SunPower Corporation
SUNPOWER CORP (Form: 10-Q, Received: 11/02/2017 16:52:32)
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 1, 2017
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

SP2014LOGOA01A15.GIF
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
(Address of Principal Executive Offices and Zip Code)

 
95134
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if a smaller reporting company)
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

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

The total number of outstanding shares of the registrant’s common stock as of October 27, 2017 was 139,571,477 .
 
 
 
 
 
d


1

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.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
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

Table of Contents


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SunPower Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
October 1, 2017
 
January 1, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
275,004

 
$
425,309

Restricted cash and cash equivalents, current portion
41,738

 
33,657

Accounts receivable, net 1
186,230

 
219,638

Costs and estimated earnings in excess of billings 1
19,229

 
32,780

Inventories
408,212

 
401,707

Advances to suppliers, current portion
46,096

 
111,479

Project assets - plants and land, current portion 1
364,165

 
374,459

Prepaid expenses and other current assets 1
164,420

 
315,670

Total current assets
1,505,094

 
1,914,699

 
 
 
 
Restricted cash and cash equivalents, net of current portion
61,211

 
55,246

Restricted long-term marketable securities
6,131

 
4,971

Property, plant and equipment, net
1,052,834

 
1,027,066

Solar power systems leased and to be leased, net
707,534

 
621,267

Project assets - plants and land, net of current portion
42,311

 
33,571

Advances to suppliers, net of current portion
185,968

 
173,277

Long-term financing receivables, net
598,832

 
507,333

Other intangible assets, net
33,686

 
44,218

Other long-term assets 1
115,040

 
185,519

Total assets
$
4,308,641

 
$
4,567,167

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable 1
$
408,430

 
$
540,295

Accrued liabilities 1
251,127

 
391,226

Billings in excess of costs and estimated earnings
8,438

 
77,140

Short-term debt
57,453

 
71,376

Convertible debt, current portion 1
299,495



Customer advances, current portion 1
45,273

 
10,138

Total current liabilities
1,070,216

 
1,090,175

 
 
 
 
Long-term debt
601,070

 
451,243

Convertible debt, net of current portion 1
815,978

 
1,113,478

Customer advances, net of current portion 1
71,877

 
298

Other long-term liabilities 1
795,943

 
721,032

Total liabilities
3,355,084

 
3,376,226

Commitments and contingencies (Note 8)


 
 
Redeemable noncontrolling interests in subsidiaries
125,860

 
103,621

Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both October 1, 2017 and January 1, 2017

 

Common stock, $0.001 par value, 367,500,000 shares authorized; 149,653,762 shares issued, and 139,543,120 outstanding as of October 1, 2017; 148,079,718 shares issued, and 138,510,325 outstanding as of January 1, 2017
140

 
139

Additional paid-in capital
2,434,428

 
2,410,395

Accumulated deficit
(1,546,511
)
 
(1,218,681
)
Accumulated other comprehensive loss
(4,109
)
 
(7,238
)
Treasury stock, at cost; 10,110,642 shares of common stock as of October 1, 2017; 9,569,393 shares of common stock as of January 1, 2017
(181,174
)
 
(176,783
)
Total stockholders' equity
702,774

 
1,007,832

Noncontrolling interests in subsidiaries
124,923

 
79,488

Total equity
827,697

 
1,087,320

Total liabilities and equity
$
4,308,641

 
$
4,567,167

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," "Customer advances, current portion," "Convertible debt, current portion," "Convertible debt, net of current portion," "Customer advances, net of current portion," and "Other long-term liabilities" financial statement line items in the Consolidated Balance Sheets (see Note 2 , Note 6 , Note 8 , Note 9 , Note 10 , and Note 11 ).


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

3

Table of Contents


SunPower Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016

 
 
 
 
 
 
 
 
Revenue 1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
$
427,049

 
$
673,538

 
$
1,063,622

 
$
1,358,249

Residential leasing
 
50,142

 
55,808

 
150,091

 
176,424


 
$
477,191

 
$
729,346

 
$
1,213,713

 
$
1,534,673

Cost of revenue 1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
428,056

 
558,342

 
1,113,169

 
1,179,777

Residential leasing
 
33,477

 
41,796

 
100,583

 
132,857


 
461,533

 
600,138

 
1,213,752

 
1,312,634

Gross margin
 
15,658

 
129,208

 
(39
)
 
222,039

Operating expenses:
 
 
 
 
 
 
 
 
Research and development 1
 
20,693

 
28,153

 
60,962

 
92,270

Sales, general and administrative 1
 
68,401

 
80,070

 
204,507

 
262,544

Restructuring charges
 
3,517

 
31,202

 
18,276

 
31,415

Total operating expenses
 
92,611

 
139,425

 
283,745

 
386,229

Operating loss
 
(76,953
)
 
(10,217
)
 
(283,784
)
 
(164,190
)
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
636

 
630

 
1,961

 
2,133

Interest expense 1
 
(21,898
)
 
(15,813
)
 
(65,037
)
 
