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SUNPOWER CORP - Quarter Report: 2013 September (Form 10-Q)

 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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.
 
 
 
 
 
 
 
 
 

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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 assets1
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 assets1
493,725

 
276,063

Total assets
$
3,759,092

 
$
3,340,948

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable1
$
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 portion1
44,977

 
59,648

Total current liabilities
1,344,664

 
961,605

 
 
 
 
Long-term debt
93,154

 
375,661

Convertible debt, net of current portion1
521,372

 
438,629

Customer advances, net of current portion1
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.

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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.

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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.


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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.


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

 
Nine Months Ended
 
September 29, 2013
 
September 30, 20121
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.

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Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company
 
SunPower Corporation (together with its subsidiaries, the "Company" or "SunPower") is a vertically integrated solar products and 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

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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

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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

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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.

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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

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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.
  

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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.

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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, gross1
 
$
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



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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 equipment2
 
545,174

 
531,289

Computer equipment
 
77,087

 
75,438

Furniture and fixtures
 
8,262

 
8,178

Solar power systems3
 
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 geography4:
 
 
 
 
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


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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



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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


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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 funds1
 
$
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

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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, 20131
 
December 30, 20121
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.


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Table of Contents

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, outstanding 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:

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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 costs1
 
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 costs1
 
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

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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)
 
Amount1
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

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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

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Table of Contents

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
)
Balance at the end of the period
 
$
134,775

 
$
109,652

 
$
134,775

 
$
109,652


Contingent Obligations

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

Future Financing Commitments

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

The Company's future financing obligations related to these agreements as of September 29, 2013 are as follows:
(In thousands)
 
Amount
Year
 
 
2013 (remaining three months)
 
$
147,120

2014
 
96,770

 
 
$
243,890


Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $25.2 million and $35.0 million as of September 29, 2013 and December 30, 2012, respectively, and are included in "Other long-term liabilities" in the Company's Condensed Consolidated Balance Sheets as they are not expected to be paid within the next twelve months. Due to the complexity and uncertainty associated with its tax positions, the Company cannot make a reasonably reliable estimate of the period in which cash settlement, if any, would be made for its liabilities associated with uncertain tax positions in other long-term liabilities.


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Table of Contents

Indemnifications
 
The Company is a party to a variety of agreements under which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights, and certain tax related matters including indemnification to customers under §48(c) solar commercial investment tax credit and Treasury Grant payments under Section 1603 of the American Recovery and Reinvestment Act. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company under the procedures specified in the particular contract. These procedures usually allow the Company to challenge the other party's claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third party claims brought against the other party. Further, the Company's obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.

Legal Matters

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

Derivative actions purporting to be brought on the Company's behalf have also been filed in state and federal courts against several of the Company's current and former officers and directors based on the same events alleged in the securities class action lawsuits described above. The California state derivative cases were consolidated as In re SunPower Corp. S'holder Derivative Litig., Lead Case No. 1-09-CV-158522 (Santa Clara Sup. Ct.), and co-lead counsel for plaintiffs have been appointed. The complaints assert state-law claims for breach of fiduciary duty, abuse of control, unjust enrichment, gross mismanagement, and waste of corporate assets. Plaintiffs filed a consolidated amended complaint on March 5, 2012. The federal derivative complaints were consolidated as In re SunPower Corp. S'holder Derivative Litig., Master File No. CV-09-05731-RS (N.D. Cal.), and lead plaintiffs and co-lead counsel were appointed on January 4, 2010. The federal complaints assert state-law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment, and seek an unspecified amount of damages. Plaintiffs filed a consolidated complaint on May 13, 2011. A Delaware state derivative case, Brenner v. Albrecht, et al., C.A. No. 6514-VCP (Del Ch.), was filed on May 23, 2011 in the Delaware Court of Chancery. The complaint asserts state-law claims for breach of fiduciary duty and contribution and indemnification, and seeks an unspecified amount of damages. On June 29, 2013, the parties to each of the derivative actions entered into an agreement in principle to settle all the derivative actions.  The terms of the settlement in principle include that the Company institute certain specified corporate governance measures, which were implemented by the Board of Directors on October 22, 2013 in connection with periodic review and update of corporate governance matters, that all claims against all defendants will be released and dismissed with prejudice, and that the Company will not oppose a request by the plaintiffs' counsel for an award of attorneys' fees up to $1 million, one half of which will be paid from the proceeds of directors and officers liability insurance.  The settlement in principle is subject to final documentation and to court approval. The parties are in the process of preparing a settlement agreement reflecting the terms of the agreement in principle, and intend to present the settlement for court approval.


