—

Upfront Warrants (held by Total)
 
—

 

 
—

 
—

Warrants (under the CSO2015)
 
n/a

 
—

 
n/a

 
—

4.00% debentures due 2023
 
—

 
n/a

 
—

 
n/a

0.75% debentures due 2018
 
—

 
—

 
—

 
—

0.875% debentures due 2021
 
—

 
—

 
—

 
—

Dilutive weighted-average common shares
 
138,209

 
136,473

 
137,832

 
134,294

 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share
 
$
(0.29
)
 
$
(0.41
)
 
$
(1.42
)
 
$
(0.44
)

The Upfront Warrants allow Total to acquire up to 9,531,677 shares of the Company's common stock at an exercise price of $7.8685. The warrants under the CSO2015, when such warrants were still outstanding, entitled holders to acquire up to 11.1 million shares of the Company's common stock at an exercise price of $24.00. During the second quarter of fiscal 2015, the Company entered into unwind agreements pursuant to which the Company issued common stock to settle all of the outstanding warrants relating to the CSO2015 (refer to "Note 12. Debt and Credit Sources" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016).

Holders of the Company's 4.00% debentures due 2023, 0.875% debentures due 2021, and 0.75% debentures due 2018 can convert the debentures into shares of the Company's common stock, at the applicable conversion rate, at any time on or before maturity. These debentures are included in the calculation of diluted net income per share if they were outstanding during the period presented and if their inclusion is dilutive under the if-converted method.

Holders of the Company's 4.50% debentures due 2015 could, under certain circumstances at their option and before maturity, convert the debentures into cash, and not into shares of the Company's common stock (or any other securities).

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Therefore, the 4.50% debentures due 2015 are excluded from the net income per share calculation. In March 2015, the 4.50% debentures due 2015 matured and were settled in cash (refer to "Note 12. Debt and Credit Sources" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016).

The following is a summary of outstanding anti-dilutive potential common stock that was excluded from income (loss) per diluted share in the following periods:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 20161
 
September 27, 20151
 
October 2, 20161
 
September 27, 20151
Stock options
 
141

 
168

 
141

 
168

Restricted stock units
 
5,384

 
3,718

 
5,384

 
3,718

Upfront Warrants (held by Total)
 
3,179

 
6,531

 
4,962

 
6,880

Warrants (under the CSO2015)
 
n/a

 
n/a

 
n/a

 
1,218

4.00% debentures due 2023
 
13,922

 
n/a

 
13,922

 
n/a

0.75% debentures due 2018
 
12,026

 
12,026

 
12,026

 
12,026

0.875% debentures due 2021
 
8,203

 
8,203

 
8,203

 
8,203


1 
As a result of the net loss per share for the three and nine months ended October 2, 2016 and the three and nine months ended September 27, 2015, the inclusion of all potentially dilutive stock options, restricted stock units, and common shares under noted warrants and convertible debt would be anti-dilutive. Therefore, those stock options, restricted stock units and shares were excluded from the computation of the weighted-average shares for diluted net loss per share for such periods.

Note 15. STOCK-BASED COMPENSATION

The following table summarizes the consolidated stock-based compensation expense by line item in the Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Cost of Residential revenue
 
$
2,083

 
$
1,541

 
$
4,562

 
$
3,675

Cost of Commercial revenue
 
1,744

 
917

 
3,141

 
1,836

Cost of Power Plant revenue
 
2,202

 
1,752

 
7,914

 
4,525

Research and development
 
2,936

 
2,172

 
8,934

 
6,825

Sales, general and administrative
 
6,942

 
8,516

 
24,351

 
25,623

Total stock-based compensation expense
 
$
15,907

 
$
14,898

 
$
48,902

 
$
42,484


The following table summarizes the consolidated stock-based compensation expense by type of award:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Restricted stock units
 
$
14,011

 
$
14,517

 
$
47,178

 
$
43,906

Change in stock-based compensation capitalized in inventory
 
1,896

 
381

 
1,724

 
(1,422
)
Total stock-based compensation expense
 
$
15,907

 
$
14,898

 
$
48,902

 
$
42,484


Note 16. SEGMENT AND GEOGRAPHICAL INFORMATION

The Company's President and Chief Executive Officer, as the CODM, has organized the Company, manages resource allocations and measures performance of the Company's activities among three end-customer segments: (i) Residential Segment, (ii) Commercial Segment and (iii) Power Plant Segment (see Note 1). The Residential and Commercial Segments combined are referred to as Distributed Generation.

The CODM assesses the performance of the three end-customer segments using information about their revenue, gross margin, and adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") after certain adjustments, described below in further detail. Additionally, for purposes of calculating Adjusted EBITDA, the calculation includes equity in earnings of unconsolidated investees and net loss attributable to noncontrolling interests and redeemable noncontrolling interests and excludes cash interest expense, net of interest income, and depreciation. The CODM does not review asset information by segment.

Adjustments Made for Segment Purposes

8point3 Energy Partners

The Company includes adjustments related to the sales of projects contributed to 8point3 based on the difference between the fair market value of the consideration received and the net carrying value of the projects contributed, of which, a portion is deferred in proportion to the Company’s retained equity interest in 8point3. Under U.S. GAAP (“GAAP”), these sales are recognized under either real estate, lease, or consolidation accounting guidance depending upon the nature of the individual asset contributed, with outcomes ranging from no, partial, or full profit recognition.

Utility and power plant projects

The Company includes adjustments related to the revenue recognition of certain utility and power plant projects based on percentage-of-completion accounting and, when relevant, the allocation of segment revenue and margin to the Company’s project development efforts at the time of initial project sale. Under GAAP, such projects are accounted for under real estate accounting guidance, under which no separate allocation to the Company’s project development efforts occurs and the amount of revenue and margin that is recognized may be limited in circumstances where the Company has certain forms of continuing involvement in the project. Over the life of each project, cumulative revenue and gross margin will eventually be equivalent under both the GAAP and segment treatments; however, revenue and gross margin will generally be recognized earlier under the Company’s segment treatment. Within each project, the relationship between the adjustments to revenue and gross margins is generally consistent. However, as the Company may have multiple utility and power plant projects in differing stages of progress at any given time, the relationship in the aggregate will occasionally appear otherwise.

Sale of operating lease assets

The Company includes adjustments related to the revenue recognition on the sale of certain solar assets subject to an operating lease (or of solar assets that are leased by or intended to be leased by the third-party purchaser to another party) based on the net proceeds received from the purchaser. Under GAAP, these sales are accounted for as borrowing transactions in accordance with lease accounting guidance. Under such guidance, revenue and profit recognition is based on rental payments made by the end lessee, and the net proceeds from the purchaser are recorded as a non-recourse borrowing liability, with imputed interest expense recorded on the liability. This treatment continues until the Company has transferred the substantial risks of ownership, as defined by lease accounting guidance, to the purchaser, at which point the sale is recognized.

Sale-leaseback transactions

The Company includes adjustments related to the revenue recognition on certain sale-leaseback transactions based on the net proceeds received from the buyer-lessor. Under GAAP, these transactions are accounted for under the financing method in accordance with real estate accounting guidance. Under such guidance, no revenue or profit is recognized at the inception of the transaction, and the net proceeds from the buyer-lessor are recorded as a financing liability. Imputed interest is recorded on the liability equal to the Company’s incremental borrowing rate adjusted solely to prevent negative amortization.

Stock-based compensation

The Company incurs stock-based compensation expense related primarily to the Company’s equity incentive awards. The Company excludes this expense from its segment results.

Amortization of intangible assets

The Company incurs amortization expense on intangible assets as a result of acquisitions, which includes patents, project assets, purchased technology, in-process research and development and trade names. The Company excludes this expense from its segment results.

Non-cash interest expense

The Company incurs non-cash interest expense related to the amortization of items such as original issuance discounts on certain of its convertible debt. The Company excludes this expense from its segment results.

Restructuring expense

The Company incurs restructuring expense related to reorganization plans aimed towards realigning resources consistent with the Company's global strategy and improving its overall operating efficiency and cost structure. The Company excludes this expense from its segment results.

Goodwill Impairment

In the third quarter of fiscal 2016, the Company performed an interim goodwill impairment evaluation due to market circumstances at the time, including a decline in the Company's stock price which resulted in the market capitalization of the Company being below its book value. The Company's preliminary calculation determined that the implied fair value of goodwill for all reporting units was zero and therefore recorded a goodwill impairment loss of $147.4 million, which includes $89.6 million of goodwill recognized in the third quarter of 2016 in connection with the Company's acquisition of the remaining 50% of AUOSP (see Notes 3 and 4). The Company excludes from its segment results the impairment of goodwill arising from business combinations prior to the acquisition of AUOSP. No adjustment was made for the impairment of the goodwill arising from the acquisition of AUOSP.

Arbitration ruling

On January 28, 2015, an arbitral tribunal of the International Court of Arbitration of the International Chamber of Commerce declared a binding partial award in the matter of an arbitration between First Philippine Electric Corporation (“FPEC”) and First Philippine Solar Corporation (“FPSC”) against SunPower Philippines Manufacturing, Ltd. (“SPML”), the Company’s wholly-owned subsidiary. The tribunal found SPML in breach of its obligations under its supply agreement with FPSC, and in breach of its joint venture agreement with FPEC. The second partial and final awards dated July 14, 2015 and September 30, 2015, respectively, reduced the estimated amounts to be paid to FPEC, and on July 22, 2016, SPML entered into a settlement with FPEC and FPSC and paid a total of $50.5 million in settlement of all claims between the parties. As a result, the Company recorded its best estimate of probable loss related to this case at the time of the initial ruling and updated the estimate as circumstances warranted. The Company excludes these amounts from its segment results.

IPO-related costs

The Company incurred costs related to the IPO of 8point3 related to legal, accounting, advisory, valuation, and other expenses, as well as modifications to or terminations of certain existing financing structures in preparation for the sale to 8point3. The Company excludes these costs from its segment results.

Other

The Company combines amounts previously disclosed under separate captions into “Other” when amounts do not have a significant impact on the presented fiscal periods.

Segment and Geographical Information

The following tables present information by end-customer segment including revenue, gross margin, and adjusted EBITDA, each as reviewed by the CODM, as well as information about significant customers and revenue by geography, based on the destination of the shipments.

 
 
Three Months Ended
 
Nine Months Ended
(In thousands):
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Revenue
 
 
 
 
 
 
 
 
Distributed Generation
 
 
 
 
 
 
 
 
   Residential
 
 
 
 
 
 
 
 
Solar power systems, components, and others
 
$
114,537

 
$
113,746

 
$
323,443

 
$
331,149

Residential leasing
 
55,808

 
49,817

 
176,424

 
139,943

   Commercial
 
139,954

 
84,983

 
290,041

 
197,030

Power Plant
 
419,047

 
131,672

 
744,765

 
533,987

Total revenue
 
$
729,346

 
$
380,218

 
$
1,534,673

 
$
1,202,109

Cost of revenue
 
 
 
 
 
 
 
 
Distributed Generation
 
 
 
 
 
 
 
 
   Residential
 
 
 
 
 
 
 
 
Solar power systems, components, and others
 
$
97,040

 
$
89,063

 
$
263,098

 
$
262,418

Residential leasing
 
41,796

 
37,348

 
132,857

 
103,744

   Commercial
 
132,618

 
72,337

 
267,367

 
178,059

Power Plant
 
328,684

 
118,826

 
649,312

 
433,545

Total cost of revenue
 
$
600,138

 
$
317,574

 
$
1,312,634

 
$
977,766

Gross margin
 
 
 
 
 
 
 
 
Distributed Generation
 
 
 
 
 
 
 
 
   Residential
 
 
 
 
 
 
 
 
Solar power systems, components, and others
 
$
17,497

 
$
24,683

 
$
60,345

 
$
68,731

Residential leasing
 
14,012

 
12,469

 
43,567

 
36,199

   Commercial
 
7,336

 
12,646

 
22,674

 
18,971

Power Plant
 
90,363

 
12,846

 
95,453

 
100,442

Total gross margin
 
$
129,208

 
$
62,644

 
$
222,039

 
$
224,343


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Three Months Ended
October 2, 2016
 
 
Revenue
 
Gross margin
Revenue and Gross margin by segment (in thousands, except percentages):
 
Residential
 
Commercial
 
Power Plant
 
Residential
 
Commercial
 
Power Plant
As reviewed by CODM
 
$
176,433

 
$
143,135

 
$
450,540

 
$
36,363

 
20.6
%
 
$
12,279

 
8.6
%
 
$
105,450

 
23.4
%
8point3 Energy Partners
 
1,336

 
(3,181
)
 
(31,456
)
 
250

 
 
 
(2,162
)
 
 
 
(11,876
)
 
 
Utility and power plant projects
 
—

 
—

 
(37
)
 
—

 
 
 
—

 
 
 
(47
)
 
 
Sale of operating lease assets
 
(7,424
)
 
—

 
—

 
(2,085
)
 
 
 
—

 
 
 
—

 
 
Sale-leaseback transactions
 
—

 
—

 
—

 
—

 
 
 
(85
)
 
 
 
—

 
 
Stock-based compensation
 
—

 
—

 
—

 
(2,083
)
 
 
 
(1,744
)
 
 
 
(2,202
)
 
 
Amortization of intangible assets
 
—

 
—

 
—

 
(869
)
 
 
 
(868
)
 
 
 
(830
)
 
 
Non-cash interest expense
 
—

 
—

 
—

 
(67
)
 
 
 
(84
)
 
 
 
(132
)
 
 
GAAP
 
$
170,345

 
$
139,954

 
$
419,047

 
$
31,509

 
18.5
%
 
$
7,336

 
5.2
%
 
$
90,363

 
21.6
%


 
 