(42,644
)
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
 
(1,406
)
 
(5,169
)
 
(19,340
)
 
(17,223
)
Other expense, net
 
(22,668
)
 
(55,411
)
 
(82,416
)
 
(92,793
)
Loss before income taxes and equity in earnings of unconsolidated investees
 
(99,621
)
 
(65,628
)
 
(366,200
)
 
(256,983
)
 Benefit from (provision for) income taxes
 
5,457

 
(7,049
)
 
1,073

 
(16,878
)
Equity in earnings of unconsolidated investees
 
15,308

 
16,770

 
21,809

 
24,356

Net loss
 
(78,856
)
 
(55,907
)
 
(343,318
)
 
(249,505
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
24,609

 
15,362

 
60,832

 
53,559

Net loss attributable to stockholders
 
$
(54,247
)
 
$
(40,545
)
 
$
(282,486
)
 
$
(195,946
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.39
)
 
$
(0.29
)
 
$
(2.03
)
 
$
(1.42
)
Diluted
 
$
(0.39
)
 
$
(0.29
)
 
$
(2.03
)
 
$
(1.42
)
Weighted-average shares:
 
 
 
 
 
 
 
 
Basic
 
139,517

 
138,209

 
139,289

 
137,832

Diluted
 
139,517

 
138,209

 
139,289

 
137,832

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 the "Revenue: Solar power systems, components, and other," "Cost of revenue: Solar power systems, components, and other," "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 9 ).


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

4

Table of Contents


SunPower Corporation
Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016
Net loss
 
$
(78,856
)
 
$
(55,907
)
 
$
(343,318
)
 
$
(249,505
)
Components of comprehensive loss:
 
 
 
 
 
 
 
 
Translation adjustment
 
2,627

 
(272
)
 
4,051

 
1,285

Net change in derivatives (Note 11)
 
(209
)
 
56

 
(1,487
)
 
(6,825
)
Income taxes
 
108

 
(30
)
 
565

 
716

Net change in accumulated other comprehensive loss
 
2,526

 
(246
)
 
3,129

 
(4,824
)
Total comprehensive loss
 
(76,330
)
 
(56,153
)
 
(340,189
)
 
(254,329
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
24,609

 
15,362

 
60,832

 
53,559

Comprehensive loss attributable to stockholders
 
$
(51,721
)
 
$
(40,791
)
 
$
(279,357
)
 
$
(200,770
)

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


5

Table of Contents


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 Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
Balances at January 1, 2017
 
$
103,621

 
138,508

 
$
139

 
$
2,410,395

 
$
(176,783
)
 
$
(7,238
)
 
$
(1,218,681
)
 
$
1,007,832

 
$
79,488

 
$
1,087,320

Cumulative-effect upon adoption of ASU 2016-09 and ASU 2016-16 (Note 1)
 

 

 

 

 

 

 
(45,344
)
 
(45,344
)
 

 
(45,344
)
Net loss
 
(24,709
)
 

 

 

 

 

 
(282,486
)
 
(282,486
)
 
(36,123
)
 
(318,609
)
Other comprehensive loss
 

 

 

 

 

 
3,129

 

 
3,129

 

 
3,129

Issuance of restricted stock to employees, net of cancellations
 

 
1,574

 
1

 

 

 

 

 
1

 

 
1

Stock-based compensation expense
 

 

 

 
24,033

 

 

 

 
24,033

 

 
24,033

Contributions from noncontrolling interests
 
52,325

 

 

 

 

 

 

 

 
89,510

 
89,510

Distributions to noncontrolling interests
 
(5,377
)
 

 

 

 

 

 

 

 
(7,952
)
 
(7,952
)
Purchases of treasury stock
 

 
(542
)
 

 

 
(4,391
)
 

 

 
(4,391
)
 

 
(4,391
)
Balances at October 1, 2017
 
$
125,860

 
139,540

 
$
140

 
$
2,434,428

 
$
(181,174
)
 
$
(4,109
)
 
$
(1,546,511
)
 
$
702,774

 
$
124,923

 
$
827,697


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

6

Table of Contents


SunPower Corporation
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
Nine Months Ended
 
 
October 1, 2017
 
October 2, 2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(343,318
)
 
$
(249,505
)
Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisitions:
 

 

Depreciation and amortization
 
133,541

 
122,842

Stock-based compensation
 
25,380

 
48,902

Non-cash interest expense
 
12,553

 
963

Non-cash restructuring charges
 

 
17,926

Gain on settlement of preexisting relationships in connection with acquisition
 

 
(203,252
)
Impairment of equity method investment
 
8,607

 
90,946

Goodwill impairment
 

 
147,365

Dividend from 8point3 Energy Partners LP
 
22,232

 

Equity in earnings of unconsolidated investees
 
(21,809
)
 
(24,356
)
Excess tax benefit from stock-based compensation
 

 
(1,222
)
Deferred income taxes
 
1,575

 
2,791

Other, net
 
5,180

 
3,805

Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 
Accounts receivable
 
34,776

 
(36,563
)
Costs and estimated earnings in excess of billings
 
13,551

 
13,579

Inventories
 
(67,012
)
 
