SunPower Corporation
SUNPOWER CORP (Form: 10-Q, Received: 10/31/2013 17:34:09)
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-34166
SunPower Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
94-3008969
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
77 Rio Robles, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)
(408) 240-5500
(Registrant's Telephone Number, Including Area Code)


_________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   T     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   T     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   o     No   T

The total number of outstanding shares of the registrant’s common stock as of October 25, 2013 was 121,395,743 .

 
 
 
 
 
d




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

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
September 29, 2013
 
December 30, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
743,575

 
$
457,487

Restricted cash and cash equivalents, current portion
14,600

 
15,568

Accounts receivable, net
377,824

 
398,150

Costs and estimated earnings in excess of billings
42,563

 
36,395

Inventories
288,049

 
291,386

Advances to suppliers, current portion
75,680

 
50,282

Project assets - plants and land, current portion
98,005

 
75,911

Prepaid expenses and other current assets 1
453,595

 
613,053

Total current assets
2,093,891

 
1,938,232

 
 
 
 
Restricted cash and cash equivalents, net of current portion
17,420

 
31,396

Restricted long-term marketable securities
9,179

 
10,885

Property, plant and equipment, net
851,344

 
774,909

Project assets - plants and land, net of current portion
3,559

 
7,596

Other intangible assets, net
514

 
744

Advances to suppliers, net of current portion
289,460

 
301,123

Other long-term assets 1
493,725

 
276,063

Total assets
$
3,759,092

 
$
3,340,948

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable 1
$
483,059

 
$
414,335

Accrued liabilities
256,454

 
247,372

Billings in excess of costs and estimated earnings
253,329

 
225,550

Short-term debt
76,845

 
14,700

Convertible debt, current portion
230,000

 

Customer advances, current portion 1
44,977

 
59,648

Total current liabilities
1,344,664

 
961,605

 
 
 
 
Long-term debt
93,154

 
375,661

Convertible debt, net of current portion 1
521,372

 
438,629

Customer advances, net of current portion 1
170,798

 
236,082

Other long-term liabilities
520,260

 
335,619

Total liabilities
2,650,248

 
2,347,596

Commitments and contingencies (Note 7)


 


Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both September 29, 2013 and December 31, 2012

 

Common stock, $0.001 par value, 367,500,000 shares authorized; 126,730,119 shares issued, and 121,390,170 outstanding as of September 29, 2013; 123,315,990 shares issued, and 119,234,280 shares outstanding as of December 30, 2012
121


119

Additional paid-in capital
1,964,369

 
1,931,947

Accumulated deficit
(828,830
)
 
(902,085
)
Accumulated other comprehensive loss
(4,948
)
 
(2,521
)
Treasury stock, at cost; 5,339,949 shares of common stock as of September 29, 2013; 4,081,710 shares of common stock as of December 30, 2012
(51,692
)
 
(34,108
)
Total stockholders' equity
1,079,020

 
993,352

Noncontrolling interests in subsidiaries
29,824

 

Total equity
1,108,844

 
993,352

Total liabilities and equity
$
3,759,092

 
$
3,340,948

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

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

3

Table of Contents

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012

 
 
 
 
 
 
 
 
Revenue
 
$
657,120

 
$
648,948

 
$
1,869,069

 
$
1,738,976

Cost of revenue
 
463,890

 
568,175

 
1,508,665

 
1,539,455

Gross margin
 
193,230

 
80,773

 
360,404

 
199,521

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
14,903

 
14,956

 
41,108

 
45,786

Sales, general and administrative
 
63,229

 
69,714

 
195,356

 
208,388

Restructuring charges
 
1,114

 
10,544

 
1,705

 
61,189

Goodwill and other intangible asset impairment
 

 
59,581

 

 
59,581

Total operating expenses
 
79,246

 
154,795

 
238,169

 
374,944

Operating income (loss)
 
113,984

 
(74,022
)
 
122,235

 
(175,423
)
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
258

 
94

 
839

 
762

Interest expense
 
(28,861
)
 
(25,834
)
 
(80,765
)
 
(63,935
)
Gain on share lending arrangement

 

 
50,645

 

 
50,645

Other, net
 
(4,159
)
 
594

 
(11,972
)
 
(4,984
)
Other income (expense), net
 
(32,762
)
 
25,499

 
(91,898
)
 
(17,512
)
Income (loss) before income taxes and equity in earnings (loss) of unconsolidated investees
 
81,222

 
(48,523
)
 
30,337

 
(192,935
)
Benefit from (provision for) income taxes
 
4,575

 
(593
)
 
(2,920
)
 
(12,542
)
Equity in earnings (loss) of unconsolidated investees
 
1,585

 
578

 
2,261

 
(1,772
)
Net income (loss)
 
87,382

 
(48,538
)
 
29,678

 
(207,249
)
Net loss attributable to noncontrolling interests
 
21,004

 

 
43,577

 

Net income (loss) attributable to stockholders
 
$
108,386

 
$
(48,538
)
 
$
73,255

 
$
(207,249
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.89

 
$
(0.41
)
 
$
0.61

 
$
(1.78
)
Diluted
 
$
0.73

 
$
(0.41
)
 
$
0.55

 
$
(1.78
)
Weighted-average shares:
 
 
 
 
 
 
 
 
Basic
 
121,314

 
118,952

 
120,604

 
116,408

Diluted
 
153,876

 
118,952

 
134,859

 
116,408


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

4

Table of Contents

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

 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Net income (loss)
 
$
87,382

 
$
(48,538
)
 