Three Months Ended
September 27, 2015
 
 
Revenue
 
Gross margin
Revenue and Gross margin by segment (in thousands, except percentages):
 
Residential
 
Commercial
 
Power Plant
 
Residential
 
Commercial
 
Power Plant
As reviewed by CODM
 
$
162,252

 
$
145,913

 
$
133,239

 
$
36,081

 
22.2
%
 
$
31,262

 
21.4
%
 
$
10,879

 
8.2
%
8point3 Energy Partners
 
1,311

 
(60,930
)
 
—

 
508

 
 
 
(18,804
)
 
 
 
—

 
 
Utility and power plant projects
 
—

 
—

 
(1,567
)
 
—

 
 
 
—

 
 
 
516

 
 
Stock-based compensation
 
—

 
—

 
—

 
(1,541
)
 
 
 
(917
)
 
 
 
(1,752
)
 
 
Amortization of intangible assets
 
—

 
—

 
—

 
(197
)
 
 
 
(104
)
 
 
 
(300
)
 
 
Non-cash interest expense
 


 


 


 
(155
)
 
 
 
(90
)
 
 
 
(242
)
 
 
Arbitration ruling
 
—

 
—

 
—

 
2,456

 
 
 
1,299

 
 
 
3,745

 
 
GAAP
 
$
163,563

 
$
84,983

 
$
131,672

 
$
37,152

 
22.7
%
 
$
12,646

 
14.9
%
 
$
12,846

 
9.8
%


 
 
Nine Months Ended
October 2, 2016
 
 
Revenue
 
Gross margin
Revenue and Gross margin by segment (in thousands, except percentages):
 
Residential
 
Commercial
 
Power Plant
 
Residential
 
Commercial
 
Power Plant
As reviewed by CODM
 
$
523,942

 
$
305,868

 
$
775,736

 
$
116,195

 
22.2
%
 
$
32,584

 
10.7
%
 
$
116,927

 
15.1
%
8point3 Energy Partners
 
3,935

 
(3,181
)
 
(17,481
)
 
1,154

 
 
 
(2,341
)
 
 
 
(7,749
)
 
 
Utility and power plant projects
 
—

 
—

 
(13,490
)
 
—

 
 
 
—

 
 
 
(7,732
)
 
 
Sale of operating lease assets
 
(28,010
)
 
—

 
—

 
(8,163
)
 
 
 
—

 
 
 
—

 
 
Sale-leaseback transactions
 
—

 
(12,646
)
 
—

 
—

 
 
 
(3,073
)
 
 
 
—

 
 
Stock-based compensation
 
—

 
—

 
—

 
(4,562
)
 
 
 
(3,141
)
 
 
 
(7,915
)
 
 
Amortization of intangible assets
 
—

 
—

 
—

 
(1,856
)
 
 
 
(2,102
)
 
 
 
(1,153
)
 
 
Non-cash interest expense
 
—

 
—

 
—

 
(201
)
 
 
 
(175
)
 
 
 
(510
)
 
 
Arbitration ruling
 
—

 
—

 
—

 
1,345

 
 
 
922

 
 
 
3,585

 
 
GAAP
 
$
499,867

 
$
290,041

 
$
744,765

 
$
103,912

 
20.8
%
 
$
22,674

 
7.8
%
 
$
95,453

 
12.8
%


 
 
Nine Months Ended
September 27, 2015
 
 
Revenue
 
Gross margin
Revenue and Gross margin by segment (in thousands, except percentages):
 
Residential
 
Commercial
 
Power Plant
 
Residential
 
Commercial
 
Power Plant
As reviewed by CODM
 
$
469,781

 
$
257,960

 
$
520,971

 
$
106,769

 
22.7
%
 
$
38,303

 
14.8
%
 
$
87,454

 
16.8
%
8point3 Energy Partners
 
1,311

 
(60,930
)
 
—

 
508

 
 
 
(18,804
)
 
 
 
—

 
 
Utility and power plant projects
 
—

 
—

 
13,016

 
—

 
 
 
—

 
 
 
16,095

 
 
Stock-based compensation
 
—

 
—

 
—

 
(3,675
)
 
 
 
(1,836
)
 
 
 
(4,524
)
 
 
Amortization of intangible assets
 
—

 
—

 
—

 
(197
)
 
 
 
(104
)
 
 
 
(300
)
 
 
Non-cash interest expense
 
—

 
—

 
—

 
(518
)
 
 
 
(252
)
 
 
 
(876
)
 
 
Arbitration ruling
 
—

 
—

 
—

 
2,084

 
 
 
1,697

 
 
 
2,678

 
 
Other
 
—

 
—

 
—

 
(41
)
 
 
 
(33
)
 
 
 
(85
)
 
 
GAAP
 
$
471,092

 
$
197,030

 
$
533,987

 
$
104,930

 
22.3
%
 
$
18,971

 
9.6
%
 
$
100,442

 
18.8
%




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Three Months Ended
 
Nine Months Ended
(In thousands):
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Adjusted EBITDA as reviewed by CODM
 
 
 
 
 
 
 
 
Distributed Generation
 
 
 
 
 
 
 
 
   Residential
 
$
30,505

 
$
43,777

 
$
97,175

 
$
151,483

   Commercial
 
(475
)
 
22,724

 
(2,671
)
 
13,736

Power Plant
 
100,007

 
603

 
75,207

 
52,576

Total Segment Adjusted EBITDA as reviewed by CODM
 
$
130,037

 
$
67,104

 
$
169,711

 
$
217,795

Reconciliation to Consolidated Statements of Income (Loss)
 
 
 
 
 
 
 
 
8point3 Energy Partners
 
(19,320
)
 
(19,371
)
 
(48,078
)
 
(14,683
)
Utility and power plant projects
 
(47
)
 
516

 
(7,732
)
 
16,095

Sale of operating lease assets
 
(2,098
)
 
—

 
(8,197
)
 
—

Sale-leaseback transactions
 
(277
)
 
—

 
(3,265
)
 
—

Stock-based compensation
 
(15,907
)
 
(14,898
)
 
(48,902
)
 
(42,484
)
Amortization of intangible assets
 
(3,018
)
 
(1,098
)
 
(14,351
)
 
(2,094
)
Non-cash interest expense
 
(308
)
 
(517
)
 
(963
)
 
(5,768
)
Restructuring expense
 
(31,202
)
 
(726
)
 
(31,415
)
 
(6,056
)
Goodwill impairment
 
(57,765
)
 
—

 
(57,765
)
 
—

Arbitration ruling
 
—

 
7,500

 
5,852

 
6,459

IPO-related costs
 
—

 
(1,233
)
 
(35
)
 
(26,364
)
Other
 
20

 
(16
)
 
31

 
(175
)
Equity in earnings of unconsolidated investees
 
(16,770
)
 
(5,052
)
 
(24,356
)
 
(9,107
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
(15,362
)
 
(30,959
)
 
(53,559
)
 
(80,403
)
Cash interest expense, net of interest income
 
(14,990
)
 
(8,348
)
 
(40,318
)
 
(27,463
)
Depreciation
 
(36,809
)
 
(36,142
)
 
(108,365
)
 
(95,566
)
Corporate and unallocated items
 
18,188

 
(12,873
)
 
14,724

 
(41,178
)
Loss before taxes and equity in earnings of unconsolidated investees
 
$
(65,628
)
 
$
(56,113
)
 
$
(256,983
)
 
$
(110,992
)

 
 
Three Months Ended
 
Nine Months Ended
(As a percentage of total revenue):
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Significant Customers:
Business Segment
 
 
 
 
 
 
 
 
8point3 Energy Partners
Power Plant
 
17
%
 
*
 
15
%
 
*

Southern Renewable Partnerships, LLC
Power Plant
 
35
%
 
n/a
 
17
%
 
n/a

MidAmerican Energy Holdings Company
Power Plant
 
*

 
*
 
*

 
18
%


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Three Months Ended
 
Nine Months Ended
(As a percentage of total revenue):
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
Revenue by geography:
 
 
 
 
 
 
 
 
United States
 
87
%
 
74
%
 
82
%
 
69
%
Japan
 
8
%
 
11
%
 
6
%
 
14
%
Rest of World
 
5
%
 
15
%
 
12
%
 
17
%
 
 
100
%
 
100
%
 
100
%
 
100
%



49
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not represent historical facts and the assumptions underlying such statements. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "potential," "will," "would," "should," and similar expressions to identify forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, projected costs and cost reduction, development of new products and improvements to our existing products, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, our ability to monetize utility projects, competitive positions, management's plans and objectives for future operations, the sufficiency of our cash and our liquidity, our ability to obtain financing, our ability to comply with debt covenants or cure any defaults, trends in average selling prices, the success of our joint ventures and acquisitions, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, expected restructuring charges, and the likelihood of any impairment of project assets, long-lived assets, and investments. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 3, 2016, and our other filings with the Securities and Exchange Commission ("SEC"). These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year, which end on the Sunday closest to the calendar month end.

Overview

SunPower is a leading global energy company that delivers complete solar solutions to residential, commercial, and power plant customers worldwide through an array of hardware, software, and financing options and through utility-scale solar power system construction and development capabilities, O&M services, and "Smart Energy" solutions. Our Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids—all personalized through easy-to-use customer interfaces. Of all the solar cells commercially available to the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. For more information about our business, please refer to the section titled "Part I. Item 1. Business" in our Annual Report on Form 10-K for the fiscal year January 3, 2016.
    
Unit of Power

When referring to our solar power systems, our facilities’ manufacturing capacity, and total sales, the unit of electricity in watts for kilowatts ("KW"), megawatts ("MW"), and gigawatts ("GW") is direct current ("DC"), unless otherwise noted as alternating current ("AC").

Levelized Cost of Energy ("LCOE")

LCOE is an evaluation of the life-cycle energy cost and life-cycle energy production of an energy producing system. It allows alternative technologies to be compared across different scales of operation, investment or operating time periods. It

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captures capital costs and ongoing system-related costs, along with the amount of electricity produced, and converts them into a common metric. Key drivers for LCOE reduction for photovoltaic products include panel efficiency, capacity factors, reliable system performance, and the life of the system.
Customer Cost of Energy ("CCOE™")

Our customers are focused on reducing their overall cost of energy by intelligently integrating solar and other distributed generation, energy efficiency, energy management, and energy storage systems with their existing utility-provided energy. The CCOE™ measurement is an evaluation of a customer’s overall cost of energy, taking into account the cost impact of each individual generation source (including the utility), energy storage systems, and energy management systems.  The CCOE measurement includes capital costs and ongoing operating costs, along with the amount of electricity produced, stored, saved, or re-sold, and converts all of these variables into a common metric. The CCOE metric allows a customer to compare different portfolios of generation sources, energy storage, and energy management, and to tailor towards optimization.  

Seasonal Trends

Our business is subject to industry-specific seasonal fluctuations including changes in weather patterns and economic incentives, among others. Sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two quarters of a fiscal year. The construction of solar power systems or installation of solar power components and related revenue may decline during cold winter months. In the United States, many customers make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. In addition, revenues may fluctuate due to the timing of project sales, construction schedules, and revenue recognition of certain projects, such as those involving the sale of real estate, which may significantly impact the quarterly profile of our results of operations. We may also retain certain development projects on our balance sheet for longer periods of time than in preceding periods in order to optimize the economic value we receive at the time of sale in light of market conditions, which can fluctuate after we have committed to projects. Delays in disposing of projects, or changes in amounts realized on disposition, may lead to significant fluctuations to the period-over-period profile of our results of operations and our cash available for working capital needs.

Fiscal Years

We have a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. The current fiscal year, fiscal 2016, is a 52-week fiscal year, while fiscal year 2015 was a 53-week fiscal year and had a 14-week fourth fiscal quarter. The third quarter of fiscal 2016 ended on October 2, 2016, while the third quarter of fiscal 2015 ended on September 27, 2015. The third quarters of fiscal 2016 and fiscal 2015 were both 13-week quarters.

Outlook

Demand

We remain focused on each of our three business segments. We believe that our key growth areas will be in our U.S. market in our Residential business and in emerging markets in our Commercial and Power Plant businesses. We plan to focus our Power Plant business development resources on a limited number of core markets, primarily in the Americas, where we believe we have a sustainable competitive advantage. Outside of these core markets, we will focus our Power Plant business on the sale of our new Oasis® complete solution, incorporating Performance Series panel technology, to developers and EPC companies in global markets. We are working to expand our global components sales capabilities and international commercial opportunities. Market conditions, however, can deteriorate after we have committed to projects; for example, shifts in the timing of demand and changes in the internal rate of return ("IRR") that our customers expect can significantly affect project sale prices. A pronounced increase in expected customer and investor IRR rates in light of market conditions may continue to drive lower overall project sale prices.

In June 2015, 8point3 Energy Partners, our joint YieldCo vehicle formed to own, operate, and acquire solar energy generation assets, completed its initial public offering. 8point3 Energy Partners remains a source of demand for our business and we plan to continue to sell to it our solar energy generating assets, including utility-scale solar power plants, commercial solar projects, and portfolios of residential solar power systems. We have used and expect to continue to use additional financing structures and sources of demand in order to maximize economic returns. For additional information on transactions with 8point3 Energy Partners and associated revenue recognition, please see "Note 10. Equity Method Investments – Equity Investment in 8point3 Energy Partners" and "– Related-Party Transactions with Investees."