(101,146
)
Project assets
 
(62,024
)
 
(434,645
)
Prepaid expenses and other assets
 
150,628

 
69,293

Long-term financing receivables, net
 
(91,499
)
 
(136,543
)
Advances to suppliers
 
52,692

 
45,003

Accounts payable and other accrued liabilities
 
(228,368
)
 
(144,202
)
Billings in excess of costs and estimated earnings
 
(68,702
)
 
(15,879
)
Customer advances
 
106,713

 
(14,440
)
Net cash used in operating activities
 
(315,304
)
 
(798,338
)
Cash flows from investing activities:
 

 
 
Purchases of property, plant and equipment
 
(57,614
)
 
(149,475
)
Cash paid for solar power systems, leased and to be leased
 
(64,532
)
 
(64,417
)
Cash paid for solar power systems
 
(38,242
)
 
(2,282
)
Proceeds from sales or maturities of marketable securities
 

 
6,210

Payments to 8point3 Energy Partners LP
 

 
(9,838
)
Purchases of marketable securities
 
(1,306
)
 

Cash paid for acquisitions, net of cash acquired
 

 
(24,003
)
Dividend from equity method investees
 
2,891

 

Cash paid for investments in unconsolidated investees
 
(15,947
)
 
(11,046
)
Net cash used in investing activities
 
(174,750
)
 
(254,851
)
Cash flows from financing activities:
 
 
 
 
Proceeds from bank loans and other debt
 
283,149

 

Repayment of bank loans and other debt
 
(303,562
)
 
(15,572
)
Proceeds from issuance of non-recourse residential financing, net of issuance costs
 
83,177

 
142,862

Repayment of non-recourse residential financing
 
(4,755
)
 
(36,707
)
Contributions from noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
141,037

 
91,723

Distributions to noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
(13,028
)
 
(13,419
)
Proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs
 
318,675

 
602,286

Repayment of non-recourse power plant and commercial financing
 
(148,606
)
 
(257,538
)
Contributions from noncontrolling interests attributable to power plant and commercial projects
 
800

 

Excess tax benefit from stock-based compensation
 


1,222

Purchases of stock for tax withholding obligations on vested restricted stock
 
(4,390
)
 
(20,953
)
Net cash provided by financing activities
 
352,497

 
493,904

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
 
1,298

 
1,480

Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
 
(136,259
)
 
(557,805
)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 1
 
514,212

 
1,020,764

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period 1
 
$
377,953

 
$
462,959

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Assignment of residential lease receivables to third parties
 
$
90


$
3,722

Costs of solar power systems, leased and to be leased, sourced from existing inventory
 
$
42,392


$
43,983

Costs of solar power systems, leased and to be leased, funded by liabilities
 
$
5,298


$
6,226

Costs of solar power systems under sale-leaseback financing arrangements, sourced from project assets
 
$
65,885


$
7,375

Acquisitions of property, plant and equipment included in accounts payable and accrued liabilities
 
$
32,367


$
85,994

Net reclassification of cash proceeds offset by project assets in connection with the deconsolidation of assets sold to the 8point3 Group
 
$
4,918


$
43,588

Exchange of receivables for an investment in an unconsolidated investee
 
$


$
2,890

Contractual obligations satisfied with inventory
 
$
19,855


$

Acquisition funded by liabilities
 
$


$
100,550

1  
"Cash, cash equivalents, restricted cash and restricted cash equivalents" balance consisted of "Cash and cash equivalents", "Restricted cash and cash equivalents, current portion" and "Restricted cash and cash equivalents, net of current portion" financial statement line items in the Consolidated Balance Sheets for the respective periods.

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

7

Table of Contents


Notes to the Consolidated Financial Statements

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 Solar International SAS France ("Total"), formerly Total Energies Nouvelles Activités USA, a subsidiary of Total S.A. ("Total S.A.") (see Note 2 ).
    
The Company's 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.