$
29,678

 
$
(207,249
)
Components of comprehensive income (loss):
 
 
 
 
 
 
 
 
Translation adjustment
 
1,923

 
148

 
(2,003
)
 
(1,802
)
Net unrealized loss on derivatives (Note 10)
 
(2,005
)
 
(2,611
)
 
(524
)
 
(10,738
)
Unrealized gain on investments
 
7

 

 

 

Income taxes
 
379

 
490

 
100

 
2,016

Net change in accumulated other comprehensive income (loss)
 
304

 
(1,973
)
 
(2,427
)
 
(10,524
)
Total comprehensive income (loss)
 
87,686

 
(50,511
)
 
27,251

 
(217,773
)
Comprehensive loss attributable to noncontrolling interests
 
21,004

 

 
43,577

 

Comprehensive income (loss) attributable to stockholders
 
$
108,690

 
$
(50,511
)
 
$
70,828

 
$
(217,773
)

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


5

Table of Contents

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

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Value
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
Balances at December 30, 2012
 
119,234

 
$
119

 
$
1,931,947

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

 
$

 
$
993,352

Net income (loss)
 

 

 

 

 

 
73,255

 
73,255

 
(43,577
)
 
29,678

Other comprehensive loss
 

 

 

 

 
(2,427
)
 

 
(2,427
)
 

 
(2,427
)
Issuance of common stock upon exercise of options
 
41

 

 
97

 

 

 

 
97

 

 
97

Issuance of restricted stock to employees, net of cancellations
 
3,373

 
2

 
(2
)
 

 

 

 

 

 

Stock-based compensation expense
 

 

 
31,599

 

 

 

 
31,599

 

 
31,599

Purchases of treasury stock
 
(1,258
)
 

 

 
(17,584
)
 

 

 
(17,584
)
 

 
(17,584
)
Tax benefit from convertible debt interest deduction
 

 

 
728

 

 

 

 
728

 

 
728

Contributions from noncontrolling interests
 

 

 

 

 

 

 

 
73,401

 
73,401

Balances at September 29, 2013
 
121,390

 
$
121

 
$
1,964,369

 
$
(51,692
)
 
$
(4,948
)
 
$
(828,830
)
 
$
1,079,020

 
$
29,824

 
$
1,108,844


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


6

Table of Contents

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

 
Nine Months Ended
 
September 29, 2013
 
September 30, 2012 1
Cash flows from operating activities:
 
 
 
Net income (loss)
$
29,678

 
$
(207,249
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
31,103

 
33,179

Depreciation
72,893

 
82,747

Loss on retirement of property, plant and equipment

 
56,399

Amortization of other intangible assets
231

 
8,099

Goodwill impairment

 
46,734

Other intangible asset impairment

 
12,847

Gain on sale of investments
(51
)
 

(Gain) loss on mark-to-market derivatives
30

 
(4
)
Non-cash interest expense
36,382

 
29,336

Amortization of debt issuance costs
3,762

 
2,899

Equity in (earnings) loss of unconsolidated investees
(2,261
)
 
1,772

Gain on equity interest in unconsolidated investee
(529
)
 

Third-party inventories write-down

 
8,869

Gain on share lending arrangement

 
(50,645
)
Gain on contract termination
(51,988
)
 

Deferred income taxes and other tax liabilities
2,317

 
110

Changes in operating assets and liabilities, net of effect of acquisition:
 
 
 
Accounts receivable
(46,391
)
 
124,865

Costs and estimated earnings in excess of billings
(6,168
)
 
(10,709
)
Inventories
(38,543
)
 
(50,076
)
Project assets
(42,113
)
 
(101,917
)
Prepaid expenses and other assets
48,355

 
(35,401
)
Advances to suppliers
(13,735
)
 
(29,993
)
Accounts payable and other accrued liabilities
106,769

 
(43,008
)
Billings in excess of costs and estimated earnings
27,779

 
(31,203
)
Customer advances
(27,967
)
 
40,048

Net cash provided by (used in) operating activities
129,553

 
(112,301
)
Cash flows from investing activities:
 
 
 
Decrease in restricted cash and cash equivalents
14,944

 
54,341

Purchases of property, plant and equipment
(25,460
)
 
(79,033
)
Cash paid for solar power systems, leased and to be leased
(83,619
)
 
(100,655
)
Purchases of marketable securities
(99,928
)
 
(1,436
)
Proceeds from sales or maturities of marketable securities
100,947

 

Proceeds from sale of equipment to third-party
645

 
419

Cash received for sale of investment in unconsolidated investees

 
17,403

Cash paid for investments in unconsolidated investees
(1,411
)
 
(10,000
)
Net cash used in investing activities
(93,882
)
 
(118,961
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible debt, net of issuance costs
296,283

 

Proceeds from issuance of bank loans, net of issuance costs

 
125,000

Proceeds from issuance of project loans, net of issuance costs
68,225

 
27,617

Proceeds from recovery of claim in connection with share lending arrangement

 
50,645

Proceeds from residential lease financing
83,365

 
26,809

Proceeds from sale-leaseback financing
40,757

 

Contributions from noncontrolling interests
73,401

 

Repayment of bank loans, project loans and other debt
(290,098
)
 
(126,427
)
Repayment of sale-leaseback financing
(5,124
)
 

Cash paid for repurchase of convertible debt

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

 
163,616

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

 
(178,290
)
Proceeds from exercise of stock options
98

 
51

Purchases of stock for tax withholding obligations on vested restricted stock
(17,584
)
 