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In late fiscal 2015, the U.S. government enacted a budget bill that extended the solar commercial investment tax credit (the “Commercial ITC”) under Section 48(c) of the Internal Revenue Code of 1986 (the “IRC”) and the individual solar investment tax credit under Section 25D of the IRC (together with the Commercial ITC, the “ITC”) for five years, at rates gradually decreasing from 30% through 2019 to 22% in 2021. After 2021, the Commercial ITC is retained at 10%. We also saw other recent developments that contributed to a favorable policy environment, including (i) a significant focus on reducing world-wide carbon emissions through such events as the COP21 sustainable innovation forum held in Paris and the announcement of the Clean Power Plan in the United States, and (ii) domestic policy measures such as the extension of bonus depreciation and approval of California Net Metering "NEM 2.0." We believe these factors will strengthen long-term demand for our products in all three business segments in U.S. and global markets and provide us an opportunity to expand our suite of energy solutions and complement our strong, existing core business. However, in the near term, the extension of the ITC has had adverse impacts on our business, as it has reduced the pressure for commercial or residential customers to make purchases before the end of 2016, which was the time when the ITC had previously been set to expire, and instead has pushed demand from these customers into fiscal 2017 and 2018. For more information about the ITC and other policy mechanisms, please refer to the section titled "Part I. Item 1. Business—Regulations—Public Policy Considerations" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. For more information about how we avail ourselves of the benefits of public policies and the risks related to public policies, please see the risk factors set forth under the caption "Part I. Item 1A. Risk Factors," including "Risks Related to Our Sales Channels—The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results" and "Risks Related to Our Sales Channels—Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 and under the caption “Part I. Item 1A. Risk Factors,” including “Our operating results are subject to significant fluctuations and are inherently unpredictable.” in this Quarterly Report on Form 10-Q.

Supply

We are focused on delivering complete solutions to customers in all three of our business segments. As part of our complete solution approach, we launched our HelixTM product for our Commercial Segment during fiscal 2015, and in the first quarter of fiscal 2016 we launched our SunPower EquinoxTM product for our Residential Segment. The SunPower Equinox and Helix systems are pre-engineered modular solutions for residential and commercial applications, respectively, that combine our high-efficiency solar module technology with integrated plug-and-play power stations, cable management systems, and mounting hardware that enable our customers to quickly and easily complete system installations and manage their energy production. During fiscal 2016 we also launched our new generation technology for our existing Oasis modular solar power blocks for power plant applications. With the addition of these modular solutions in our residential and commercial applications, we are able to provide complete solutions across all end-customer segments. Additionally, in the fourth quarter of fiscal 2015 we announced the launch of our new lower cost, high efficiency Performance Series product line, which will enhance our ability to rapidly expand our global footprint with minimal capital cost.

We continue to see significant and increasing opportunities in technologies and capabilities adjacent to our core product offerings that can significantly reduce our customers' CCOE measurement, including the integration of energy storage and energy management functionality into our systems, and have made investments to realize those opportunities, including our investment in a data-driven Energy Services Management Platform from Tendril Networks, Inc., and our strategic partnership with EnerNOC to deploy their Software as a Service energy intelligence software solution to our commercial and power plant customers, enabling our customers to make intelligent energy choices by addressing how they buy energy, how they use energy and when they use it. We have added advanced module-level control electronics to our portfolio of technology designed to enable longer series strings and significant balance of system components cost reductions in large arrays. We are developing next generation microinverter technology and currently offer solar panels that use microinverters designed to eliminate the need to mount or assemble additional components on the roof or the side of a building and enable optimization and monitoring at the solar panel level to ensure maximum energy production by the solar system. We also continue to work on making combined solar and distributed energy storage solutions broadly commercially available to certain customers in the United States through our agreement to offer Sunverge SIS energy solutions comprising batteries, power electronics, and multiple energy inputs controlled by software in the cloud.

We continue to improve our unique, differentiated solar cell and panel technology. We emphasize improvement of our solar cell efficiency and LCOE and CCOE performance through enhancement of our existing products, development of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies. We are now producing our solar cells with over 25% efficiency in the lab, have reached production panel efficiencies over 24%, and have started up our first high-volume Performance Series production lines in Mexico.

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We plan to reduce our overall solar cell manufacturing output to match profitable demand levels, with increasing bias toward our highest efficiency X-Series product platform. We recently closed our Philippine panel assembly facility and are transferring the equipment to our latest generation, lower cost panel assembly facilities in Mexico. As part of this realignment, we expect to reduce our back-contact panel assembly capacity while ramping production of our new Performance Series technology.

We are focused on reducing the cost of our solar panels and systems and are working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies and expanding economies of scale. We also continually focus on reducing manufacturing cost and complexity in conjunction with our overall cost-control strategies. We believe that the global demand for solar systems is highly elastic and that our aggressive, but achievable, cost reduction roadmap will reduce installed costs for our customers across all business segments and drive increased demand for our solar solutions.

We also work with our suppliers and partners to ensure the reliability of our supply chain. We have contracted with some of our suppliers for multi-year supply agreements, under which we have annual minimum purchase obligations. For more information about our purchase commitments and obligations, please see "Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations" and "Note 9. Commitments and Contingencies" in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

We currently believe our supplier relationships and various short- and long-term contracts will afford us the volume of material and services required to meet our planned output; however, we face the risk that the pricing of our long-term contracts may exceed market value. We purchase our polysilicon under fixed-price long-term supply agreements; purchases in fiscal 2015 under these agreements significantly exceeded market value and the volume contracted to be purchased in fiscal 2016 exceeds our planned utilization, which may result in higher inventory balances until we are able to fully utilize the polysilicon inventory in future periods. For more information about these risks, please see "—Our long-term, firm commitment supply agreements could result in excess or insufficient inventory, place us at a competitive disadvantage on pricing, or lead to disputes, each of which could impair our ability to meet our cost reduction roadmap" and "—We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframes and could in turn result in sales and installation delays, cancellations, penalty payments and loss of market share" under "Part 1. Item 1A. Risk Factors—Risks Related to Our Supply Chain" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.

M&A

During fiscal 2015 and fiscal 2016, we made strategic acquisitions and investments, including the acquisition of AUOSP in the third quarter of fiscal 2016, that will allow us to service a broader market with enhanced expertise. We look for similar investment opportunities to expand our business and portfolio of technology by making investments that will enable us to achieve our strategic vision.

Financing

We are able to utilize various means to finance our utility-scale power plant development and construction projects, including our ability to sell projects to 8point3 Energy Partners. Through our investments in and involvement with the 8point3 Group, as well as through the use of our various other financing structures, we seek to access a lower cost of capital, in order to enable the continued development of our project pipeline described below in our key U.S. market and in select, sustainable foreign markets. As part of this strategy, we plan to retain these development projects on our balance sheet for longer periods of time than in preceding periods in order to optimize the economic value we receive at the time of sale.

Projects Under Contract

The table below presents significant construction and development projects under contract as of October 2, 2016:

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Project
 
Location
 
Size (MW)
 
Third-Party Owner / Purchaser(s)
 
Power Purchase Agreement(s)
 
Expected Substantial Completion of Project1
Boulder Solar Project I2
 
Nevada, USA
 
125
 
Southern Renewable Partnerships, LLC
 
NV Energy
 
2016
Rio Bravo Solar Projects
 
California, USA
 
50
 
Duke Energy Renewables Solar, LLC
 
Southern California Edison
 
2016
1Expected completion of revenue recognition assumes completion of construction in the stated fiscal year.
2 
ROFO Project—pursuant to a Right of First Offer Agreement between SunPower and OpCo, the 8point3 Group has rights of first offer on interests, including minority interests, in these projects. For additional information on 8point3 Energy Partners and related transactions, please refer to the section titled "Note 7. Fair Value Measurements" and "Note 10. Equity Method Investments" in the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10.


As of October 2, 2016, an aggregate of approximately $326.2 million of remaining revenue is expected to be recognized on projects reflected in the table above through the expected completion dates noted. Projects will be removed from the table above in the period in which substantially all of the revenue for such project has been recognized.

Projects with Executed Power Purchase Agreements - Not Sold / Not Under Contract

The table below presents significant construction and development projects with executed PPAs, but not sold or under contract as of October 2, 2016:
Project
 
Location
 
Size (MW)
 
Power Purchase Agreement(s)
 
Expected Substantial Completion of Project1
Ticul Solar Projects
 
Mexico
 
400
 
Comision Federal Electricidad
 
2018
Guajiro Solar Project
 
Mexico
 
117
 
Comision Federal Electricidad
 
2018
El Pelicano Solar Project
 
Chile
 
111
 
Empresa de Transporte de Pasajeros Metro S.A.
 
2017
Iberdrola Gala Solar Project
 
Oregon, USA
 
71
 
Customer A
 
2017
Stanford Solar Generating Station
 
California, USA
 
68
 
Stanford University
 
2016
Turlock Solar Generating Station
 
California, USA
 
68
 
Turlock Irrigation District
 
2016
Boulder Solar Project II
 
Nevada, USA
 
50
 
Sierra Pacific Power Company
 
2016
1 
Expected completion of revenue recognition assumes completion of construction and sale of the project in the stated fiscal year.



Our project pipeline extends beyond the projects represented in the tables above. Significant projects with development and milestone activities in progress will be excluded from the table above until an associated PPA has been executed.

Results of Operations

Revenue

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Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Distributed Generation
 
 
 
 
 
 
 
 
 
 
 
 
    Residential
 
$
170,345

 
$
163,563

 
4%
 
$
499,867

 
$
471,092

 
6%
    Commercial
 
139,954

 
84,983

 
65%
 
290,041

 
197,030

 
47%
Power Plant
 
419,047

 
131,672

 
218%
 
744,765

 
533,987

 
39%
Total revenue
 
$
729,346

 
$
380,218

 
92%
 
$
1,534,673

 
$
1,202,109

 
28%

Total Revenue:  Our total revenue increased by 92% and 28% during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, due to increased sales of solar power systems across all Segments and particularly due to the sale of the 128 MW Henrietta project in the Power Plant Segment during the third quarter of fiscal 2016.

Concentrations: The Power Plant Segment as a percentage of total revenue recognized was approximately 57% and 49% during the three and nine months ended October 2, 2016 as compared to 35% and 44% during the three and nine months ended September 27, 2015, respectively. The revenue for the Power Plant Segment as a percentage of total revenue recognized increased primarily due to the sale of certain large-scale solar power systems in the Power Plant Segment, particularly the 128 MW Henrietta project, during the third quarter of fiscal 2016.

The table below represents our significant customers that accounted for greater than 10 percent of total revenue in each of the three and nine months ended October 2, 2016 and September 27, 2015.
 
 
Three Months Ended
 
Nine Months Ended
Revenue
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
Significant Customers:
 
Business Segment
 
 
 
 
 
 
 
 
 
8point3 Energy Partners
 
Power Plant
 
17
%
 
*
 
15
%
 
*

 
Southern Renewable Partnerships, LLC
 
Power Plant
 
35
%
 
n/a
 
17
%
 
n/a

 
MidAmerican Energy Holdings Company
 
Power Plant
 
*

 
*
 
*

 
18
%
 
*
denotes less than 10% during the period

Residential Revenue: Residential revenue increased four and six percent during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily due to an increase in sales of residential solar power systems in North America driven by stronger sales through our dealer network, an increase in the number of leases placed in service under our residential leasing program within the United States, and an increase in the proportion of capital leases relative to total leases placed in service.

Commercial Revenue:  Commercial revenue increased 65% and 47% during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily because of stronger sales of commercial components and systems in North America due to a favorable policy environment.

Power Plant Revenue: Power Plant revenue increased 218% and 39% during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily due to an increase in revenue recognized on certain large-scale utility projects in the North America, particularly the 128 MW Henrietta project, partially offset by a decline in component sales to Power Plant customers in Japan, France, and China in fiscal 2016.

Cost of Revenue

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Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Distributed Generation
 
 
 
 
 
 
 
 
 
 
 
 
    Residential
 
$
138,836

 
$
126,411

 
10%
 
$
395,955

 
$
366,162

 
8%
    Commercial
 
132,618

 
72,337

 
83%
 
267,367

 
178,059

 
50%
Power Plant
 
328,684

 
118,826

 
177%
 
649,312

 
433,545

 
50%
Total cost of revenue
 
$
600,138

 
$
317,574

 
89%
 
$
1,312,634

 
$
977,766

 
34%
Total cost of revenue as a percentage of revenue
 
82
%
 
84
%
 
 
 
86
%
 
81
%
 
 
Total gross margin percentage
 
18
%
 
16
%
 
 
 
14
%
 
19
%
 
 

Total Cost of Revenue: Our total cost of revenue increased 89% and 34% during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily as a result of the increase in the recognition of revenue and corresponding costs of certain large-scale solar power systems within the United States during fiscal 2016, as well as write-downs totaling $16.5 million and $8.0 million on certain solar power development projects during the second and third quarters of fiscal 2016, respectively.

Gross Margin
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Distributed Generation
 
 
 
 
 
 
 
 
 
 
 
 
    Residential
 
18%
 
23%
 
(5)%
 
21%
 
22%
 
(1)%
    Commercial
 
5%
 
15%
 
(10)%
 
8%
 
10%
 
(2)%
Power Plant
 
22%
 
10%
 
12%
 
13%
 
19%
 
(6)%

Residential Gross Margin: Gross margin for our Residential Segment decreased five and one percentage points during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, as a result of declining average selling prices in Japan, where a reduction in the country's feed-in tariff during the last half of fiscal 2015 continued to reduce demand for solar power systems and the volatility of the value of the Japanese Yen reduced demand for imported goods in general, partially offset by an increased volume of sales with favorable margins for residential leases and higher average selling prices for residential components and systems in North America.