Liquidity
The Company continues to face challenging industry conditions and a competitive environment. While the Company continues to focus on improving overall operating performance and liquidity, including managing cash flow and working capital, notably with cash savings resulting from restructuring actions and cost reduction initiatives put in place in the third and fourth quarters of 2016, the Company's net losses continued through the third quarter of 2017 and are expected to continue through 2018. The Company has the ability to enhance its available cash by borrowing up to $95.0 million under its revolving credit facility with Credit Agricole Corporate and Investment Bank ("Credit Agricole") pursuant to the Letter Agreement executed by the Company and Total S.A. on May 8, 2017 (see Note 2). However, the Company’s $300.0 million 0.75% senior convertible debentures due 2018 (the “0.75% debentures due 2018”), $200.0 million of which are held by Total, mature on June 1, 2018. These events and conditions indicate the Company may not have the liquid funds necessary to repay the existing 0.75% debentures due 2018 at maturity and satisfy its estimated liquidity needs within the 12 months from the date of issuance of these interim financial statements. The Company has a history of successfully refinancing and extending the maturity date of its debts; however, there is no assurance that the 0.75% debentures due 2018 will be refinanced or their maturity extended to sufficiently meet the Company’s obligations as they become due or on terms acceptable to the Company. Given its current share price compared to the conversion price of $24.95 per share for the 0.75% debentures due 2018, the Company anticipates that bondholders will choose to select repayment in cash. In addition, the Company has decided to divest certain assets, such as its equity interest in 8point3 Group, and join the sale process initiated by First Solar, Inc. The Company anticipates that it could repay the 0.75% debentures due 2018 with proceeds from these divestitures. Regarding the 8point3 Group sale process, while the Company believes both parties are committed to proceeding, no final decision on any particular alternative has yet been reached.
While the Company believes it is probable that it can effectively implement plans to sell its investment in 8point3 Group, which mitigates the conditions and events giving rise to uncertainty regarding repayment of the 0.75% debentures due 2018, there are a number of factors that may defer or otherwise limit the Company’s ability to sell this investment including, among others, (i) final approval of a transaction, once a partner, structure, and price are finalized, by the Company’s Board of Directors, (ii) legal and regulatory approvals, and (iii) approval by various classes of equity owners and/or the Board of Directors of 8point3 Energy Partners (or a subcommittee thereof), as required based on the final transaction structure. The

8



Company believes it has sufficiently evaluated these conditions in concluding that the sale of the Company's equity interests in 8point3 Group is considered probable of occurring prior to the maturity of the 0.75% debentures due 2018. The Company cannot predict, with certainty, the outcome of its actions to generate liquidity, including the outcome of the 8point3 Group divestiture, or whether such actions would generate the necessary liquidity as currently anticipated to fulfill its obligations within the 12 months from the date of issuance of these interim financial statements.

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. Both fiscal 2017 and 2016 are 52-week fiscal years. The third quarter of fiscal 2017 ended on October 1, 2017 , while the third quarter of fiscal 2016 ended on October 2, 2016 . The third quarters of fiscal 2017 and 2016 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 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, valuations for business combinations, other intangible assets, investments, and other long-term assets; 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.

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board ("FASB") issued an update to the standards to require companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standard is effective for the Company no later than the first quarter of fiscal 2018. The Company elected early adoption of the updated accounting standard in the first quarter of fiscal 2017. The Company had restricted cash and cash equivalents held by various banks to secure its letter of credit facilities and deposits designated for the construction of various residential, commercial and power plant solar energy projects. The adoption of this accounting standard did not result in a significant impact to the Company’s consolidated financial statements and related disclosures.

In October 2016, the FASB issued an update to the standards to amend how a reporting entity considers indirect interests held by related parties under common control when evaluating whether it is the primary beneficiary of a Variable Interest Entities. The Company adopted the updated accounting standard in the first quarter of fiscal 2017. Adoption of the new accounting standard did not have a material impact to the Company's consolidated financial statements.


9



In October 2016, the FASB issued an update to the standards to require entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance is effective for the Company no later than the first quarter of fiscal 2018. The Company elected early adoption of the accounting standard in the first quarter of fiscal 2017, resulting in a cumulative-effect adjustment of a $61.0 million increase in accumulated deficit as of January 1, 2017, with corresponding adjustments to Prepaid expenses and other current assets, and Other long-term assets of $4.9 million and $56.1 million , respectively.

In August 2016, the FASB issued an update to the standards to clarify the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new guidance is effective for the Company no later than the first quarter of fiscal 2018. The Company elected early adoption of the updated accounting standard on a retrospective basis in the first quarter of fiscal 2017. The adoption of this updated accounting standard did not result in a significant impact to the Company’s consolidated financial statements.

In March 2016, the FASB issued an update to the standards to simplify certain aspects of the accounting for share-based payment transactions to employees. The new standard requires excess tax benefits and tax deficiencies to be recorded in the statements of income as a component of the provision for income taxes when stock awards vest or are settled. In addition, it eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The standard also provides an accounting policy election to account for forfeitures as they occur, allows companies to withhold more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the cash flows statement.
    
The Company adopted the new guidance in the first quarter of fiscal 2017. Upon adoption on a prospective basis, excess tax benefits or deficiencies from share-based award activity are reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they were previously recognized in equity. The Company also elected to continue to estimate expected forfeitures to determine stock-based compensation expense and to present excess tax benefits as an operating activity in the statement of cash flows retrospectively. Adoption of the new accounting standard resulted in a decrease of net cumulative-effect adjustment of $15.7 million , primarily related to the recognition of the previously unrecognized excess tax benefits which decreased the accumulated deficit with a corresponding adjustment to long-term tax liabilities as of January 1, 2017. The Company adopted the guidance on a modified retrospective basis.

In March 2016, the FASB issued an update to the standards to eliminate the retroactive adoption of the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The new guidance was effective for the Company for the first quarter of fiscal 2017 and required a prospective approach to adoption. The Company adopted the guidance in the first quarter of 2017, which impacted its investment in Dongfang Huansheng Photovoltaic (Jiangsu) Co., Ltd., given it qualified for equity method treatment during the quarter (see Note 9).