(5,430
)
Net cash provided by (used in) financing activities
249,323

 
(115,017
)
Effect of exchange rate changes on cash and cash equivalents
1,094

 
(2,213
)
Net increase (decrease) in cash and cash equivalents
286,088

 
(348,492
)
Cash and cash equivalents, beginning of period
457,487

 
725,618

Cash and cash equivalents, end of period
$
743,575

 
$
377,126

 
 
 
 
Non-cash transactions:
 
 
 
Assignment of residential lease receivables to a third party financial institution
$
67,400

 
$
10,259

Property, plant and equipment acquisitions funded by liabilities
$
5,628

 
$
13,243

Costs of solar power systems, leased and to be leased, sourced from existing inventory
$
43,341

 
$
80,068

Costs of solar power systems, leased and to be leased, funded by liabilities
$
2,315

 
$
6,712

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

 
$

Non-cash interest expense capitalized and added to the cost of qualified assets
$
400

 
$
1,161

Issuance of warrants in connection with the Liquidity Support Agreement
$

 
$
50,327

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

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

7

Table of Contents

Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Basis of Presentation and Preparation
    
Principles of Consolidation

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

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the Company's condensed consolidated financial statements and the accompanying notes. Such reclassifications had no effect on previously reported results of operations or retained earnings. As reflected in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2012 ("2012 Form 10-K"), in connection with the growth of its residential lease program, during the fourth quarter of fiscal 2012 the Company began to separately classify both the cost of the leased assets and related investing cash flows based upon the nature of the lease entered into. The Company has reclassified prior period interim balances to conform to the current period presentation, which resulted in an increase in operating cash flows of $100.7 million for the nine months ended September 30, 2012 .

Fiscal Years

The Company has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Both fiscal 2013 and 2012 are 52-week fiscal years. The third quarter of fiscal 2013 ended on September 29, 2013 , while the third quarter of fiscal 2012 ended on September 30, 2012 . All quarters in fiscal 2013 and fiscal 2012 were 13-week quarters.

Management Estimates

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

8


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

Summary of Significant Accounting Policies

Revenue Recognition

Residential Leases

The Company offers a solar lease program, in partnership with third-party financial institutions, which allows its residential customers to obtain SunPower systems under lease agreements for terms of up to 20 years. Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines.

For those systems classified as sales-type leases, the net present value of the minimum lease payments, net of executory costs, is recognized as revenue when the lease is placed in service. This net present value as well as the net present value of the residual value of the lease at termination are recorded as receivables in the Condensed Consolidated Balance Sheets. The difference between the initial net amounts and the gross amounts are amortized to revenue over the lease term using the interest method. The residual values of our solar systems are determined at the inception of the lease applying an estimated system fair value at the end of the lease term.

For those systems classified as operating leases, rental revenue is recognized, net of executory costs, on a straight-line basis over the term of the lease.

Noncontrolling Interests

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

Other than as described above, there have been no significant changes in the Company's significant accounting policies during the nine months ended September 29, 2013, as compared with the significant accounting policies described in the 2012 Form 10-K.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") amended its guidance related to the presentation of unrecognized tax benefits. The amended guidance specifies when an unrecognized tax benefit or a portion of an unrecognized tax benefit should be presented as a liability versus an offset against a deferred tax asset when a net operating loss carryforward, a similar tax loss or tax credit carryforward exists. The amendment will become effective for the Company in the first quarter of fiscal 2014. The Company does not expect that the requirement will have a material impact on its condensed consolidated financial statements.

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

9


does not expect that the requirement will have a material impact on its condensed consolidated financial statements as it is disclosure only in nature.

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

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

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

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

On April 28, 2011 , the Company and Total entered into a Tender Offer Agreement (the "Tender Offer Agreement"), pursuant to which, on May 3, 2011, Total commenced a cash tender offer to acquire up to 60% of the Company's outstanding shares of former class A common stock and up to 60% of the Company's outstanding shares of former class B common stock (the "Tender Offer") at a price of $23.25 per share for each class. The offer expired on June 14, 2011 and Total accepted for payment on June 21, 2011 a total of 34,756,682 shares of the Company's former class A common stock and 25,220,000 shares of the Company's former class B common stock, representing 60% of each class of its outstanding common stock as of June 13, 2011 , for a total cost of approximately $1.4 billion .

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

Credit Support Agreement

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

In consideration for the commitments of Total S.A., under the Credit Support Agreement, the Company is required to pay Total S.A. a guarantee fee for each letter of credit that is the subject of a Guaranty and was outstanding for all or part of the preceding calendar quarter. The Company is also required to reimburse Total S.A. for payments made under any Guaranty and certain expenses of Total S.A., plus interest on both. The Company incurred guaranty fees under the Credit Support Agreement of $2.7 million and $6.2 million in the three and nine months ended September 29, 2013 , respectively, and $1.7 million and $5.2 million in the three and nine months ended September 30, 2012 , respectively.

The Company has agreed to undertake certain actions, including, but not limited to, ensuring that the payment obligations of the Company to Total S.A. rank at least equal in right of payment with all of the Company's other present and future indebtedness, other than certain permitted secured indebtedness. The Company has also agreed to refrain from taking

10


certain actions, including refraining from making any equity distributions so long as it has any outstanding repayment obligation to Total S.A. resulting from a draw on a guaranteed letter of credit.