Commercial Gross Margin: Gross margin for our Commercial Segment decreased ten and two percentage points during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily because we deferred the recognition of any profit on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Note 10. Equity Method Investments-Equity Investment in 8point3 Energy Partners" in this Quarterly Report on Form 10-Q, as well as declining average selling prices in Japan, where a reduction in the country's feed-in tariff during the during the last half of fiscal 2015 continued to reduce demand for solar power systems and the volatility of the value of the Japanese Yen reduced demand for imported goods in general.

Power Plant Gross Margin: Gross margin for our Power Plant Segment increased 12 percentage points during the three months ended October 2, 2016 as compared to the three months ended September 27, 2015 primarily due to the sale of certain large-scale solar power systems, particularly the 128 MW Henrietta project, during the third quarter of fiscal 2016. Gross margin for our Power Plant Segment decreased six percentage points during the nine months ended October 2, 2016 as compared to the nine months ended September 27, 2015 primarily because during fiscal 2016, we deferred the recognition of any profit on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Note 10. Equity Method Investments—Equity Investment in 8point3 Energy Partners" in this Quarterly Report on Form 10-Q. Additionally, during the second and third quarters of fiscal 2016 we experienced pressure on project pricing due to increased

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global competition and write-downs totaling $22.6 million on certain solar power development projects as a result of a variety of factors, including an increase in the internal rate of return expected by our customers in light of market conditions.

Research and Development ("R&D")
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
R&D
 
$
28,153

 
$
24,973

 
13%
 
$
92,270

 
$
66,701

 
38%
As a percentage of revenue
 
4
%
 
7
%
 
 
 
6
%
 
6
%
 
 

R&D expense increased $3.2 million and $25.6 million, in the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily due to an increase in labor costs as a result of additional headcount and salary related expenses, as well as an increase in other net expenses such as materials, consulting and outside services as we continue to develop our next generation solar technology and expand our product offering. The remaining increase was a result of other net expenses to support R&D programs as well as amortization of intangible assets attributable to R&D activity. These increases were partially offset by contributions under the R&D Agreement with Total.

Sales, General and Administrative ("SG&A")
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
SG&A
 
$
80,070

 
$
81,109

 
(1)%
 
$
262,544

 
$
239,843

 
9%
As a percentage of revenue
 
11
%
 
21
%
 
 
 
17
%
 
20
%
 
 

SG&A expense decreased $1.0 million in the three months ended October 2, 2016 as compared to the three months ended September 27, 2015, respectively, due to a decrease in stock-based compensation expense attributable to SG&A functions. SG&A expense increased $22.7 million in the nine months ended October 2, 2016 as compared to the nine months ended September 27, 2015 due to an increase in selling and marketing expenses as we grow our sales teams and increase our marketing activity for residential and commercial products in North America and through digital media, as well as increases in other costs related to ongoing legal proceedings and non-cash charges primarily related to depreciation and the amortization and disposition of intangible assets.

Restructuring Charges
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Restructuring charges
 
$
31,202

 
$
726

 
n.m.
 
$
31,415

 
$
6,056

 
n.m.
As a percentage of revenue
 
4
%
 
—
%
 
 
 
2
%
 
1
%
 
 

Restructuring charges increased $30.5 million and $25.4 million during the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily related to severance charges associated with our August 2016 restructuring plan. Remaining restructuring charges are associated with legacy restructuring plans approved in fiscal 2014, 2012, and 2011.

See "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 8. Restructuring" for further information regarding our restructuring plans.


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Other Income (Expense), Net
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Interest income
 
$
630

 
$
448

 
41%
 
$
2,133

 
$
1,498

 
42%
Interest expense
 
(15,813
)
 
(8,796
)
 
80%
 
(42,644
)
 
(32,994
)
 
29%
Gain on settlement of preexisting relationships in connection with acquisition
 
203,252

 
—

 
—%
 
203,252

 
—

 
—%
Loss on equity method investment in connection with acquisition
 
(90,946
)
 
—

 
—%
 
(90,946
)
 
—

 
—%
Goodwill impairment
 
(147,365
)
 
—

 
—%
 
(147,365
)
 
—

 
—%
Other, net
 
(5,169
)
 
(3,601
)
 
44%
 
(17,223
)
 
8,761

 
(297)%
Other expense, net
 
$
(55,411
)
 
$
(11,949
)
 
364%
 
$
(92,793
)
 
$
(22,735
)
 
308%
As a percentage of revenue
 
(8
)%
 
(3
)%
 
 
 
(6
)%
 
(2
)%
 
 
    
Other expense, net increased $43.5 million and $70.1 million, in the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015, respectively, primarily driven by a $147.4 million expense related to the impairment of goodwill and a $90.9 million expense related to the impairment of our equity method investment in AUOSP, partially offset by a $203.3 million gain recognized on the termination of our preexisting relationships upon completing our acquisition of AUOSP, all of which occurred in the third quarter of fiscal 2016. For more information on these transactions, see "—Note 3. Business Combinations" and "—Note 4. Goodwill and Other Intangible Assets" in "Item 1. Financial Statements—Notes to Consolidated Financial Statements" in this Quarterly Report on Form 10-Q.

The remainder of the increase in other expense, net was driven by the gain recognized on the sale of a residential lease portfolio to 8point3 Energy Partners during the second quarter of fiscal 2015, an increase in interest expense in fiscal 2016 due to the issuance of the 4.00% debentures due 2023 late in the fourth quarter of fiscal 2015 and additional interest incurred on financing activities related to our residential lease business in fiscal 2016, as well as unfavorable changes in the fair value of foreign currency derivatives and other net expenses.

Income Taxes
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Provision for income taxes
 
$
(7,049
)
 
$
(36,224
)
 
(81)%
 
$
(16,878
)
 
$
(37,916
)
 
(55)%
As a percentage of revenue
 
(1
)%
 
(10
)%
 
 
 
(1
)%
 
(3
)%
 
 

In the three and nine months ended October 2, 2016, our income tax provision of $7.0 million and $16.9 million, respectively, on a loss before income taxes and equity in earnings of unconsolidated investees of $65.6 million and $257.0 million, respectively, was primarily due to the projected tax expense in profitable jurisdictions, the recognition of U.S. prepaid income tax due to intercompany transactions, settlement of certain foreign audits, and provision-to-return adjustments in U.S. and foreign jurisdictions. In the three and nine months ended September 27, 2015, our income tax provision of $36.2 million and $37.9 million, respectively, on a loss before income taxes and equity in earnings of unconsolidated investees of $56.1 million and $111.0 million, respectively, was primarily due to projected tax expense resulting from forecasted taxable income for fiscal 2015, primarily driven by transactions with the 8point3 Group, book to tax differences, and accruals of unrecognized tax benefits in the current period, partially offset by utilization of net operating loss and credit carryforwards. The decrease in

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our income tax provision in the three and nine months ended October 2, 2016 as compared to the three and nine months ended September 27, 2015 was a result of an decrease in forecasted taxable income, partially offset by the settlement of certain foreign audits and provision-to-return adjustments in domestic and foreign jurisdictions.

A material amount of our total revenue is generated from customers located outside of the United States, and a substantial portion of our assets and employees are located outside of the United States. U.S. income taxes and foreign withholding taxes have not been provided on the undistributed earnings of our non-U.S. subsidiaries as such earnings are intended to be indefinitely reinvested in operations outside the United States to the extent that such earnings have not been currently or previously subjected to taxation of the United States.

We record a valuation allowance to reduce our U.S. and French deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with the estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount, or if we subsequently determine that realization of an amount previously recorded is unlikely, we would record an adjustment to the deferred tax asset valuation allowance, which would change income tax in the period of adjustment. As of October 2, 2016, we believe there is insufficient evidence to realize additional deferred tax assets.

Equity in Earnings of Unconsolidated Investees
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Equity in earnings of unconsolidated investees
 
$
16,770

 
$
5,052

 
232%
 
$
24,356

 
$
9,107

 
167%
As a percentage of revenue
 
2
%
 
1
%
 
 
 
2
%
 
1
%
 
 

Our equity in earnings of unconsolidated investees increased $11.7 million and $15.2 million in the three and nine months ended October 2, 2016, compared to the three and nine months ended September 27, 2015, respectively, primarily due to our share of the earnings generated by the activities of the 8point3 Group during fiscal 2016 as well as our share of the earnings generated by the activities of AUOSP during fiscal 2016 prior to the acquisition and subsequent consolidation of AUOSP. For more information on the acquisition of AUOSP, see "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 3. Business Combinations" in this Quarterly Report on Form 10-Q.

Net Loss
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Net loss
 
$
(55,907
)
 
$
(87,285
)
 
(36)%
 
$
(249,505
)
 
$
(139,801
)
 
78%

Net loss decreased by $31.4 million in the three months ended October 2, 2016 as compared to the three months ended September 27, 2015. The decrease in net loss was primarily driven by: (i) a $66.6 million increase in gross margin, primarily due to the substantial completion of certain large-scale solar power projects with favorable margins that was partially offset by $8.0 million of total write-downs on certain solar power development projects in the third quarter of fiscal 2016; (ii) a $29.2 million decrease in provision for income taxes primarily due to a decrease in the forecasted taxable income that reduced the overall tax provision in the period; and (iii) a $11.7 million increase in our equity in earnings of unconsolidated investees due to the activities of the 8point3 Group that took place during the third quarter of fiscal 2016 and the activities at our AUOSP joint venture prior to our acquisition of AUOSP. The decrease in net loss was partially offset by: (i) a $43.5 million increase in other expense, net primarily driven by a $147.4 million expense related to the impairment of goodwill and a $90.9 million expense related to the impairment of our equity method investment in AUOSP, partially offset by a $203.3 million gain recognized on the termination of our preexisting relationships upon completing our acquisition of AUOSP; (ii) a $30.5 million increase in restructuring expense primarily due to severance costs associated with the August 2016 restructuring plan; (iii) a $2.1 million increase in operating expenses due to increased marketing spend and increased headcount in R&D and sales departments in addition to certain non-cash charges.


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Net loss increased by $109.7 million in the nine months ended October 2, 2016, as compared to the nine months ended September 27, 2015. The increase in net loss was primarily driven by: (i) a $70.1 million increase in other expense, net primarily driven by the impairment of goodwill and the loss on our equity method investment in AUOSP during the third quarter of fiscal 2016 (partially offset by the settlement of preexisting relationships with AUOSP), a gain recognized on the sale of a residential lease portfolio to 8point3 Energy Partners during the second quarter of fiscal 2015, an overall increase in interest expense in fiscal 2016 due to the issuance of the 4.00% debentures due 2023 late in the fourth quarter of fiscal 2015 and additional interest incurred on financing activities related to our residential lease business, and unfavorable changes in the fair value of foreign currency derivatives and other net expenses; (ii) a $48.3 million increase in operating expenses due to increased marketing spend and increased headcount in R&D and sales departments in addition to certain non-cash charges; and (iii) a $25.4 million increase in restructuring expense primarily due to severance costs associated with our August 2016 restructuring plan. The increase in net loss was partially offset by: (i) a $21.0 million decrease in provision for income taxes primarily due to a decrease in the forecasted taxable income that reduced the overall tax provision in the period; (ii) a $15.2 million increase in our equity in earnings of unconsolidated investees due to the activities of the 8point3 Group that took place during the third quarter of fiscal 2016 and the activities at our AUOSP joint venture prior to our acquisition of AUOSP; (iii) an increase in gross margin of $2.3 million primarily driven by the sale of certain large-scale solar power systems with high margins during the third quarter for fiscal 2016 that were mostly offset by write-downs totaling $24.5 million on certain solar power development projects during fiscal 2016 that were based on the estimated selling price of such projects, and by declines in the margins of our Residential and Commercial Segments due to lower average selling prices in some markets and the completion of certain commercial projects with favorable margins in the first half of fiscal 2016.

Information about other significant variances in our results of operations is described above.

Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
 
% Change
 
October 2, 2016
 
September 27, 2015
 
% Change
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
$
15,362

 
$
30,959

 
(50)%
 
$
53,559

 
$
80,403

 
(33)%

We have entered into facilities with third-party tax equity investors under which the investors invest in a structure known as a partnership flip. We determined that we hold controlling interests in these less-than-wholly-owned entities and therefore we have fully consolidated these entities. We apply the hypothetical liquidation at book value method in allocating recorded net income (loss) to each investor based on the change in the reporting period, of the amount of net assets of the entity to which each investor would be entitled to under the governing contractual arrangements in a liquidation scenario.

In the three months ended October 2, 2016 and September 27, 2015, we attributed $15.4 million and $31.0 million, respectively, of net losses primarily to the third-party investors as a result of allocating certain assets, including tax credits and accelerated tax depreciation benefits, to the investors. The $15.6 million decrease in net loss attributable to noncontrolling interests and redeemable noncontrolling interests is primarily attributable to a decrease in income per watt for leases placed in service under new facilities executed with third-party investors, partially offset by an increase in total number of leases placed in service under new and existing facilities with third-party investors.

In the nine months ended October 2, 2016 and September 27, 2015, we attributed $53.6 million and $80.4 million, respectively, of net losses primarily to the third-party investors as a result of allocating certain assets, including tax credits and accelerated tax depreciation benefits, to the investors. The $26.8 million decrease in net loss attributable to noncontrolling interests and redeemable noncontrolling interests is primarily attributable to a decrease in income per watt for leases placed in service under new facilities executed with third-party investors, partially offset by an increase in total number of leases placed in service under new and existing facilities with third-party investors.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues, and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions

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that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. In addition to our most critical estimates discussed below and in our 2015 Annual Report on Form 10-K, we also have other key accounting policies that are less subjective and, therefore, judgments involved in their application would not have a material impact on our reported results of operations (See "Note 1. The Company and Summary of Significant Accounting Policies" under "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements" in our 2015 Annual Report on Form 10-K and Note 1. on this Form 10-Q).