Recent Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued an update to the standards which targeted improvements to accounting for hedging activities. The improvements include (i) alignment of risk management activities and financial reporting, and (ii) other simplifications in the application of hedge accounting guidance. The new guidance is effective for the Company no later than the first quarter of 2019 and requires a modified retrospective approach to adoption. Early adoption is permitted in any interim period. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In May 2017, the FASB issued an update to the standards to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new guidance is effective for the Company no later than the first quarter of 2018. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In February 2017, the FASB issued new guidance to clarify the scope and application of the sale or transfer of nonfinancial assets to noncustomers, including partial sales and also to define what constitutes an “in substance nonfinancial asset” which can include financial assets. The new guidance eliminates several accounting differences between transactions involving assets and transactions involving businesses. Further, the guidance aligns the accounting for derecognition of a nonfinancial asset with that of a business. The new guidance is effective for the Company no later than the first quarter of 2018. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

10




In January 2017, the FASB issued an update to the standards to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for the Company no later than the first quarter of fiscal 2018 and requires a prospective 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 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 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. 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 May 2014, the FASB issued a new revenue recognition standard ("ASC 606") 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 ASC 606 which (i) clarify the application of the principal versus agent guidance; (ii) clarify the guidance relating to performance obligations and licensing; (iii) clarify the assessment of the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition; and (iv) clarify narrow aspects of ASC 606 or corrects unintended application of the guidance. 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 will adopt ASC 606 on January 1, 2018 retrospectively, applying the new standard to each prior reporting period presented. The Company's ability to adopt retrospectively is dependent upon the completion of the analysis of information necessary to restate prior period financial statements and disclosures. The Company is in the process of reviewing historical contracts to quantify the impact of adoption on its consolidated financial statements. The Company is also in the process of assessing the appropriate changes to its business processes and upgrading its systems and controls to support recognition and disclosure under ASC 606.

The Company expects the adoption of ASC 606 to primarily affect its Power Plants and Commercial Segments. Sales of solar power systems that include the sale or lease of related real estate, which occur under both segments, are currently accounted for under the guidance for real estate sales ("ASC 360-20"). ASC 360-20 requires the Company to evaluate whether such arrangements have any forms of continuing involvement that may affect the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement requiring the Company to reduce the potential profit on a project sale by its maximum exposure to loss.  The Company anticipates that ASC 606, which supersedes the real estate sales guidance under ASC 360-20, will result in the earlier recognition of revenue and profit. In addition, the Company’s investment in the 8point3 Group as of October 1, 2017 , has a negative carrying value of $72.4 million primarily as a result of profit deferred under ASC 360-20. Under ASC 606, the Company expects that a material amount of this deferred profit will have been recognized prior to January 1, 2018, and as a result the Company’s carrying value in the 8point3 Group will materially increase upon adoption. The Company expects that revenue recognition for its other sales arrangements, including the sales of components, sales and construction of solar systems, and operations and maintenance services, will remain materially consistent.

The Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates that this standard will have a material impact on its consolidated financial statements and disclosures. However, the

11



Company does not know or cannot reasonably estimate quantitative information, beyond that discussed above, related to the impact of the new standard on the financial statements at this time.

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 (the "Private Placement Agreement"), 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 1, 2017 , 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 56% .

Supply Agreement

In November 2016, the Company and Total entered into a four-year, up to 200-MW supply agreement to support the solarization of Total facilities. The agreement covers the supply of 150 MW of E-Series panels with an option to purchase up to another 50 MW of P-Series panels. In March 2017, the Company received a prepayment totaling $88.5 million . The prepayment is secured by certain of the Company's assets located in the United States and in Mexico.

The Company recognizes revenue for the solar panels consistent with its revenue recognition policy for solar power components: when persuasive evidence of an arrangement exists, delivery of the product has occurred, title and risk of loss has passed to Total, the sales price is fixed or determinable, collectability of the resulting receivable is reasonably assured, and the risks and rewards of ownership have passed. In the second quarter of fiscal 2017, the Company started to supply Total with panels under the supply agreement and as of October 1, 2017 , the Company had $12.5 million of "Customer advances, current portion" and $71.7 million of "Customer advances, net of current portion" on its Consolidated Balance Sheets related to the aforementioned supply agreement (see Note 8 ).

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 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 a 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.

In addition to the Credit Support Agreement, the Company and Total S.A. entered into a letter agreement (the "Letter Agreement") in May 2017 to facilitate the issuance by Total S.A. of one or more guaranties of the Company's payment obligations (the "Guaranties") of up to $100.0 million (the "Support Amount") under the Amended and Restated Revolving Credit Agreement with Credit Agricole Corporate and Investment Bank, as "Administrative Agent," and the other lenders party thereto; See Note 10 for additional information on the Amended and Restated Revolving Credit Agreement with Credit Agricole. In consideration for the commitments of Total S.A. pursuant to the Letter Agreement, the Company is required to pay

12



a guarantor commitment fee of 0.50% per annum for the unutilized Support Amount and a guaranty fee of 2.35% per annum of the Guaranty outstanding. The maturity date of the Letter Agreement is August 26, 2019.