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

Affiliation Agreement

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

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

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

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

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

Affiliation Agreement Guaranty

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

Research & Collaboration Agreement

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

11



The R&D Agreement enables a joint committee (the "R&D Strategic Committee") to identify, plan and manage the R&D Collaboration. Due to the impracticability of anticipating and establishing all of the legal and business terms that are and will be applicable to the R&D Collaboration or to each R&D Project, the R&D Agreement sets forth broad principles applicable to the parties' potential R&D Collaboration, and the R&D Collaboration Committee establishes the particular terms governing each particular R&D Project consistent with the terms set forth in the R&D Agreement. In the three and nine months ended September 29, 2013, Total contributed $0.3 million and $1.3 million , respectively, to projects under the R&D Agreement. The Company records research and development expense net of contributions under collaborative arrangements.

Registration Rights Agreement

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

Stockholder Rights Plan

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

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

By-laws Amendment

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

Liquidity Support Agreement with Total S.A.

The Company is party to an agreement with a customer to construct the California Valley Solar Ranch, a solar park. Part of the debt financing necessary for the customer to pay for the construction of this solar park is being provided by the Federal Financing Bank in reliance on a guarantee of repayment provided by the Department of Energy (the "DOE") under a loan guarantee program. On February 28, 2012 , the Company entered into a Liquidity Support Agreement with Total S.A. and the DOE, and a series of related agreements with Total S.A. and Total, under which Total S.A. has agreed to provide the Company, or cause to be provided, additional liquidity under certain circumstances to a maximum amount of $600.0 million ("Liquidity

12


Support Facility"). Total S.A. is required to provide liquidity support to the Company under the facility, and the Company is required to accept such liquidity support from Total S.A., if either the Company's actual or projected unrestricted cash, cash equivalents, and unused borrowing capacity are reduced below $100.0 million , or the Company fails to satisfy any financial covenant under its indebtedness. In either such event, subject to a $600.0 million aggregate limit, Total S.A. is required to provide the Company with sufficient liquidity support to increase the amount of its unrestricted cash, cash equivalents and unused borrowing capacity to above $100.0 million , and to restore compliance with its financial covenants. Total S.A.'s current guarantee of the Company's July 2013 revolving credit facility with Credit Agricole, as further described below, reduces the capacity available under the Liquidity Support Facility by $250.0 million . The Liquidity Support Facility is available until the completion of the solar park, expected to be completed in the beginning of fiscal 2014, and, under certain conditions, up to December 31, 2016, at which time all outstanding guarantees will expire (except for the Total S.A. guarantee of the Credit Agricole facility which will expire on or about January 31, 2014) and all outstanding debt under the facility will become due. The use of the Liquidity Support Facility is not limited to direct obligations related to the solar park, and is available for general corporate purposes, but the Company has agreed to conduct its operations, and use any proceeds from such facility, in ways that minimize the likelihood of Total S.A. being required to provide further support. In connection with the Liquidity Support Agreement, the Company also entered into a Compensation and Funding Agreement with Total S.A., and a Private Placement Agreement and a Revolving Credit and Convertible Loan Agreement with Total, which implement the terms of the Liquidity Support Agreement and Compensation Funding Agreement.

Compensation and Funding Agreement

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

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

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

13


On December 24, 2012, Total S.A. issued a guarantee for the Company's obligations under the September 2011 revolving credit facility with Credit Agricole (the "September 2011 revolving credit facility"). The issuance of the guarantee reduced the capacity available under the Liquidity Support Facility from $600.0 million to $325.0 million. The Company was required to pay Total S.A. an annual guarantee fee of 2.75% of the outstanding amount under the September 2012 revolving credit facility with Credit Agricole. The guarantee reduced related interest rates and removed certain financial and restrictive covenants under the facility. On July 3, 2013, the Company terminated the September 2011 revolving credit facility after establishing a new revolving credit facility with Credit Agricole (the "July 2013 revolving credit facility"). Total S.A. has issued a guarantee for the Company's obligations under the July 2013 revolving credit facility. The issuance of the guarantee, together with the termination of the similar $275.0 million guaranty of the September 2011 revolving credit facility, as described above, increased the capacity available under the Liquidity Support Facility by $25.0 million . The Company is required to pay Total S.A. an annual guarantee fee of 2.75% of the outstanding amount under the July 2013 revolving credit facility (see Note 9).

The Company incurred fees under the Compensation and Funding Agreement of $1.5 million and $4.0 million in the three and nine months ended September 29, 2013 , respectively, and $1.4 million and $3.5 million in the three and nine months ended September 30, 2012 , respectively.

Master Agreement

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

0.75% Debentures Due 2018

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


Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

The Company conducts its annual impairment test of goodwill as of the Sunday closest to the end of the third fiscal quarter of each year. Impairment of goodwill is tested at the Company's reporting unit level. Management determined that the Americas Segment, the EMEA Segment, and the APAC Segment are 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 its external market capitalization to determine the appropriateness of its assumptions and adjusted, if appropriate. These assumptions took into account the current industry environment and its impact on the Company's business.

14



Based on the impairment test as of September 30, 2012 , the Company determined that the carrying value of the Americas and EMEA reporting units exceeded their fair value. As a result, the Company performed the second step of the impairment analysis for the two reporting units discussed above. The Company's calculation of the implied fair value of goodwill included significant assumptions for, among others, the fair values of recognized assets and liabilities and of unrecognized intangible assets, all of which require significant judgment by management. The Company calculated that the implied fair value of goodwill for the two reporting units was zero and therefore recorded a goodwill impairment loss of $46.7 million , representing all of the goodwill associated with these reporting units. As of September 29, 2013 and December 30, 2012 , the Company had no remaining goodwill balance.