Valuation of Long-Lived Assets

Our long-lived assets include property, plant and equipment, solar power systems leased and to be leased, and other intangible assets with finite lives. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets and significant negative industry or economic trends. Our impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses.

Valuation of Project Assets - Plant and Land

Project assets consist primarily of capitalized costs relating to solar power system projects in various stages of development that we incur prior to the sale of the solar power system to a third-party. These costs include costs for land and costs for developing and constructing a solar power system. Development costs can include legal, consulting, permitting, and other similar costs. Once we enter into a definitive sales agreement, we reclassify these project asset costs to deferred project costs within "Prepaid expenses and other current assets" in our Consolidated Balance Sheet until we have met the criteria to recognize the sale of the project asset or solar power project as revenue. We release these project costs to cost of revenue as each respective project asset or solar power system is sold to a customer, since the project is constructed for a customer (matching the underlying revenue recognition method).

We evaluate the realizability of project assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider the project to be recoverable if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed or if costs incurred to date may be recovered via other means, such as a sale prior to the completion of the development cycle. We examine a number of factors to determine if the project will be profitable, including whether there are any environmental, ecological, permitting, or regulatory conditions that have changed for the project since the start of development. In addition, we must anticipate market conditions, such as the future cost of energy and changes in the factors that our future customers use to value our project assets in sale arrangements, including the internal rate of return that customers expect. Changes in such conditions could cause the cost of the project to increase or the selling price of the project to decrease. Due to the development, construction, and sale timeframe of our larger solar projects, we classify project assets which are not expected to be sold within the next 12 months as "Project assets - plants and land, net of current portion" on the Consolidated Balance Sheets. Once specific milestones have been achieved, we determine if the sale of the project assets will occur within the next 12 months from a given balance sheet date and, if so, we then reclassify the project assets as current.

Valuation of Inventories

Inventories are valued at the lower of cost or market value. We evaluate the realizability of our inventories, including future purchase commitments under fixed-price long-term supply agreements, based on assumptions about expected demand and market conditions. Our assumption of expected demand is developed based on our analysis of bookings, sales backlog, sales pipeline, market forecast and competitive intelligence. Our assumption of expected demand is compared to available inventory, production capacity, future polysilicon purchase commitments, available third-party inventory and growth plans. Our factory production plans, which drive materials requirement planning, are established based on our assumptions of expected demand. We respond to reductions in expected demand by temporarily reducing manufacturing output and adjusting expected valuation assumptions as necessary. In addition, expected demand by geography has changed historically due to changes in the availability and size of government mandates and economic incentives.


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We evaluate the terms of our long-term inventory purchase agreements with suppliers for the procurement of polysilicon, ingots, wafers, and solar cells and establish accruals for estimated losses on adverse purchase commitments as necessary, such as lower of cost or market value adjustments, forfeiture of advanced deposits and liquidated damages. 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. We anticipate total obligations related to long-term supply agreements for inventories will be realized because quantities are less than management's expected demand for its solar power products over a period of years; however, if raw materials inventory balances temporarily exceed near-term demand, we may elect to sell such inventory to third parties to optimize working capital needs. Other market conditions that could affect the realizable value of our inventories and are periodically evaluated by management include the aging of inventories on hand, historical inventory turnover ratio, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, the current market price of polysilicon as compared to the price in our fixed-price arrangements, and product merchantability, among other factors. If, based on assumptions about expected demand and market conditions, we determine that the cost of inventories exceeds its net realizable value or inventory is excess or obsolete, or we enter into arrangements with third parties for the sale of raw materials that do not allow us to recover our current contractually committed price for such raw materials, we record a write-down or accrual, which may be material, equal to the difference between the cost of inventories and the estimated net realizable value. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could negatively affect our gross margin and operating results. If actual market conditions are more favorable, we may have higher gross margin when products that have been previously written down are sold in the normal course of business.

Goodwill Impairment

Goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. If goodwill is determined more likely than not to be impaired upon an initial assessment of qualitative factors, a two-step valuation and accounting 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.

We conduct our annual impairment test of goodwill as of the first day of the fourth fiscal quarter of each year, or on an interim basis if circumstances warrant. Impairment of goodwill is tested at our reporting unit level. Management determined that the Residential Segment, the Commercial Segment, and the Power Plant Segment are also the reporting units. In estimating the fair value of the reporting units, we make estimates and judgments about our 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 fair values of our reporting units are also compared to our total external market capitalization to validate the appropriateness of its assumptions and such reporting unit values are adjusted, if appropriate. These assumptions also consider the current industry environment and the resulting impact on our expectations for the performance of our business. In the event that management determines that the value of goodwill has become impaired, we will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. For additional details see "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Goodwill and Other Intangible Assets" in this Quarterly Report on Form 10-Q.


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Liquidity and Capital Resources
 
Cash Flows

A summary of the sources and uses of cash and cash equivalents is as follows:
 
 
Nine Months Ended
(In thousands)
 
October 2, 2016
 
September 27, 2015
Net cash used in operating activities
 
$
(798,338
)
 
$
(429,360
)
Net cash provided by (used in) investing activities
 
$
(267,706
)
 
$
62,977

Net cash provided by (used in) financing activities
 
$
493,904

 
$
(82,669
)

Operating Activities

Net cash used in operating activities in the nine months ended October 2, 2016 was $798.3 million and was primarily the result of: (i) a net loss of $249.5 million; (ii) a $434.6 million increase in project assets primarily related to the construction of our Commercial and Power Plant solar energy projects in the Americas; (iii) a $203.3 million non-cash settlement of preexisting relationships in connection with the acquisition of AUOSP; (iv) a $144.2 million decrease in accounts payable and other accrued liabilities, primarily attributable to recognition of revenue of certain utility-scale projects; (v) a $136.5 million increase in long-term financing receivables related to our net investment in sales-type leases; (vi) a $101.1 million increase in inventories driven by construction of our solar energy projects; (vii) a $36.6 million increase in accounts receivable, primarily driven by billings; (viii) a $24.4 million increase in equity in earnings of unconsolidated investees; (ix) a $15.9 million decrease in billings in excess of costs and estimated earnings driven by the recognition revenue and corresponding costs of certain utility-scale projects; (x) a $14.4 million decrease in customer advances; and (xi) an $1.2 million in excess tax benefit from stock-based compensation. This was partially offset by: (i) other net non-cash charges of $176.5 million related to depreciation, non-cash interest charges and stock-based compensation; (ii) a $147.4 million impairment of goodwill; (iii) $90.9 million in impairment of equity method investments; (iv) a $70.0 million decrease in prepaid expenses and other assets, primarily related to recognition of revenue and corresponding costs of certain utility-scale projects; (v) a $45.0 million decrease in advance payments made to suppliers; (vi) $17.9 million in non-cash restructuring charges; (vii) a $13.6 million decrease in costs and estimated earnings in excess of billings driven by milestone billings; and (viii) a $2.1 million net change in deferred income taxes.
    
Net cash used in operating activities in the nine months ended September 27, 2015 was $429.4 million and was primarily the result of: (i) a net loss of $139.8 million; (ii) a $499.8 million increase in project assets primarily related to our Quinto Solar Energy Project; (iii) a $187.2 million increase in inventories driven by project assets for construction of solar power systems for Commercial and Power Plant projects in North America and purchases of polysilicon; (iv) a $108.4 million increase in long-term financing receivables related to our net investment in sales-type leases; (v) a $59.8 million decrease in accounts payable and other accrued liabilities; (vi) a $27.9 million gain on the sale of a residential lease portfolio to 8point3 Energy Partners; (vii) a $25.1 million excess tax benefit from stock-based compensation; (viii) a $21.0 million decrease in customer advances; (ix) a $9.1 million increase in equity in earnings of unconsolidated investees; and (x) a $4.0 million decrease in billings in excess of costs and estimated earnings driven by a decrease related to the Solar Star Projects. This was partially offset by: (i) a $292.1 million decrease in accounts receivable, primarily driven by the collection of retainage related to the Solar Star Projects; (ii) a $148.0 million decrease in costs and estimated earnings in excess of billings driven by a decrease related to the Solar Star Projects; (iii) other net non-cash charges of $147.6 million related to depreciation, non-cash interest charges and stock-based compensation; (iv) a $29.8 million decrease in advance payment made to suppliers; (v) a $22.7 million net change in deferred income taxes and income tax liabilities and (vi) a $12.6 million decrease in prepaid expenses and other assets driven by an increase in deferred costs related to the Solar Star Projects.

Investing Activities

Net cash used in investing activities in the nine months ended October 2, 2016 was $267.7 million, which included (i) $216.2 million in capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems, leased and to be leased; (ii) $24.0 million paid for the acquisition of AUOSP, net of cash acquired; (iii) a $12.9 million increase in restricted cash (iv) $11.0 million paid for investments in consolidated and unconsolidated investees; and (v) $9.8 million in payments to 8point3 Energy Partners. This was offset by: (i) $6.2 million in proceeds from sales or maturities of marketable securities.


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Net cash provided by investing activities in the nine months ended September 27, 2015 was $63.0 million, which included $363.9 million in proceeds from 8point3 Energy Partners. This was partially offset by (i) $206.8 million in capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems, leased and to be leased; (ii) $59.0 million paid for acquisitions; (iii) a $27.7 million increase in restricted cash; (iv) $4.1 million paid for investments in unconsolidated investees; and (v) $3.4 million paid for intangibles.

Financing Activities

Net cash provided by financing activities in the nine months ended October 2, 2016 was $493.9 million, which included: (i) $344.7 million in net proceeds from the issuance of non-recourse power plant and commercial financing, net of issuance costs; (ii) $106.2 million in net proceeds from the issuance of non-recourse residential financing, net of issuance costs; (iii) $78.3 million of net contributions from noncontrolling interests and redeemable noncontrolling interests related to the residential lease projects; and (iv) $1.2 million in excess tax benefit from stock-based compensation. This was partially offset by: (i) $21.0 million in purchases of treasury stock for tax withholding obligations on vested restricted stock; and (ii) $15.6 million in repayments of bank loans and other debt.

Net cash used in financing activities in the nine months ended September 27, 2015 was $82.7 million, which included: (i) a $249.6 million net payment to settle the 4.50% debentures due 2015 and the 4.50% Bond Hedge; (ii) $240.2 million in repayments of bank loans, project loans and other debt, primarily in the Quinto Credit Facility; (iii) $42.4 million in purchases of treasury stock for tax withholding obligations on vested restricted stock; and (iv) $37.8 million of net repayments of residential lease financing. This was partially offset by: (i) $211.8 million in net proceeds from the issuance of project loans; (ii) $126.9 million of net contributions from noncontrolling interests and redeemable noncontrolling interests related to the residential lease program; (iii) $79.4 million in net proceeds from the issuance of non-recourse debt financing, net of issuance costs; (iv) $29.3 million in proceeds from 8point3 Energy Partners; (v) $15.0 million in net proceeds from sale-leaseback financing; and (vi) $25.1 million in excess tax benefit from stock-based compensation.

Debt and Credit Sources

Convertible Debentures

As of October 2, 2016, an aggregate principal amount of $425.0 million of the 4.00% debentures due 2023 remained issued and outstanding. The 4.00% debentures due 2023 were issued on December 15, 2015. Interest on the 4.00% debentures due 2023 is payable on January 15 and July 15 of each year, beginning on July 15, 2016. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price approximately equal to $30.53 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 4.00% debentures due 2023 mature on January 15, 2023. Holders may require us to repurchase all or a portion of their 4.00% debentures due 2023, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control fundamental change, as described in the related indenture, the 4.00% debentures due 2023 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 4.00% debentures due 2023 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo Bank, National Association ("Wells Fargo"), the trustee, or the holders of a specified amount of then-outstanding 4.00% debentures due 2023 will have the right to declare all amounts then outstanding due and payable.

As of October 2, 2016, an aggregate principal amount of $400.0 million of the 0.875% debentures due 2021 remained issued and outstanding. The 0.875% debentures due 2021 were issued on June 11, 2014. Interest on the 0.875% debentures due 2021 is payable on June 1 and December 1 of each year. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price approximately equal to $48.76 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 0.875% debentures due 2021 mature on June 1, 2021. Holders may require us to repurchase all or a portion of their 0.875% debentures due 2021, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control fundamental change, as described in the related indenture, the 0.875% debentures due 2021 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 0.875% debentures due 2021 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.875% debentures due 2021 will have the right to declare all amounts then outstanding due and payable.

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As of October 2, 2016, an aggregate principal amount of $300.0 million of the 0.75% debentures due 2018 remained issued and outstanding. The 0.75% debentures due 2018 were issued on May 29, 2013. Interest on the 0.75% debentures due 2018 is payable on June 1 and December 1 of each year. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price equal to $24.95 per share. The applicable conversion rate may be subject to adjustment in certain circumstances. If not earlier converted, the 0.75% debentures due 2018 mature on June 1, 2018. Holders may require us to repurchase all or a portion of their 0.75% debentures due 2018, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control fundamental change, as described in the related indenture, the 0.75% debentures due 2018 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 0.75% debentures due 2018 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.75% debentures due 2018 will have the right to declare all amounts then outstanding due and payable. Please see "Part I. Item 1A. Risk Factors—Risks Related to our Debt and Equity Securities—Conversion of our outstanding 0.75% debentures, 0.875% debentures, 4.00% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.

Mortgage Loan Agreement with IFC

On May 6, 2010, we entered into a mortgage loan agreement with IFC. Under the loan agreement, we borrowed $75.0 million and are required to repay the amount borrowed starting two years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. We are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. We may prepay all or a part of the outstanding principal, subject to a 1% prepayment premium. We have pledged certain assets as collateral supporting repayment obligations.
  