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

Note 8. EQUITY METHOD INVESTMENTS

The Company accounts for its equity interests in its unconsolidated investees described below under the equity method of accounting as it has the ability to exercise significant influence, but does not own a majority equity interest in, or otherwise control, the investees. As of September 29, 2013 and December 30, 2012, the Company's carrying value of its equity method investments totaled $113.8 million and $111.5 million, respectively, and is classified as “Other long-term assets” in its Condensed Consolidated Balance Sheets. The Company's share of its earnings (loss) from equity method investments is reflected as "Equity in earnings (loss) of unconsolidated investees" in its Condensed Consolidated Statement of Operations.

Related Party Transactions with Equity Method Investees:
 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Accounts receivable
 
$
10,304

 
$
17,847

Accounts payable
 
48,080

 
63,469

Other long-term assets:
 
 
 
 
Long-term note receivable
 
1,863

 
1,040

 
 
Three Months Ended
 
Nine months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Payments made to equity method investees for products/services
 
$
112,416

 
$
123,112

 
$
338,495

 
$
452,379


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

In December 2012, the Company entered into an agreement with Tianjin Zhonghuan Semiconductor Co. Ltd. ("TZS"), Inner Mongolia Power Group Co. Ltd. ("IMP") and Hohhot Jinqiao City Development Company Co., Ltd. ("HJCD") to form CCPV, a jointly owned entity to manufacture and deploy the Company's C-7 Tracker concentrator technology in Inner Mongolia and other regions in China. Huaxia CPV will be based in Hohhot, Inner Mongolia. Under the terms of the agreement, the Company will invest RMB 100,000,000 (or approximately $16.3 million based on the exchange rate as of September 29, 2013), for a 25% equity ownership in CCPV, with the investment to be made over a period of two years subsequent to the establishment of the entity. The establishment of the entity is subject to approval of the Chinese government. No contributions have been made to date.

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

In October 2012, the Company made a $3.0 million equity investment in Diamond Energy, an alternative energy project developer and clean electricity retailer headquartered in Melbourne, Australia, in exchange for a 25% equity ownership. The Company additionally provided Diamond Energy AUD 2.0 million (or $1.9 million based on the exchange rate as of September 29, 2013) under a five-year convertible note agreement and will receive interest of 1% per annum on the amounts lent to Diamond Energy, to be paid upon conversion or maturity.

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

Equity Investment and Joint Venture with AUOSP


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

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

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

The Company has concluded that it is not the primary beneficiary of AUOSP since, although the Company and AUO are both obligated to absorb losses or have the right to receive benefits, the Company alone does not have the power to direct the activities of AUOSP that most significantly impact its economic performance. In making this determination the Company considered the shared power arrangement, including equal board governance for significant decisions, elective appointment, and the fact that both parties contribute to the activities that most significantly impact the joint venture's economic performance. The Company accounts for its investment in AUOSP using the equity method as a result of the shared power arrangement. As of September 29, 2013, the Company's maximum exposure to loss as a result of its involvement with AUOSP is limited to the carrying value of its investment.

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

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

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

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

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

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

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

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

Note 9. DEBT AND CREDIT SOURCES

The following table summarizes the Company's outstanding debt as of September 29, 2013 and the related maturity dates:
 
 
 
 
Payments Due by Period
(In thousands)
 
Face Value
 
2013 (remaining three months)
 
2014
 
2015
 
2016
 
2017
 
Beyond 2017
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.75% debentures due 2018
 
$
300,000

 
$

 
$

 
$

 
$

 
$

 
$
300,000

4.50% debentures due 2015
 
250,000

 

 

 
250,000

 

 

 

4.75% debentures due 2014
 
230,000

 

 
230,000

 

 

 

 

0.75% debentures due 2015
 
79

 

 

 
79

 

 

 

IFC mortgage loan
 
62,500

 

 
15,000

 
15,000

 
15,000

 
15,000

 
2,500

CEDA loan
 
30,000

 

 

 

 

 

 
30,000

Other debt1
 
70,783

 
30,027

 
31,077

 
582

 
567

 
548

 
7,982

 
 
$
943,362

 
$
30,027

 
$
276,077

 
$
265,661

 
$
15,567

 
$
15,548

 
$
340,482

1 
The balance of Other debt excludes payments related to capital leases which are disclosed in Note 7. "Commitments and Contingencies" to these condensed consolidated financial statements.