Other Intangible Assets

The Company's acquired other intangible assets consist of patents, trade names and purchased technology; customer relationships; and purchased in-process research and development. As of September 29, 2013 and December 30, 2012 , the Company's other intangible assets, net of accumulated depreciation, totaled $0.5 million and $0.7 million , respectively. All of the Company's acquired other intangible assets are subject to amortization. Aggregate amortization expense for other intangible assets totaled less than $0.1 million and $0.2 million for the three and nine months ended September 29, 2013 , respectively, and $2.6 million and $8.1 million in the three and nine months ended September 30, 2012 , respectively.

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

Note 4. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross 1
 
$
407,680

 
$
429,977

Less: allowance for doubtful accounts
 
(27,476
)
 
(26,773
)
Less: allowance for sales returns
 
(2,380
)
 
(5,054
)
 
 
$
377,824

 
$
398,150

1  
Includes short-term finance receivables associated with solar power systems leased of $6.0 million and $4.5 million as of September 29, 2013 and December 30, 2012 , respectively.

Inventories:
 
 
 
 
Raw materials
 
$
79,272

 
$
89,331

Work-in-process
 
47,212

 
50,627

Finished goods
 
161,565

 
151,428

 
 
$
288,049

 
$
291,386



15


 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Prepaid expenses and other current assets:
 
 
 
 
VAT receivables, current portion
 
$
99,899

 
$
97,041

Foreign currency derivatives
 
2,198

 
1,275

Deferred project costs
 
172,679

 
305,980

Deferred costs for solar power systems to be leased
 
25,264

 
31,419

Other receivables
 
78,336

 
104,640

Other prepaid expenses
 
28,905

 
25,230

Other current assets
 
46,314

 
47,468

 
 
$
453,595

 
$
613,053


Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
91,911

 
$
61,862

Project assets — land
 
9,653

 
21,645

 
 
$
101,564

 
$
83,507

Project assets - plants and land, current portion
 
$
98,005

 
$
75,911

Project assets - plants and land, net of current portion
 
$
3,559

 
$
7,596


Property, plant and equipment, net:
 
 
 
 
Land and buildings
 
$
26,080

 
$
20,109

Leasehold improvements
 
229,817

 
221,378

Manufacturing equipment 2
 
545,174

 
531,289

Computer equipment
 
77,087

 
75,438

Furniture and fixtures
 
8,262

 
8,178

Solar power systems 3
 
54,585

 
12,501

Solar power systems leased
 
290,388

 
163,003

Solar power systems to be leased
 
52,936

 
89,423

Construction-in-process
 
9,001

 
34,110

 
 
1,293,330

 
1,155,429

Less: accumulated depreciation
 
(441,986
)
 
(380,520
)
 
 
$
851,344

 
$
774,909

2  
The Company's mortgage loan agreement with International Finance Corporation ("IFC") is collateralized by certain manufacturing equipment with a net book value of $153.5 million and $152.9 million as of September 29, 2013 and December 30, 2012 , respectively. The Company also provided security for advance payments received from a third-party supplier in the form of collateralized manufacturing equipment with a net book value of $16.5 million as of December 30, 2012 .

3  
Includes $25.3 million of solar power systems associated with sale-leaseback transactions under the financing method as of September 29, 2013 (see Note 7).
    
Property, plant and equipment, net by geography 4 :
 
 
 
 
Philippines
 
$
333,959

 
$
367,708

United States
 
458,825

 
343,710

Mexico
 
32,377

 
32,409

Europe
 
25,681

 
29,292

Other
 
502

 
1,790

 
 
$
851,344

 
$
774,909


16


4  
Property, plant and equipment, net are based on the physical location of the assets.

The table below presents the cash and non-cash interest expense capitalized to property, plant and equipment and project assets during the three and nine months ended September 29, 2013 and September 30, 2012 , respectively.
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Interest expense:
 
 
 
 
 
 
 
 
Interest cost incurred
 
$
(29,075
)
 
$
(26,912
)
 
$
(81,827
)
 
$
(66,899
)
Cash interest cost capitalized - property, plant and equipment
 
39

 
272

 
267

 
859

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

 
142

 
57

 
444

Cash interest cost capitalized - project assets - plant and land
 
96

 
395

 
395

 
944

Non-cash interest cost capitalized - project assets - plant and land
 
79

 
269

 
343

 
717

Interest expense
 
$
(28,861
)
 
$
(25,834
)
 
$
(80,765
)
 
$
(63,935
)

 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Other long-term assets:
 
 
 
 
Equity method investments
 
$
113,778

 
$
111,516

Bond hedge derivative
 
96,635

 
2,327

Cost method investments
 
12,374

 
14,918

Long-term financing receivables
 
139,177

 
67,742

Long-term debt issuance costs
 
18,153

 
38,185

Other
 
113,608

 
41,375

 
 
$
493,725

 
$
276,063


Accrued liabilities:
 
 
 
 
VAT payables
 
$
5,456

 
$
2,049

Foreign currency derivatives
 
7,250

 
4,891

Short-term warranty reserves
 
9,468

 
9,054

Interest payable
 
10,840

 
9,672

Deferred revenue
 
25,521

 
32,507

Employee compensation and employee benefits
 
48,024

 
40,750

Restructuring reserve
 
11,935

 
29,477

Short-term residential lease financing
 
28,471

 
25,153

Other
 
109,489

 
93,819

 
 
$
256,454

 
$
247,372



17


 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Other long-term liabilities:
 
 

 
 