As of October 2, 2016, we had $17.5 million outstanding under the mortgage loan agreement. Additionally, in accordance with the terms of the mortgage loan agreement, we are required to establish a debt service reserve account which shall contain the amount, as determined by IFC, equal to the aggregate principal and interest due on the next succeeding interest payment date after such date. As of October 2, 2016, we had restricted cash and cash equivalents of $9.2 million related to the IFC debt service reserve.

Loan Agreement with California Enterprise Development Authority ("CEDA")

On December 29, 2010, we borrowed from CEDA the proceeds of the $30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation - Headquarters Project) Series 2010 (the "Bonds") maturing April 1, 2031 under a loan agreement with CEDA. Certain of our obligations under the loan agreement were contained in a promissory note dated December 29, 2010 issued by us to CEDA, which assigned the promissory note, along with all right, title and interest in the loan agreement, to Wells Fargo, as trustee, with respect to the Bonds for the benefit of the holders of the Bonds. The Bonds bear interest at a fixed-rate of 8.50% per annum.

As of October 2, 2016, the $30.0 million aggregate principal amount of the Bonds was classified as "Long-term debt" in our Consolidated Balance Sheets.

Revolving Credit Facility with Credit Agricole

On July 3, 2013, we entered into a revolving credit agreement with Credit Agricole, as administrative agent, and certain financial institutions, under which we may borrow up to $250.0 million. On August 26, 2014, we entered into an amendment to the revolving credit facility that extends, among other things, the maturity date of the facility from July 3, 2016 to August 26, 2019 (the "Maturity Date"). Amounts borrowed may be repaid and reborrowed until the Maturity Date. On February 17, 2016, the Company entered into an amendment to the credit agreement, expanding the available borrowings under the revolving credit facility to $300.0 million and adding a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. The revolving credit facility includes representations, covenants, and events of default customary for financing transactions of this type. The revolving credit facility was entered into in conjunction with the delivery by Total S.A. of a guarantee of our obligations under the facility. On January 31, 2014, (i) our obligations under the revolving credit facility became secured by a pledge of certain accounts receivable and inventory, (ii) certain of our subsidiaries entered into guaranties of the revolving credit facility, and (iii) Total S.A.'s guarantee of our obligations under the revolving credit facility expired.

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We are required to pay (a) interest on outstanding borrowings under the facility of (i) with respect to any LIBOR rate loan, an amount ranging from 1.50% to 2.00% (depending on our leverage ratio from time to time) plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; and (ii) with respect to any alternate base rate loan, an amount ranging from 0.50% to 1.00% (depending on our leverage ratio from time to time) plus the greater of (1) the prime rate, (2) the Federal Funds rate plus 0.50%, and (3) the one-month LIBOR rate plus 1%; and (b) a commitment fee ranging from 0.25% to 0.35% (depending on our leverage ratio from time to time) per annum on funds available for borrowing and not borrowed. We will be required to pay interest on letters of credit under the agreement of (a) with respect to any performance letter of credit, an amount ranging from 0.90% to 1.20% (depending on our leverage ratio from time to time); and (b) with respect to any other letter of credit, an amount ranging from 1.50% to 2.00% (depending on our leverage ratio from time to time).

As of October 2, 2016, we had $4.7 million of outstanding borrowings under the revolving credit facility, all of which were related to letters of credit.

August 2016 Letter of Credit Facility Agreement

In August 2016, we entered into a letter of credit facility with Banco Santander, S.A. which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed $85 million. As of October 2, 2016, letters of credit issued and outstanding under the facility with Banco Santander, S.A. totaled $43.8 million.

2016 Letter of Credit Facility Agreements

In June 2016, we entered into a Continuing Agreement for Standby Letters of Credit and Demand Guarantees with Deutsche Bank and Deutsche Bank Trust (the “2016 Non-Guaranteed LC Facility”) which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed $50.0 million. The 2016 Non-Guaranteed LC Facility will terminate on June 29, 2018. As of October 2, 2016, letters of credit issued and outstanding under the 2016 Non-Guaranteed LC Facility totaled $46.0 million.

In June 2016, we entered into bilateral letter of credit facility agreements (the “2016 Guaranteed LC Facilities”) with The Bank of Tokyo-Mitsubishi UFJ, Crédit Agricole, and HSBC. Each letter of credit facility agreement provides for the issuance, upon our request, of letters of credit by the issuing bank thereunder in order to support certain of our obligations until December 31, 2018. Payment of obligations under each of the letter of credit facilities are guaranteed by Total S.A. pursuant to the Credit Support Agreement. Aggregate letter of credit amounts may be increased upon the agreement of the respective parties but, otherwise, may not exceed $75.0 million with The Bank of Tokyo-Mitsubishi UFJ, $75.0 million with Credit Agricole and $175.0 million with HSBC, for a total capacity of $325.0 million. Each letter of credit issued under one of the letter of credit facilities generally must have an expiration date, subject to certain exceptions, no later than the earlier of (a) two years from completion of the applicable project and (b) March 31, 2020.

In June 2016, in connection with the 2016 Guaranteed LC Facilities, we entered into a transfer agreement to transfer to the 2016 Guaranteed LC Facilities all existing outstanding letters of credit issued under our letter of credit facility agreement with Deutsche Bank, as administrative agent, and certain financial institutions, entered into in August 2011 and amended from time to time. In connection with the transfer of the existing outstanding letters of credit, the aggregate commitment amount under the August 2011 letter of credit facility was permanently reduced to zero on June 29, 2016. As of October 2, 2016, there were no letters of credit issued and outstanding under the August 2011 letter of credit facility with Deutsche Bank. As of October 2, 2016, letters of credit issued and outstanding under the 2016 Guaranteed LC Facilities totaled $250.6 million.

September 2011 Letter of Credit Facility with Deutsche Bank Trust

On September 27, 2011, we entered into a letter of credit facility with Deutsche Bank Trust which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed $200.0 million. Each letter of credit issued under the facility is fully cash-collateralized and we have entered into a security agreement with Deutsche Bank Trust, granting them a security interest in a cash collateral account established for this purpose.

As of October 2, 2016 letters of credit issued under the Deutsche Bank Trust facility totaled $3.6 million, which was fully collateralized with restricted cash as classified on the Consolidated Balance Sheets.

Revolving Credit Facility with Mizuho and Goldman Sachs


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On May 4, 2016, we entered into a revolving credit facility (the "Construction Revolver") with Mizuho Bank Ltd., as administrative agent, and Goldman Sachs Bank USA, under which we may borrow up to $200 million. The Construction Revolver also includes a $100 million accordion feature.  Amounts borrowed under the Construction Revolver may be repaid and reborrowed in support of our commercial and small scale utility projects in the United States until the May 4, 2021 maturity date. The Construction Revolver includes representations, covenants, and events of default customary for financing transactions of this type.

Borrowings under the Construction Revolver bear interest at the applicable LIBOR rate plus 1.50% for the first two years (with the final year at LIBOR plus 1.75%). All outstanding indebtedness under the facility may be voluntarily prepaid in whole or in part without premium or penalty (with certain limitations to partial repayments), other than customary breakage costs. The Construction Revolver is secured by the assets of, and equity in, the various project companies to which the borrowings relate, but is otherwise non-recourse to us and our other affiliates.

As of October 2, 2016, outstanding borrowings under the Construction Revolver totaled $57.7 million.

Non-recourse Financing and Other Debt

In order to facilitate the construction, sale or ongoing operation of certain solar projects, including our residential leasing program, we regularly obtain project-level financing. These financings are secured either by the assets of the specific project being financed or by our equity in the relevant project entity and the lenders do not have recourse to the general assets of the Company for repayment of such debt obligations, and hence the financings are referred to as non-recourse. Non-recourse financing is typically in the form of loans from third-party financial institutions, but also takes other forms, including "flip partnership" structures, sale-leaseback arrangements, or other forms commonly used in the solar or similar industries. We may seek non-recourse financing covering solely the construction period of the solar project or may also seek financing covering part or all of the operating life of the solar project. We classify non-recourse financings in our Consolidated Balance Sheets in accordance with their terms; however, in certain circumstances, we may repay or refinance these financings prior to stated maturity dates in connection with the sale of the related project or similar such circumstances. In addition, in certain instances, the customer may assume the loans at the time that the project entity is sold to the customer. In these instances, subsequent debt assumption is reflected as a financing outflow and operating inflow in the Consolidated Statements of Cash Flows to reflect the substance of the assumption as a facilitation of customer financing from a third party.

For our residential lease program, non-recourse financing is typically accomplished by aggregating an agreed-upon volume of solar power systems and leases with residential customers into a specific project entity. The Company has entered into the following non-recourse financings with respect to its residential lease program:

In fiscal 2016, we entered into bridge loans to finance solar power systems and leases under our residential lease program. The loans are repaid over terms ranging from two to seven years. Some loans may be prepaid without penalties at our option at any time, while other loans may be prepaid, subject to a prepayment fee, after one year. During the three and nine months ended October 2, 2016, we had net proceeds (repayments) of $(30.6) million and $3.5 million, respectively, in connection with these loans. As of October 2, 2016, the aggregate carrying amount of these loans, presented in "Long-term debt" on our Consolidated Balance Sheets, was $4.5 million.

We enter into long-term loans to finance solar power systems and leases under our residential lease program. The loans are repaid over their terms of between 17 and 18 years, and may be prepaid without penalty at our option beginning seven years after the original issuance of the loan. During the three and nine months ended October 2, 2016, we had net proceeds of $80.8 million and $82.9 million, respectively, in connection with these loans. During the three and nine months ended September 27, 2015, we had net proceeds of $25.4 million and $79.4 million, respectively, in connection with these loans. As of October 2, 2016, and January 3, 2016, the aggregate carrying amount of these loans, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $254.8 million and $171.8 million, respectively.

We have entered into multiple arrangements under which solar power systems are financed by third-party investors or customers, including by a legal sale of the underlying asset that is accounted for as a borrowing under relevant accounting guidelines as the requirements to recognize the transfer of the asset were not met. Under the terms of these arrangements, the third parties make an upfront payment to us, which we recognize as a liability that will be reduced over the term of the arrangement as lease receivables and government incentives are received by the third party. As the liability is reduced, we make a corresponding reduction in receivables. We use this approach to account for both operating and sales-type leases with our residential lease customers in our consolidated financial statements. During the three and nine months ended October 2, 2016, we had net proceeds of $4.9 million and $19.8 million, respectively, in connection with these facilities. During the three and nine months ended September 27, 2015, we had net proceeds (repayments) of $2.2 million and $(37.8) million,

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respectively, in connection with these facilities. As of October 2, 2016 and January 3, 2016, the aggregate carrying amount of these facilities, presented in "Accrued liabilities" and "Other long-term liabilities" on our Consolidated Balance Sheets, was $52.9 million and $36.8 million, respectively (see Note 5).

We also enter into facilities with third-party tax equity investors under which the investors invest in a structure known as a partnership flip. We hold controlling interests in these less-than-wholly-owned entities and therefore fully consolidate these entities. We account for the portion of net assets in the consolidated entities attributable to the investors as noncontrolling interests in our consolidated financial statements. Noncontrolling interests in subsidiaries that are redeemable at the option of the noncontrolling interest holder are classified accordingly as redeemable, between liabilities and equity on the Company's Consolidated Balance Sheets. During the three and nine months ended October 2, 2016, we had net contributions of $28.0 million and $78.3 million, respectively, under these facilities and attributed losses of $18.7 million and $55.6 million, respectively, to the non-controlling interests corresponding principally to certain assets, including tax credits, which were allocated to the non-controlling interests during the periods. During the three and nine months ended September 27, 2015, we had net contributions of $39.6 million and $126.9 million, respectively, under these facilities and attributed losses of $31.1 million and $80.9 million, respectively, to the non-controlling interests corresponding principally to certain assets, including tax credits, which were allocated to the non-controlling interests during the periods. As of October 2, 2016 and January 3, 2016, the aggregate carrying amount of these facilities, presented in “Redeemable non-controlling interests in subsidiaries” and “Non-controlling interests in subsidiaries” on our Consolidated Balance Sheets, was $153.3 million and $128.6 million, respectively.

For our power plant and commercial solar projects, non-recourse financing is typically accomplished using an individual solar power system or a series of solar power systems with a common end customer, in each case owned by a specific project entity. We have entered into the following non-recourse financings with respect to our power plant and commercial projects:

In fiscal 2016, we entered into the Construction Revolver credit facility to support the construction of our commercial and small scale utility projects in the United States. During the three and nine months ended October 2, 2016, we had net proceeds of $44.9 million and $57.2 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying value of the Construction Revolver, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $57.7 million.

In fiscal 2016, we entered into a long-term credit facility to finance the 125 MW utility-scale Boulder power plant project in Nevada. During both the three and nine months ended October 2, 2016, we had net proceeds of $36.5 million and $147.4 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $154.3 million.

In fiscal 2016, we entered into a short-term credit facility to finance the utility-scale Rio Bravo power plant projects in California, with an aggregate size of approximately 50 MW. During both the three and nine months ended October 2, 2016, we had net proceeds of $32.5 million and $109.8 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" on our Consolidated Balance Sheets, was $112.6 million.

In fiscal 2016, we entered into a short-term credit facility to finance the 20 MW utility-scale Wildwood power plant project in California. During both the three and nine months ended October 2, 2016, we had net proceeds of $13.5 million and $38.5 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" on our Consolidated Balance Sheets, was $41.6 million.

In fiscal 2016, we entered into a long-term credit facility to finance several related utility-scale power plant projects in California, including the Stanford and Turlock projects, with an aggregate size of approximately 350 MW. During the three and nine months ended October 2, 2016, we had net proceeds of zero and $192.2 million, respectively, in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $201.6 million.