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 ability of the Company and its board of directors 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, dated February 28, 2012, as amended, 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 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) (the "Exchange Act"), 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


13



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 1, 2017 , the Company had $1.3 million of "Costs and estimated earnings in excess of billings" and $4.9 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 first quarter of fiscal 2017, in connection with a co-development project between the Company and Total, Total paid $0.5 million to the Company in exchange for the Company's ownership interest in the co-development project.

Related-Party Transactions with Total and its Affiliates:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
October 1, 2017
 
October 2, 2016
 
October 1, 2017
 
October 2, 2016
Revenue:
 
 
 
 
 
 
 
 
EPC, O&M, and components revenue
 
$
12,500

 
$
1,632

 
$
19,683

 
$
63,161

Cost of revenue:
 
 
 
 
 
 
 
 
EPC, O&M, and components cost of revenue
 
$
9,793

 
$
2,276

 
$
14,198

 
$
58,300

Research and development expense:
 
 
 
 
 
 
 
 
Offsetting contributions received under the R&D Agreement
 
$
(15
)
 
$
(111
)
 
$
(119
)
 
$
(532
)
Interest expense:
 
 
 
 
 
 
 
 
Guarantee fees incurred under the Credit Support Agreement
 
$
1,481

 
$
1,821

 
$
4,860

 
$
5,088

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

 
$
1,000

 
$
3,000

 
$
3,000



Note 3 . OTHER INTANGIBLE ASSETS

Other Intangible Assets

The following tables present details of the Company's acquired other intangible assets:

14


(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of October 1, 2017
 
 
 
 
 
 
Patents and purchased technology
 
$
51,140

 
$
(23,718
)
 
$
27,422

Project pipeline assets
 
9,446

 
(3,182
)
 
6,264

Purchased in-process research and development
 
1,200

 
(1,200
)
 

Other
 
1,000

 
(1,000
)
 

 
 
$
62,786

 
$
(29,100
)
 
$
33,686

 
 
 
 
 
 
 
As of January 1, 2017
 
 
 
 
 
 
Patents and purchased technology
 
$
51,140

 
$
(16,014
)
 
$
35,126

Project pipeline assets
 
9,446

 
(1,804
)
 
7,642

Purchased in-process research and development
 
1,200

 

 
1,200

Other
 
1,000

 
(750
)
 
250

 
 
$
62,786

 
$
(18,568
)
 
$
44,218


During the three and nine months ended October 1, 2017 , aggregate amortization expense for intangible assets totaled $3.0 million and $10.5 million , respectively. During the three and nine months ended October 2, 2016 , aggregate amortization expense for intangible assets totaled $3.0 million and $14.5 million , respectively.

As of October 1, 2017 , the estimated future amortization expense related to intangible assets with finite useful lives is as follows:
(In thousands)
 
Amount
Fiscal Year
 
 
2017 (remaining three months)
 
$
2,964

2018
 
14,407

2019
 
9,963

2020
 
6,317

2021
 
23

Thereafter
 
12

 
 
$
33,686



Note 4 . BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross 1,2,3
 
$
225,714

 
$
242,451

Less: allowance for doubtful accounts
 
(37,246
)
 
(20,380
)
Less: allowance for sales returns
 
(2,238
)
 
(2,433
)
 
 
$
186,230

 
$
219,638

1  
Includes short-term financing receivables associated with solar power systems leased of $23.1 million and $19.3 million as of October 1, 2017 and January 1, 2017 , respectively (see Note 5 ).

2  
Includes short-term retainage of $10.4 million and $8.8 million as of October 1, 2017 and January 1, 2017 , 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.

3  
As of October 1, 2017 and January 1, 2017 , the Company pledged accounts receivable of $1.8 million and $0.3 million , respectively, to third-party investors as security for the Company's contractual obligations.


15






As of
(In thousands)

October 1, 2017

January 1, 2017
Inventories:




Raw materials

$
104,116


$
136,906

Work-in-process

143,303


184,967

Finished goods

160,793


79,834

 

$
408,212


$
401,707


 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Prepaid expenses and other current assets:
 
 
 
 
Deferred project costs 1
 
$
17,930

 
$
68,338

VAT receivables, current portion
 
22,279

 
14,260

Deferred costs for solar power systems to be leased
 
21,535

 
28,705

Derivative financial instruments
 
1,525

 
4,802

Prepaid inventory
 

 
83,943

Other receivables
 
79,624

 
85,834

Prepaid taxes
 
117

 
5,468

Other prepaid expenses
 
20,920

 
24,260

Other current assets
 
490

 
60

 
 
$
164,420

 
$
315,670

1  
As of October 1, 2017 and January 1, 2017 , the Company had pledged deferred project costs of $6.4 million and $2.3 million , respectively, to third-party investors as security for the Company's contractual obligations.