Embedded conversion option derivatives
 
$
96,665

 
$
2,327

Long-term warranty reserves
 
125,307

 
107,803

Deferred revenue
 
157,395

 
128,936

Unrecognized tax benefits
 
25,193

 
35,022

Long-term residential lease financing
 
28,788

 
11,411

Long-term sale-leaseback financing (Note 7)
 
36,575

 

Other
 
50,337

 
50,120

 
 
$
520,260

 
$
335,619


Accumulated other comprehensive loss:
 
 

 
 

Cumulative translation adjustment
 
$
(4,322
)
 
$
(2,319
)
Net unrealized loss on derivatives
 
(767
)
 
(243
)
Deferred taxes
 
141

 
41

 
 
$
(4,948
)
 
$
(2,521
)

Solar Power Systems Leased and to be Leased

The Company leases solar systems to residential customers under both operating and sales-type leases. As of September 29, 2013 and December 30, 2012 , solar power systems leased under operating leases, presented in "Property, plant and equipment, net" in the Company's Condensed Consolidated Balance Sheets was $290.4 million and $163.0 million , respectively, and solar power systems to be leased under operating leases, presented in "Property, plant and equipment, net" in the Company's Condensed Consolidated Balance Sheets was $52.9 million and $89.4 million , respectively. As of September 29, 2013 , financing receivables for sales-type leases, presented in "Accounts receivable, net" and "Other long-term assets" in the Company's Condensed Consolidated Balance Sheets was $6.0 million and $139.2 million , respectively. As of December 30, 2012 , financing receivables for sales-type leases, presented in "Accounts receivable, net" and "Other long-term assets" in the Company's Condensed Consolidated Balance Sheets was $4.5 million and $67.7 million , respectively. Amounts recognized in the Company's Condensed Consolidated Statement of Operations are not significant in any period presented.

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

As of September 29, 2013 and December 30, 2012 , the remaining liability to the third-party investors, presented in "Accrued liabilities" and "Other long-term liabilities" on the Company's Condensed Consolidated Balance Sheets, was $57.3 million and $36.6 million , respectively. As of September 29, 2013 and December 30, 2012 , the Company has pledged solar assets with an aggregate book value of $228.3 million and $280.8 million , respectively, to the third-party investors as security for its obligations under the contractual arrangements.

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

Note 5. FAIR VALUE MEASUREMENTS


18


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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during the three and nine months ended September 29, 2013 or September 30, 2012 . The Company did not have any assets or liabilities measured at fair value on a recurring basis requiring Level 3 inputs as of September 29, 2013 or December 30, 2012 .

The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of September 29, 2013 and December 30, 2012 , respectively:
 
 
September 29, 2013
 
December 30, 2012
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds 1
 
$
308,001

 
$
308,001

 
$

 
$
117,254

 
$
117,254

 
$

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 10)
 
2,198

 

 
2,198

 
1,275

 

 
1,275

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 9)
 
96,635

 

 
96,635

 
2,327

 

 
2,327

Foreign currency derivatives (Note 10)
 
384

 

 
384

 

 

 

Total assets
 
$
407,218

 
$
308,001


$
99,217


$
120,856

 
$
117,254

 
$
3,602

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives (Note 10)
 
$
7,250

 
$

 
$
7,250

 
$
4,891

 
$

 
$
4,891

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt derivatives (Note 9)
 
96,665

 

 
96,665

 
2,327

 

 
2,327

Foreign currency derivatives (Note 10)
 
495

 

 
495

 

 

 

Total liabilities
 
$
104,410

 
$

 
$
104,410

 
$
7,218

 
$

 
$
7,218

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

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

Available-for-Sale Debt Securities

In the second quarter of fiscal 2013, the Company purchased $99.9 million in U.S. government bonds, classified as available-for-sale. The Company valued these bonds based on movements of U.S. Treasury bond rates, which are observable at commonly quoted market intervals, since the time of purchase. Accordingly, the available-for-sale debt securities were categorized in Level 2 of the fair value hierarchy. During the third quarter of fiscal 2013, the Company sold all the bonds held

19


for proceeds totaling $100.0 million.

Debt Derivatives

The 4.50% Bond Hedge (as defined in Note 9) and the embedded cash conversion option within the 4.50% debentures (as defined in Note 9) are classified as derivative instruments that require mark-to-market treatment with changes in fair value reported in the Company's Condensed Consolidated Statements of Operations. The fair values of these derivative instruments were determined utilizing the following Level 1 and Level 2 inputs:
 
As of
 
September 29, 2013 1
 
December 30, 2012 1
Stock price
$
26.17

 
$
5.49

Exercise price
$
22.53

 
$
22.53

Interest rate
0.37
%
 
0.40
%
Stock volatility
59.6
%
 
59.9
%
Credit risk adjustment
1.04
%
 
1.07
%
Maturity date
February 18, 2015

 
February 18, 2015

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

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

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

Held-to-Maturity Debt Securities

The Company's debt securities, classified as held-to-maturity, consist of Philippine government bonds which are maintained as collateral for present and future business transactions within the country. These bonds have maturity dates of up to 5 years and are classified as "Restricted long-term marketable securities" on the Company's Condensed Consolidated Balance Sheets. As of September 29, 2013 and December 30, 2012 , these bonds had a carrying value of $9.2 million and $10.9 million respectively. The Company records such held-to-maturity investments at amortized cost based on its ability and intent to hold the securities until maturity. The Company monitors for changes in circumstances and events that would impact its ability and intent to hold such securities until the recorded amortized costs are recovered. No other-than-temporary impairment loss was incurred during the three and nine months ended September 29, 2013 or September 30, 2012 . The held-to-maturity debt securities were categorized in Level 2 of the fair value hierarchy.