In fiscal 2016, we entered into a long-term credit facility to finance the 111 MW utility-scale El Pelicano power plant project in Chile. During both the three and nine months ended October 2, 2016, we had net proceeds of $41.4 million in connection with the facility. As of October 2, 2016, the aggregate carrying amount of this facility, presented in "Long-term debt" on our Consolidated Balance Sheets, was $47.0 million.

In fiscal 2015, we entered into a long-term credit facility to finance the 128 MW utility-scale Henrietta utility-scale power plant in California. During the three months ended October 2, 2016, in connection with the sale of the project, we repaid the full amount outstanding, and as a result, during both the three and nine months ended October 2, 2016, the Company had

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net repayments of $216.7 million in connection with the facility. As of January 3, 2016, the aggregate carrying amount of this loan, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $216.7 million.

In fiscal 2015, we entered into a long-term credit facility to finance the 60 MW Hooper utility-scale power plant in Colorado. In the first quarter of fiscal 2016, we repaid the full amount outstanding. During the nine months ended October 2, 2016, we had net repayments of $37.3 million in connection with the facility. As of January 3, 2016, the carrying amount of this facility, presented in "Long-term debt" on our Consolidated Balance Sheets, was $37.3 million.

In fiscal 2013, we entered into a long-term loan agreement to finance a 5.4 MW utility and power plant operating in Arizona. As of both October 2, 2016, and January 3, 2016, the aggregate carrying amount under this loan, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $7.8 million.

Other debt is further composed of non-recourse project loans in EMEA, which are scheduled to mature through 2028.

See "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 6. Leasing" in this Quarterly Report on Form 10-Q for a discussion of the Company’s sale-leasebacks accounted for under the financing method.

Liquidity

As of October 2, 2016, we had unrestricted cash and cash equivalents of $383.9 million as compared to $954.5 million as of January 3, 2016. Our cash balances are held in numerous locations throughout the world and as of October 2, 2016, we had approximately $90.3 million held outside of the United States. This offshore cash is used to fund operations of our business in the Europe and Asia Pacific regions as well as non-U.S. manufacturing operations, which require local payment for product materials and other expenses.  The amounts held outside of the United States represent the earnings of our foreign subsidiaries which, if repatriated to the United States under current law, would be subject to United States federal and state tax less applicable foreign tax credits. Repatriation of earnings that have not been subjected to U.S. or foreign withholding tax and that have been indefinitely reinvested outside the U.S. could result in additional United States federal income tax or foreign withholding tax payments in future years.

We expect total capital expenditures related to purchases of property, plant and equipment in the range of $220 million to $240 million in fiscal 2016 in order to increase our manufacturing capacity for our highest efficiency X-Series product platform and our new Performance Series technology, improve our current and next generation solar cell manufacturing technology, and other projects. In addition, we expect to invest a significant amount of capital to develop solar power systems and plants for sale to customers. The development of solar power plants can require long periods of time and substantial initial investments. Our efforts in this area may consist of all stages of development, including land acquisition, permitting, financing, construction, operation and the eventual sale of the projects. We often choose to bear the costs of such efforts prior to the final sale to a customer, which involves significant upfront investments of resources (including, for example, large transmission deposits or other payments, which may be non-refundable), land acquisition, permitting, legal and other costs, and in some cases the actual costs of constructing a project, in advance of the signing of PPAs and EPC contracts and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Any delays in disposition of one or more projects could have a negative impact on our liquidity.

Certain of our customers also require performance bonds issued by a bonding agency or letters of credit issued by financial institutions, which are returned to us upon satisfaction of contractual requirements. If there is a contractual dispute with the customer, the customer may withhold the security or make a draw under such security, which could have an adverse impact on our liquidity. Obtaining letters of credit may require adequate collateral. All letters of credit issued under our 2016 Guaranteed LC Facilities are guaranteed by Total S.A. pursuant to the Credit Support Agreement. Our September 2011 letter of credit facility with Deutsche Bank Trust is fully collateralized by restricted cash, which reduces the amount of cash available for operations. As of October 2, 2016, letters of credit issued under the Deutsche Bank Trust facility amounted to $3.6 million which were fully collateralized with restricted cash on the Consolidated Balance Sheets.

In fiscal 2011, we launched our residential lease program with dealers in the United States, in partnership with a third-party financial institution, which allows customers to obtain SunPower systems under lease agreements up to 20 years, subject to financing availability. We have entered into facilities with financial institutions that will provide financing to support additional residential solar lease projects. Under the terms of certain programs, we receive upfront payments for periods under which the third-party financial institution has agreed to assume collection risk for certain residential leases. Changes in the amount or timing of upfront payments received from the financial institutions may have an impact on our cash position within the next twelve months. The normal collection of monthly rent payments for leases placed in service is not expected to have a material impact on our cash position within the next twelve months. We have entered into multiple facilities with third-party

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investors under which both parties will invest in entities that hold SunPower solar power systems and leases with residential customers. We determined that we hold a controlling interest in these less-than-wholly-owned entities and have fully consolidated these entities as a result (see "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 6. Leasing"). During the nine months ended October 2, 2016, we received $91.7 million in contributions from investors under the related facility agreements. Additionally, during fiscal 2014, 2015 and 2016, we entered into several long-term non-recourse loans to finance solar power systems and leases under our residential lease program. In fiscal 2016, we drew down $86.0 million of proceeds, net of issuance costs, under the loan agreements. The loans have 17- and 18-year terms and as of October 2, 2016, the short-term and long-term balances of the loans were $7.3 million and $247.5 million, respectively. We are actively arranging additional third-party financing for our residential lease program; however, the credit markets are unpredictable, and if they become challenging, we may be unable to arrange additional financing partners for our residential lease program in future periods, which could have a negative impact on our sales. In the unlikely event that we enter into a material number of additional leases without promptly obtaining corresponding third-party financing, our cash and working capital could be negatively affected.

Solar power plant projects often require significant up-front investments. These include payments for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible. We often make arrangements with third-party financiers to acquire and build solar power systems or to fund project construction using non-recourse project debt. As of October 2, 2016, outstanding amounts related to our project financing totaled $881.8 million.

We believe that our current cash, cash equivalents, cash expected to be generated from operations and funds available under our existing credit facilities will be sufficient to meet our working capital needs and fund our committed capital expenditures over the next 12 months, including the development and construction of solar power systems and plants. Additionally, we work with our vendors to obtain favorable payment terms, when possible, and may choose to reduce manufacturing output to reduce inventory in order to optimize our working capital. We may also choose to explore additional options in connection with our short-term liquidity needs, such as selling raw materials inventory to third parties, liquidating certain investments, discontinuing the development of certain projects, implementing restructuring plans, and deferring or canceling uncommitted capital expenditures and other investment or acquisition activities. We expect to be able to supplement our short-term liquidity, if necessary, with access to capital markets and additional credit facilities, including non-recourse debt, made available by various domestic and foreign financial institutions. However, there can be no assurance that our liquidity will be adequate over time or that we will in fact have access to capital markets on reasonable terms or at all. A significant portion of our revenue is generated from a limited number of customers and large projects and our inability to execute these projects, or to collect from these customers or for these projects, would have a significant negative impact on our business. Our capital expenditures and use of working capital may be greater than we expect if we decide to make additional investments in the development and construction of solar power plants and sales of power plants and associated cash proceeds are delayed, or if we decide to accelerate increases in our manufacturing capacity internally or through capital contributions to joint ventures. We require project financing in connection with the construction of solar power plants, which financing may not be available on terms acceptable to us. In addition, we could in the future make additional investments or guarantee certain financial obligations of our investments, which could reduce our cash flows, increase our indebtedness and expose us to the credit risk of our joint ventures. See also "Risks Related to Our Sales Channels—A limited number of customers and large projects are expected to continue to comprise a significant portion of our revenues and any decrease in revenues from those customers or projects, payment of liquidated damages, or an increase in related expenses, could have a material adverse effect on our business, results of operations and financial condition," and "Risks Related to Our Liquidity—We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments as planned due to the general economic environment and the continued market pressure driving down the average selling prices of our solar power products," among other factors in Part I. "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.

On February 17, 2016, we entered into an amendment to the credit agreement with Credit Agricole to expand the available borrowings under the revolving credit facility to $300.0 million and to add a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. As of October 2, 2016, we had $295.3 million available to us under the revolving credit facility. Proceeds from our revolving credit facility with Credit Agricole may be used for general corporate purposes. Our revolving credit facility with Credit Agricole requires that we maintain certain financial ratios, including the ratio that our debt at the end of each quarter to our EBITDA for the last twelve months, as defined, will not exceed 4.5 to 1. We expect to not be in compliance with this covenant at some point in the next twelve months, and it is possible that we may not be in compliance with other covenants in the future, which could affect the availability of borrowings under the line, if not remedied. Additionally, on May 4, 2016, we entered into the Construction Revolver credit facility, under which we may borrow up to $200 million, with a $100 million accordion feature, in support of our commercial and small scale utility projects in the United States until its May 4, 2021 maturity date, subject to certain conditions. As of October 2, 2016, we had $139.9 million available to us under the Construction Revolver credit facility. There are no assurances, however, that we will have

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sufficient available cash to repay our indebtedness or that we will be able to refinance such indebtedness on similar terms to the expiring indebtedness. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing. The current economic environment, however, could limit our ability to raise capital by issuing new equity or debt securities on acceptable terms, and lenders may be unwilling to lend funds on acceptable terms in the amounts that would be required to supplement cash flows to support operations. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders (and the potential for further dilution upon the exercise of warrants or the conversion of convertible debt) and may not be available on favorable terms or at all, particularly in light of the current conditions in the financial and credit markets. Additional debt would result in increased expenses and would likely impose new restrictive covenants which may be similar or different than those restrictions contained in the covenants under our current loan agreements and debentures. In addition, financing arrangements, including project financing for our solar power plants and letters of credit facilities, may not be available to us, or may not be available in amounts or on terms acceptable to us.
 
Contractual Obligations

The following table summarizes our contractual obligations as of October 2, 2016:
 
 
 
 
Payments Due by Fiscal Period
(In thousands)
 
Total
 
2016 (remaining three months)
 
2017-2018
 
2019-2020
 
Beyond 2020
Convertible debt, including interest1
 
$
1,252,111

 
$
5,751

 
$
344,194

 
$
41,000

 
$
861,166

IFC mortgage loan, including interest2
 
17,940

 
171

 
17,769

 
—

 
—

CEDA loan, including interest3
 
66,982

 
645

 
5,100

 
5,100

 
56,137

Other debt, including interest4
 
1,140,784

 
320,287

 
274,979

 
70,176

 
475,342

Future financing commitments5
 
9,048

 
7,487

 
1,561

 
—

 
—

Operating lease commitments6
 
123,384

 
4,684

 
28,949

 
24,817

 
64,934

Sale-leaseback financing7
 
111,390

 
2,876

 
16,986

 
14,930

 
76,598

Capital lease commitments8
 
5,084

 
286

 
2,084

 
1,248

 
1,466

Non-cancellable purchase orders9
 
218,833

 
218,833

 
—

 
—

 
—

Purchase commitments under agreements10
 
1,171,116

 
274,716

 
555,859

 
337,541

 
3,000

Deferred purchase consideration in connection with acquisition
 
61,100

 
—

 
1,100

 
60,000

 
—

Total
 
$
4,177,772

 
$
835,736

 
$
1,248,581

 
$
554,812

 
$
1,538,643

1 
Convertible debt, including interest, relates to the aggregate of $1,125.0 million in outstanding principal amount of our senior convertible debentures on October 2, 2016. For the purpose of the table above, we assume that all holders of the outstanding debentures will hold the debentures through the date of maturity, and upon conversion, the values of the senior convertible debentures will be equal to the aggregate principal amount with no premiums.

2 
IFC mortgage loan, including interest, relates to the $17.5 million outstanding principal amount as of October 2, 2016. Under the loan agreement, we are required to repay the amount borrowed, starting 2 years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. We are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed.

3 
CEDA loan, including interest, relates to the proceeds of the $30.0 million aggregate principal amount of the Bonds. The Bonds mature on April 1, 2031 and bear interest at a fixed rate of 8.50% through maturity.

4 
Other debt, including interest, primarily relates to non-recourse finance projects and solar power systems and leases under our residential lease program as described in "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies."

5 
In connection with purchase and joint venture agreements with non-public companies, we will be required to provide additional financing to such parties of up to $9.0 million, subject to certain conditions.

6 
Operating lease commitments primarily relate to certain solar power systems leased from unaffiliated third parties over minimum lease terms of up to 20 years and various facility lease agreements.

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7 
Sale-leaseback financing relates to future minimum lease obligations for solar power systems under sale-leaseback arrangements which were determined to include integral equipment and accounted for under the financing method.

8 
Capital lease commitments primarily relate to certain buildings, manufacturing and equipment under capital leases in Europe for terms of up to 12 years.

9 
Non-cancellable purchase orders relate to purchases of raw materials for inventory and manufacturing equipment from a variety of vendors.

10 
Purchase commitments under agreements relate to arrangements entered into with several suppliers, including joint ventures, for polysilicon, ingots, wafers, and Solar Renewable Energy Credits, among others. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 8 years and there are certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that we terminate the arrangements.

Liabilities Associated with Uncertain Tax Positions

Due to the complexity and uncertainty associated with our tax positions, we cannot make a reasonably reliable estimate of the period in which cash settlement will be made for our liabilities associated with uncertain tax positions in other long-term liabilities. Therefore, they have been excluded from the table above. As of October 2, 2016, total liabilities associated with uncertain tax positions were $44.1 million and are included in "Other long-term liabilities" in our Consolidated Balance Sheets as they are not expected to be paid within the next twelve months.