 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
394,285

 
$
389,103

Project assets — land
 
12,191

 
18,927

 
 
$
406,476

 
$
408,030

Project assets - plants and land, current portion
 
$
364,165

 
$
374,459

Project assets - plants and land, net of current portion
 
$
42,311

 
$
33,571


 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Property, plant and equipment, net:
 
 
 
 
Manufacturing equipment 1
 
$
417,974

 
$
403,808

Land and buildings
 
196,883

 
130,080

Leasehold improvements
 
300,402

 
280,620

Solar power systems 2
 
313,747

 
207,277

Computer equipment
 
113,896

 
185,518

Furniture and fixtures
 
12,958

 
12,591

Construction-in-process
 
15,917

 
39,849

 
 
1,371,777

 
1,259,743

Less: accumulated depreciation
 
(318,943
)
 
(232,677
)
 
 
$
1,052,834

 
$
1,027,066


16



1  
The Company's mortgage loan agreement with International Finance Corporation ("IFC") was collateralized by certain manufacturing equipment with a net book value of $14.3 million as of January 1, 2017 . During the first quarter of 2017 , the entire outstanding balance, and the associated interest, of the mortgage loan agreement with IFC has been repaid.

2  
Includes $281.2 million and $177.1 million of solar power systems associated with sale-leaseback transactions under the financing method as of October 1, 2017 and January 1, 2017 , 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 5 ).
 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Property, plant and equipment, net by geography 1 :
 
 
 
 
Philippines
 
$
338,319

 
$
373,286

United States
 
360,766

 
276,053

Malaysia
 
249,871

 
275,980

Mexico
 
84,227

 
81,419

Europe
 
19,501

 
20,154

Other
 
150

 
174

 
 
$
1,052,834

 
$
1,027,066

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

 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Other long-term assets:
 
 
 
 
Equity method investments 1
 
$
(5,523
)
 
$
(6,931
)
Derivative financial instruments
 
9,149

 
11,429

Cost method investments
 
33,156

 
39,423

Other 2
 
78,258

 
141,598

 
 
$
115,040

 
$
185,519

1  
Includes the carrying value of the Company's investment in the 8point3 Group, which had a negative value of $72.4 million and $60.6 million as of October 1, 2017 and January 1, 2017 , respectively (see Note 9 ).

2  
As of October 1, 2017 and January 1, 2017 , the Company had pledged deferred project costs of $5.8 million and $0.4 million , respectively, to third-party investors as security for the Company's contractual obligations.



17



 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Accrued liabilities:
 
 
 
 
Employee compensation and employee benefits
 
$
41,922

 
$
43,370

Deferred revenue
 
28,683

 
27,649

Interest payable
 
11,211

 
15,329

Short-term warranty reserves
 
21,829

 
4,894

Restructuring reserve
 
3,719

 
18,001

VAT payables
 
7,184

 
4,743

Derivative financial instruments
 
745

 
2,023

Inventory payable
 

 
83,943

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

 
3,665

Contributions from noncontrolling interests attributable to projects prior to COD
 
2,304

 
93,875

Taxes payable
 
18,601

 
25,602

Liability due to AU Optronics
 
29,967

 
31,714

Other
 
84,962

 
36,418

 
 
$
251,127

 
$
391,226


 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Other long-term liabilities:
 
 
 
 

Deferred revenue
 
$
185,298

 
$
188,932

Long-term warranty reserves
 
155,157

 
156,315

Long-term sale-leaseback financing
 
314,688

 
204,879

Long-term residential lease financing with 8point3 Energy Partners
 
29,281

 
29,370

Unrecognized tax benefits
 
24,335

 
47,203

Long-term pension liability
 
4,117

 
3,381

Derivative financial instruments
 
979

 
448

Long-term liability due to AU Optronics
 
61,165

 
71,639

Other
 
20,923

 
18,865

 
 
$
795,943

 
$
721,032


 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Accumulated other comprehensive loss:
 
 
 
 

Cumulative translation adjustment
 
$
(8,218
)
 
$
(12,249
)
Net unrealized gain (loss) on derivatives
 
(265
)
 
1,203

Net gain on long-term pension liability adjustment
 
4,228

 
4,228

Deferred taxes
 
146

 
(420
)
 
 
$
(4,109
)
 
$
(7,238
)

Note 5 . LEASING

Residential Lease Program

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.