Equity and Cost Method Investments

The Company's equity and cost method investments in non-consolidated entities are comprised of convertible promissory notes, common and preferred stock. The Company monitors these investments, which are included in "Other long-term assets" in its Condensed Consolidated Balance Sheets, for impairment and records reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include Level 2 and Level 3 measurements such as the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices, and declines in operations of the issuer.


20


As of September 29, 2013 and December 30, 2012 , the Company had $12.4 million and $14.9 million , respectively, in investments accounted for under the cost method. As of September 29, 2013 and December 30, 2012 , $1.9 million and $5.9 million , respectively, remained due and receivable from cost method investees and $5.1 million and $12.9 million , respectively, remained due and payable to cost method investments. Further, as of September 29, 2013 , o utstanding long-term note receivables provided to cost method investees totaled $1.9 million .

As of September 29, 2013 and December 30, 2012 , the Company had $113.8 million and $111.5 million , respectively, in investments accounted for under the equity method (see Note 8).

Note 6. RESTRUCTURING

October 2012 Restructuring Plan

On October 12, 2012 , the Company's Board of Directors approved a reorganization (the "October 2012 Plan") to accelerate operating cost reduction and improve overall operating efficiency. In connection with the October 2012 Plan, which is expected to be completed within the first half of fiscal 2014, the Company expects to eliminate approximately 900 positions, primarily in the Philippines, representing approximately 15% of the Company's global workforce. As a result, the Company expects to record restructuring charges totaling $30.0 million to $35.0 million , related to all segments. Such charges are composed of severance benefits, lease and related termination costs, and other associated costs. The Company expects greater than 90% of these charges to be cash.

Legacy Restructuring Plans

During fiscal 2012 and 2011, the Company implemented approved restructuring plans, related to all segments, to align with changes in the global solar market which included the consolidation of the Company's Philippine manufacturing operations as well as actions to accelerate operating cost reduction and improve overall operating efficiency. These restructuring activities were substantially complete as of September 29, 2013, as the remaining accrual is primarily attributable to ongoing facility lease obligations. The Company expects to continue to incur restructuring costs as it revises previous estimates in connection with these plans. Revisions to estimates will primarily be due to changes in assumptions associated with lease and related termination costs.

The following table summarizes the restructuring charges recognized in the Company's Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative To Date
 
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
 
October 2012 Plan:
 
 
 
 
 
 
 
 
 
 
Severance and benefits
 
$
42

 
$

 
$
(1,779
)
 
$

 
$
27,274

Lease and related termination costs
 
(162
)
 

 
(89
)
 

 
625

Other costs
 
176

 

 
1,091

 

 
1,551

 
 
56

 

 
(777
)
 

 
29,450

Legacy Restructuring Plans:
 
 
 
 
 
 
 
 
 
 
Non-cash impairment charges
 
595

 
9,965

 
595

 
53,371

 
60,748

Severance and benefits
 
394

 
(110
)
 
394

 
1,345

 
20,230

Lease and related termination costs
 
26

 
(1,481
)
 
1,363

 
2,849

 
5,569

Other costs
 
43

 
2,170

 
130

 
3,624

 
7,934

 
 
1,058

 
10,544

 
2,482

 
61,189

 
94,481

Total restructuring charges
 
$
1,114

 
$
10,544

 
$
1,705

 
$
61,189

 
$
123,931


The following table summarizes the restructuring reserve activity during the nine months ended September 29, 2013 :

21


 
 
Nine Months Ended
(In thousands)
 
December 30, 2012
 
Charges (Benefits)
 
Payments
 
September 29, 2013
October 2012 Plan:
 
 
 
 
 
 
 
 
Severance and benefits
 
$
24,439

 
$
(1,779
)
 
$
(14,676
)
 
$
7,984

Lease and related termination costs
 
714

 
(89
)
 
(320
)
 
305

Other costs 1
 
358

 
1,091

 
(1,343
)
 
106

Legacy Restructuring Plans:
 
 
 
 
 
 
 
 
Severance and benefits
 
60

 
394

 
(41
)
 
413

Lease and related termination costs
 
2,436

 
1,363

 
(1,452
)
 
2,347

Other costs 1
 
1,470

 
130

 
(820
)
 
780

Total restructuring liabilities
 
$
29,477

 
$
1,110

 
$
(18,652
)
 
$
11,935

1  
Other costs primarily represent associated legal services.

Note 7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of September 29, 2013 , future minimum obligations under non-cancellable capital and operating leases are as follows:
 
 
Capital Lease
 
Operating Lease
(In thousands)
 
Amount
 
Amount
Year
 
 
 
 
2013 (remaining three months)
 
$
259

 
$
6,085

2014
 
1,056

 
15,327

2015
 
1,012

 
14,441

2016
 
993

 
13,894

2017
 
947

 
12,290

Thereafter
 
2,449

 
85,386

 
 
$
6,716

 
$
147,423


Facilities and Equipment

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

Sale-Leaseback Arrangements

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

The Company has classified its sale-leaseback arrangements of solar power systems not involving integral equipment as operating leases. The deferred profit on the sale of these systems is recognized over the term of the lease. Future minimum lease obligations associated with these systems is included in the table above. As of September 29, 2013 , future minimum payments to be received from customers under PPAs associated with the solar power systems under sale-leaseback arrangements classified as operating leases was $78.2 million , which will be recognized over the lease term of up to 20 years.