Off-Balance-Sheet Arrangements

As of October 2, 2016, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Exchange Risk

Our exposure to movements in foreign currency exchange rates is primarily related to sales to European customers that are denominated in Euros. Revenue generated from European customers represented 3% and 4% of our total revenue in the three and nine months ended October 2, 2016, respectively, and 5% and 8% of our total revenue in the three and nine months ended September 27, 2015, respectively. A 10% change in the Euro exchange rate would have impacted our revenue by approximately $1.9 million and $5.6 million in the three and nine months ended October 2, 2016, respectively, and $1.8 million and $9.0 million in the three and nine months ended September 27, 2015, respectively.

In the past, we have experienced an adverse impact on our revenue, gross margin and profitability as a result of foreign currency fluctuations. When foreign currencies appreciate against the U.S. dollar, inventories and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our solar power products more expensive for international customers, thus potentially leading to a reduction in demand, our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies.

We currently conduct hedging activities which involve the use of option and forward currency contracts that are designed to address our exposure to changes in the foreign exchange rate between the U.S. dollar and other currencies. As of October 2, 2016, we had outstanding hedge option currency contracts and forward currency contracts with aggregate notional values of $76.8 million and $62.3 million, respectively. As of January 3, 2016, we had outstanding hedge option currency contracts and forward currency contracts with aggregate notional values of zero and $35.7 million, respectively. Because we hedge some of our expected future foreign exchange exposure, if associated revenues do not materialize we could experience a reclassification of ineffective gains or losses into earnings. Such a reclassification could adversely impact our revenue, margins and results of operations. We cannot predict the impact of future exchange rate fluctuations on our business and operating results.

Credit Risk
 
We have certain financial and derivative instruments that subject us to credit risk. These consist primarily of cash and cash equivalents, restricted cash and cash equivalents, investments, accounts receivable, notes receivable, advances to suppliers, foreign currency option contracts, foreign currency forward contracts, bond hedge and warrant transactions. We are exposed to credit losses in the event of nonperformance by the counterparties to our financial and derivative instruments. Our investment policy requires cash and cash equivalents, restricted cash and cash equivalents, and investments to be placed with high-quality financial institutions and limits the amount of credit risk from any one issuer. We additionally perform ongoing credit evaluations of our customers’ financial condition whenever deemed necessary and generally do not require collateral.

We enter into agreements with vendors that specify future quantities and pricing of polysilicon to be supplied for periods up to 10 years. Under certain agreements, we are required to make prepayments to the vendors over the terms of the arrangements. As of October 2, 2016 and January 3, 2016, advances to suppliers totaled $314.1 million and $359.1 million, respectively. Two suppliers accounted for 86% and 14% of total advances to suppliers as of October 2, 2016, and 82% and 16% as of January 3, 2016.

We enter into foreign currency derivative contracts and convertible debenture hedge transactions with high-quality financial institutions and limit the amount of credit exposure to any single counterparty. The foreign currency derivative contracts are limited to a time period of 12 months or less. We regularly evaluate the credit standing of our counterparty financial institutions.

Interest Rate Risk

We are exposed to interest rate risk because many of our customers depend on debt financing to purchase our solar power systems. An increase in interest rates could make it difficult for our customers to obtain the financing necessary to purchase our solar power systems on favorable terms, or at all, and thus lower demand for our solar power products, reduce revenue and adversely impact our operating results. An increase in interest rates could lower a customer's return on investment in a system or make alternative investments more attractive relative to solar power systems, which, in each case, could cause our customers to seek alternative investments that promise higher returns or demand higher returns from our solar power systems, reduce gross margin and adversely impact our operating results. This risk is significant to our business because our sales model is highly sensitive to interest rate fluctuations and the availability of credit, and would be adversely affected by increases in interest rates or liquidity constraints.

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Our interest expense would increase to the extent interest rates rise in connection with our variable interest rate borrowings. As of October 2, 2016, the outstanding principal balance of our variable interest borrowings was $700.8 million. We do not believe that an immediate 10% increase in interest rates would have a material effect on our financial statements. In addition, lower interest rates would have an adverse impact on our interest income. Our investment portfolio primarily consists of $3.0 million in money market funds as of October 2, 2016 which exposes us to interest rate risk. Due to the relatively short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our money market funds. Since we believe we have the ability to liquidate substantially all of this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

Equity Price Risk Involving Minority Investments in Joint Ventures and Other Non-Public Companies

Our investments held in joint ventures and other non-public companies expose us to equity price risk. As of October 2, 2016 and January 3, 2016, investments of $(43.7) million and $186.4 million, respectively, are accounted for using the equity method, and $48.5 million and $36.4 million, respectively, are accounted for using the cost method. The carrying value of our equity method investments as of October 2, 2016 and January 3, 2016 included the negative balance of $55.2 million and $30.9 million, respectively, of our investment in the 8point3 Group (See "Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 10. Equity Method Investments"). These strategic investments in third parties are subject to risk of changes in market value, which if determined to be other-than-temporary, could result in realized impairment losses. We generally do not attempt to reduce or eliminate our market exposure in equity and cost method investments. We monitor these investments for impairment and record reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices and declines in operations of the issuer. There can be no assurance that our equity and cost method investments will not face risks of loss in the future.

Interest Rate Risk and Market Price Risk Involving Convertible Debt

The fair market value of our outstanding convertible debentures is subject to interest rate risk, market price risk and other factors due to the convertible feature of the debentures. The fair market value of the debentures will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair market value of the debentures will generally increase as the market price of our common stock increases and decrease as the market price of our common stock falls. The interest and market value changes affect the fair market value of the debentures, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligations, except to the extent increases in the value of our common stock may provide the holders of our 4.00% debentures due 2023, 0.875% debentures due 2021, or 0.75% debentures due 2018 the right to convert such debentures into cash in certain instances. The aggregate estimated fair value of our outstanding convertible debentures was $898.0 million as of October 2, 2016. The aggregate estimated fair value of our outstanding convertible debentures was $1,253.2 million as of January 3, 2016. Estimated fair values are based on quoted market prices as reported by an independent pricing source. A 10% increase in quoted market prices would increase the estimated fair value of our then-outstanding debentures to $987.8 million and $1,378.5 million as of October 2, 2016 and January 3, 2016, respectively, and a 10% decrease in the quoted market prices would decrease the estimated fair value of our then-outstanding debentures to $808.2 million and $1,127.9 million as of October 2, 2016 and January 3, 2016, respectively.


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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure control and procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 2, 2016 at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
ITEM 1. LEGAL PROCEEDINGS
The disclosure under "Note 9. Commitments and Contingencies—Legal Matters" in "Notes to Consolidated Financial Statements" contained in this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016, except for the risk factors described and included below.

Our operating results are subject to significant fluctuations and are inherently unpredictable.

We do not know whether our revenue will continue to grow, or if it will continue to grow sufficiently to outpace our expenses, which we also expect to grow. As a result, we may not be profitable on a quarterly basis. Our quarterly revenue and operating results are difficult to predict and have in the past fluctuated significantly from quarter to quarter. The principal reason for these significant fluctuations in our results is that we derive a substantial portion of our total revenues from our large commercial and utility-scale and power plant customers, and, consequently:

•
the amount, timing and mix of sales to our large commercial, utilities and power plant customers, often for a single medium or large-scale project, may cause large fluctuations in our revenue and other financial results because, at any given time, a single large-scale project can account for a material portion of our total revenue in a given quarter;

•
our inability to monetize our projects as planned, or any delay in obtaining the required government support or initial payments to begin recognizing revenue under the relevant recognition criteria, and the corresponding revenue impact under the percentage-of-completion method of recognizing revenue, may similarly cause large fluctuations in our revenue and other financial results;

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•
our ability to monetize projects as planned is also subject to market conditions, including, fluctuations in demand based on the availability of regulatory incentives and other factors, changes in the internal rate of return expected by customers in light of market conditions, the increasing number of power plants being constructed or available for sale, and competition for financing, which can make both financing and disposition more challenging and may significantly affect project sale prices;

•
market conditions may deteriorate after we have committed to projects, resulting in delays in disposing of projects, or changes in amounts realized on disposition, which may lead to significant fluctuations in the period-over-period profile of our results of operations and our cash available for working capital needs;

•
in the event a project is subsequently canceled, abandoned, or is deemed unlikely to occur, we will charge all prior capital costs as an operating expense in the quarter in which such determination is made, which could materially adversely affect operating results;

•
a delayed disposition of a project could require us to recognize a gain on the sale of assets instead of recognizing revenue;

•
our agreements with these customers may be canceled if we fail to meet certain product specifications or materially breach the agreement;

•
in the event of a customer bankruptcy, our customers may seek to renegotiate the terms of current agreements or renewals; and

•
the failure by any significant customer to pay for orders, whether due to liquidity issues or otherwise, could materially and adversely affect our results of operations.

Any decrease in revenue from our large commercial and utility–scale power plant customers, whether due to a loss or delay of projects or an inability to collect, could have a significant negative impact on our business. See also "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our 2015 Annual Report on Form 10-K. See also "Risks Related to Our Sales Channels–Revenues from a limited number of customers and large projects are expected to continue to comprise a significant portion of our total revenues and any decrease in revenues from those customers or projects, payment of liquidated damages, or an increase in related expenses, could have a material adverse effect on our business, results of operations and financial condition” in our 2015 Annual Report on Form 10-K.
Sales to our residential and light commercial customers are similarly susceptible to fluctuations in volumes and revenue, as well as fluctuations in demand based on the availability of regulatory incentives and other factors. In addition, demand from our commercial and residential customers may fluctuate based on the perceived cost-effectiveness of the electricity generated by our solar power systems as compared to conventional energy sources, such as natural gas and coal (which fuel sources are subject to significant price swings from time to time), and other non-solar renewable energy sources, such as wind. Declining average selling prices immediately affect our residential and light commercial sales volumes, and therefore lead to large fluctuations in revenue.
Further, our revenue mix of materials sales versus project sales can fluctuate dramatically from quarter to quarter, which may adversely affect our margins and financial results in any given period.
Any of the foregoing may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our common stock and our liquidity.
We base our planned operating expenses in part on our expectations of future revenue and a significant portion of our expenses is fixed in the short term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would materially adversely affect our operating results for that quarter. See also “–Risks Related to Our Sales Channels-Our business could be adversely affected by seasonal trends and construction cycles” in our 2015 Annual Report on Form 10-K.
See also "Risks Related to Our Sales Channels–The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results" and "Risks Related to Our Sales Channels–Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers

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to the purchase and use of solar power products, which may significantly reduce demand for our products and services" in our 2015 Annual Report on Form 10-K.

As owners and operators of solar power systems that deliver electricity to the grid, certain of our affiliated entities may be considered public utilities for purposes of the Federal Power Act, as amended (the “FPA”), and are subject to regulation by the Federal Energy Regulatory Commission (“FERC”), as well as various local and state regulatory bodies.

Although we are not directly subject to FERC regulation under the FPA, we are considered to be a “holding company” for purposes of Section 203 of the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the business through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or acquire ownership interests in their securities may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.

Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. FERC may grant our affiliated entities the authority to sell electricity at market-based rates and may also grant them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or revise market-based sales authority if the FERC subsequently determines that our affiliated entities can exercise market power in the sale of generation products, the provision of transmission services, or if it finds that any of the entities can create barriers to entry by competitors. In addition, if the entities fail to comply with certain reporting obligations, FERC may revoke their power sales tariffs. Finally, if the entities were deemed to have engaged in manipulative or deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or suspension or revocation of their market-based rate authority. If our affiliated entities were to lose their market-based rate authority, such companies would be required to obtain the FERC’s acceptance of a cost-of-service rate schedule and could become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and have an adverse effect on our results of operations. In addition to the risks described above, we may be subject to additional regulatory regimes at state or foreign levels to the extent we own and operate solar power systems in such jurisdictions.

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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table sets forth all purchases made by or on behalf of us or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock during each of the indicated periods.
Period
 
Total Number of Shares Purchased1
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
July 4, 2016 through July 31, 2016
 
6,504

 
$
14.88

 
—

 
—

August 1, 2016 through August 28, 2016
 
24,737

 
$
11.80

 
—

 
—

August 29, 2016 through October 2, 2016
 
93,789

 
$
9.52

 
—

 
—

 
 
125,030

 
$
10.25

 
—

 
—

1 
The shares purchased represent shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.


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ITEM 6: EXHIBITS

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 
SUNPOWER CORPORATION
 
 
 
Dated: November 9, 2016
By:  
/s/  CHARLES D. BOYNTON
 
 
 
 
 
Charles D. Boynton
 
 
Executive Vice President and
 
 
Chief Financial Officer





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Index to Exhibits
Exhibit Number
 
Description
10.69
 
Stock Purchase Agreement, dated September 19, 2016, by and between SunPower Technology, Ltd. and AU Optronics Singapore Pte. Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2016).
31.1*
 
Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2*
 
Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1**
 
Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*+
 
XBRL Instance Document.
101.SCH*+
 
XBRL Taxonomy Schema Document.
101.CAL*+
 
XBRL Taxonomy Calculation Linkbase Document.
101.LAB*+
 
XBRL Taxonomy Label Linkbase Document.
101.PRE*+
 
XBRL Taxonomy Presentation Linkbase Document.
101.DEF*+
 
XBRL Taxonomy Definition Linkbase Document.

Exhibits marked with an asterisk (*) are filed herewith.

Exhibits marked with two asterisks (**) are furnished and not filed herewith.

Exhibits marked with a cross (+) are XBRL (Extensible Business Reporting Language) information furnished and not filed herewith, are not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.


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