18




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 1, 2017 and January 1, 2017 :
 
 
As of
(In thousands)
 
October 1, 2017
 
January 1, 2017
Solar power systems leased and to be leased, net 1,2 :
 
 
 
 
Solar power systems leased
 
$
776,826

 
$
666,700

Solar power systems to be leased
 
23,804

 
25,367

 
 
800,630

 
692,067

Less: accumulated depreciation
 
(93,096
)
 
(70,800
)
 
 
$
707,534

 
$
621,267

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

2  
As of October 1, 2017 and January 1, 2017 , the Company had pledged solar assets with an aggregate book value of $108.8 million and $13.1 million , 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 1, 2017 :
(In thousands)
 
Fiscal 2017 (remaining three months)
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Thereafter
 
Total
Minimum future rentals on operating leases placed in service 1
 
$
7,887

 
30,745

 
30,809

 
30,873

 
30,939

 
433,084

 
$
564,337

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 1, 2017 and January 1, 2017 , 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 1, 2017
 
January 1, 2017
Financing receivables 1 :
 
 
 
 
Minimum lease payments receivable 2
 
$
656,314

 
$
560,582

Unguaranteed residual value
 
82,018

 
70,636

Unearned income
 
(116,363
)
 
(104,624
)
Net financing receivables
 
$
621,969

 
$
526,594

Current
 
$
23,137

 
$
19,261

Long-term
 
$
598,832

 
$
507,333

1  
As of October 1, 2017 and January 1, 2017 , the Company had pledged financing receivables of $109.1 million and $18.6 million , respectively, to third-party investors as security for the Company's contractual obligations.

2  
Net of allowance for doubtful accounts amounting to $5.7 million and $4.5 million , as of October 1, 2017 and January 1, 2017 , respectively.

As of October 1, 2017 , future maturities of net financing receivables for sales-type leases are as follows:

19



(In thousands)
 
Fiscal 2017 (remaining three months)
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Thereafter
 
Total
Scheduled maturities of minimum lease payments receivable 1
 
$
9,443

 
33,755

 
34,038

 
34,330

 
34,628

 
510,120

 
$
656,314

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 1, 2017 , future minimum lease obligations associated with these systems were $73.7 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 4 ). As of October 1, 2017 , future minimum lease obligations for the sale-leaseback arrangements accounted for under the financing method were $266.1 million , which will be recognized over the lease terms of up to 25 years . During the three and nine months ended October 1, 2017 , the Company had net financing proceeds of $53.7 million and $95.7 million , respectively, in connection with these sale-leaseback arrangements. During both the three and nine months ended October 2, 2016 , the Company had net financing proceeds of $12.4 million , in connection with these sale-leaseback arrangements. As of October 1, 2017 and January 1, 2017 , the carrying amount of the sale-leaseback financing liabilities, presented in "Other long-term liabilities" on the Company's Consolidated Balance Sheets, was $314.7 million and $204.9 million , respectively (see Note 4 ).

Note 6 . FAIR VALUE MEASUREMENTS

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during 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 1, 2017 or January 1, 2017 .

20




The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of October 1, 2017 and January 1, 2017 :
 
 
October 1, 2017
 
January 1, 2017
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents 1 :
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$

 
$

 
$

 
$
3,002

 
$
3,002

 
$

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
1,525

 

 
1,525

 
4,802

 

 
4,802

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
9,149

 

 
9,149

 
11,429

 

 
11,429

Total assets
 
$
10,674

 
$

 
$
10,674

 
$
19,233

 
$
3,002


$
16,231

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
$
745

 
$

 
$
745

 
$
2,023

 
$

 
$
2,023

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
979

 

 
979

 
448

 

 
448

Total liabilities
 
$
1,724

 
$

 
$
1,724

 
$
2,471

 
$

 
$
2,471

1  
The Company's restricted cash and 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 1, 2017 and October 2, 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 1, 2017 and January 1, 2017 these bonds had a carrying value of $6.1 million and $5.0 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.

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

21



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 1, 2017 and January 1, 2017 , the Company had $(5.5) million and $(6.9) million , respectively, in investments accounted for under the equity method (see Note 9 ). As of October 1, 2017 and January 1, 2017 , the Company had $33.2 million and $39.4 million respectively, in investments accounted for under the cost method.

Note 7 . RESTRUCTURING

December 2016 Restructuring Plan

On December 2, 2016, the Company adopted a restructuring plan to reduce costs and focus on improving cash flow. As part of the plan, the Board of Directors approved the closure of the Company’s Philippine-based Fab 2 manufacturing facility. In connection with the plan, which is expected to be completed by the first half of fiscal 2018, the Company expects approximately 2,500 employees to be affected, primarily in the Philippines. The Company expects to incur restructuring charges in connection with the plan totaling approximately $225 million to $275 million , consisting primarily of asset impairments, severance benefits, lease and related termination costs, and other associated costs. The Company expects approximately 30% of such total restructuring charges to be cash. The actual timing and costs of the plan may differ from the Company’s current expectations and estimates.

August 2016 Restructuring Plan

On August 9, 2016 , the Company adopted a restructuring plan 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. The Company expects to incur restructuring charges totaling approximately $35 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 prior fiscal years, 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 1, 2017 , and the remaining costs to be incurred are not expected to be material.

The following table summarizes the restructuring charges recognized in the Company's Consolidated Statements of Operations:

22



 
 
Nine Months Ended
(In thousands)
 
October 1, 2017
 
October 2, 2016
 
Cumulative To Date
December 2016 Plan:
 
 
 
 
 
 
Non-cash impairment charges (benefits)
 
$

 
$
17,926

 
$
148,791

Severance and benefits