Beginning in the first quarter of fiscal 2013, the Company entered into sale-leaseback arrangements under which the systems under the sale-leaseback arrangements have been determined to be integral equipment as defined under the accounting guidance for such transactions. The Company was further determined to have continuing involvement with the solar power

22


systems throughout the lease due to purchase option rights. As a result of such continuing involvement, the Company accounts for each transaction as a financing. Under the financing method, the proceeds received from the sale of the solar power systems are recorded by the Company as financing liabilities and presented within "Other long-term liabilities" in the Company's Condensed Consolidated Balance Sheets (see Note 4). The financing liabilities are subsequently reduced by the Company's payments to lease back the solar power systems, less interest expense calculated based on the Company's incremental borrowing rate adjusted to the rate required to prevent negative amortization. The solar power systems under the sale-leaseback arrangements remains on the Company's balance sheet and are classified within "Property, plant and equipment, net" (see Note 4). As of September 29, 2013 , future minimum lease obligations for the sale-leaseback arrangements accounted for under the financing method were $39.2 million , which will be recognized over the lease term of up to 20 years.

Purchase Commitments
 
The Company purchases raw materials for inventory and manufacturing equipment from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based on specifications defined by the Company, or that establish parameters defining the Company's requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company's requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of the Company's disclosed purchase commitments arising from these agreements are firm, non-cancellable, and unconditional commitments.

The Company also has agreements with several suppliers, including some of its non-consolidated investees, for the procurement of polysilicon, ingots, wafers, solar cells, solar panels, and Solar Renewable Energy Credits which specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 years and provide for certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that the Company terminates the arrangements.

Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of September 29, 2013 are as follows:
(In thousands)
 
Amount 1
Year
 
 
2013 (remaining three months)
 
$
591,486

2014
 
523,887

2015
 
370,463

2016
 
334,105

2017
 
194,512

Thereafter
 
516,979

 
 
$
2,531,432

Non-cancellable purchase orders
 
$
249,019

Long-term supply agreements
 
$
2,282,413

1  
Total future purchase obligations as of September 29, 2013 include $137.7 million to related parties.

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

23



As noted above, the Company has entered into agreements with various vendors that specify future quantities and pricing of products to be supplied. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements. Under certain agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. During the three and nine months ended September 29, 2013 , the Company made additional advance payments totaling $26.3 million and $41.8 million , respectively, in accordance with the terms of existing long-term supply agreements. As of September 29, 2013 and December 30, 2012 , advances to suppliers totaled $365.1 million and $351.4 million , respectively, of which $75.7 million and $50.3 million , respectively, is classified as short-term in the Company's Condensed Consolidated Balance Sheets. Two suppliers accounted for 75% and 24% of total advances to suppliers as of September 29, 2013 , and 76% and 23% as of December 30, 2012 .

The Company's future prepayment obligations as of September 29, 2013 are as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining three months)
 
$
39,475

2014
 
65,791

 
 
$
105,266


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 September 29, 2013 is as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining three months)
 
$
17,980

2014
 
30,512

2015
 
18,387

2016
 
22,713

2017
 
27,039

Thereafter
 
99,144

 
 
$
215,775


In fiscal 2010, the Company and its joint venture, AUO SunPower Sdn. Bhd. ("AUOSP"), entered into an agreement under which the Company resells to AUOSP polysilicon purchased from a third-party supplier. Advance payments provided by AUOSP related to such polysilicon are then made by the Company to the third-party supplier. These advance payments are applied as a credit against AUOSP’s polysilicon purchases from the Company. Such polysilicon is used by AUOSP to manufacture solar cells which are sold to the Company on a "cost-plus" basis. As of September 29, 2013 and December 30, 2012 , outstanding advance payments received from AUOSP totaled $184.4 million and $190.1 million , respectively, of which $13.6 million and $8.8 million , respectively, is classified as short-term in the Company's Condensed Consolidated Balance Sheets, based on projected product shipment dates.

In fiscal 2007, the Company entered into an agreement with a supplier under which the Company resold polysilicon procured from different third-party suppliers. Such polysilicon was used by the supplier to manufacture ingots and wafers, which could be sold to the Company or other customers. Under this agreement, the Company received advance payments which were applied as a credit against the supplier's polysilicon purchases from the Company. During the third quarter of fiscal 2013, the Company and the supplier agreed to terminate the agreement resulting in the supplier's forfeiture of the then-outstanding advance payments held by the Company. As a result, the Company recorded a $52.0 million gain within "Cost of revenue" on the Condensed Consolidated Statement of Operations to reflect the forfeiture of such advance payments. Additionally, pursuant to the termination of the above agreement, the Company received a 3% equity interest in the supplier that is accounted for under the cost method of accounting.

As of December 30, 2012 , outstanding advance payments received by the Company under this agreement totaled $56.1 million , of which $8.1 million is classified as short-term in the Company's Condensed Consolidated Balance Sheets. As of December 30, 2012 , these outstanding advances were fully collateralized by letters of credit totaling $32.0 million ; accounts

24


receivable of $7.6 million ; and manufacturing equipment with a net book value of $16.5 million . Subsequent to the termination of the above agreement, there were no outstanding advance payments or collateralized assets.

Product Warranties

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

The following table summarizes accrued warranty activity for the three and nine months ended September 29, 2013 and September 30, 2012 , respectively:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Balance at the beginning of the period
 
$
126,293

 
$
104,439

 
$
117,172

 
$
94,323

Accruals for warranties issued during the period
 
9,643

 
7,387

 
21,995

 
20,692

Settlements made during the period
 
(1,161
)
 
(2,174
)
 
(4,392
)
 
(5,363
)