Convertible Debt

The following table summarizes the Company's outstanding convertible debt:
 
 
September 29, 2013
 
December 30, 2012
(In thousands)
 
Carrying Value
 
Face Value
 
Fair Value1
 
Carrying Value
 
Face Value
 
Fair Value1
Convertible debt:
 
 
 
 
 
 
 
 
 
 
 
 
0.75% debentures due 2018
 
$
300,000

 
$
300,000

 
$
354,303

 
$

 
$

 
$

4.50% debentures due 2015
 
221,293

 
250,000

 
328,815

 
208,550

 
250,000

 
228,750

4.75% debentures due 2014
 
230,000

 
230,000

 
263,127

 
230,000

 
230,000

 
218,960

0.75% debentures due 2015
 
79

 
79

 
74

 
79

 
79

 
79

 
 
$
751,372

 
$
780,079

 
$
946,319

 
$
438,629

 
$
480,079

 
$
447,789

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

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

0.75% Debentures Due 2018


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On May 29, 2013, the Company issued $300.0 million in principal amount of its 0.75% debentures due 2018. Interest on the 0.75% debentures due 2018 is payable on June 1 and December 1 of each year, beginning on December 1, 2013. Holders are able to exercise their right to convert the debentures at any time into shares of the Company's common stock at an initial conversion price approximately equal to $24.95 per share. The applicable conversion rate may be subject to adjustment in certain circumstances. The maximum number of shares of the Company's common stock that may be issued through the conversion is 15,633,957, subject to anti-dilution and certain other adjustments. If not earlier converted, the 0.75% debentures due 2018 mature on June 1, 2018. If the Company undergoes a fundamental change, as described in the indenture governing the 0.75% debentures due 2018, holders may require the Company to repurchase all or a portion of their 0.75% debentures due 2018 at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If the Company undergoes a non-stock change of control fundamental change, as described in the governing indenture, the 0.75% debentures due 2018 will be subject to redemption at the Company's option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.75% debentures due 2018 will have the right to declare all amounts then outstanding due and payable.

4.50% Debentures due 2015

In fiscal 2010, the Company issued $250.0 million in principal amount of its 4.50% senior cash convertible debentures ("4.50% debentures due 2015"). Interest is payable semi-annually, on March 15 and September 15 of each year, at a rate of 4.50% per annum which commenced on September 15, 2010. The 4.50% debentures due 2015 mature on March 15, 2015 unless repurchased or converted in accordance with their terms prior to such date.

The 4.50% debentures due 2015 are convertible only into cash, and not into shares of the Company's common stock (or any other securities). Prior to December 15, 2014, if the weighted average price of the Company's common stock is more than 130% of the then current conversion price for at least 20 out of 30 consecutive trade days ending on the last trading day of the fiscal quarter, then holders of the 4.50% debentures due 2015 have the right to convert the debentures any day in the following fiscal quarter and, thereafter, they will be convertible at any time in the succeeding fiscal quarter, based on an initial conversion price of $22.53 per share of the Company's common stock. The conversion price will be subject to adjustment in certain events, such as distributions of dividends or stock splits. Upon conversion, the Company will deliver an amount of cash calculated by reference to the price of its common stock over the applicable observation period. The Company may not redeem the 4.50% debentures due 2015 prior to maturity. Holders may also require the Company to repurchase all or a portion of their 4.50% debentures due 2015 upon a fundamental change, as defined in the debenture agreement, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, such as the Company's failure to make certain payments or perform or observe certain obligations thereunder, Wells Fargo, the trustee, or holders of a specified amount of then-outstanding 4.50% debentures will have the right to declare all amounts then outstanding due and payable.

The embedded cash conversion option within the 4.50% debentures due 2015 is a derivative instrument that is required to be separated from the 4.50% debentures due 2015 and accounted for separately as a derivative instrument (derivative liability) with changes in fair value reported in the Company's Condensed Consolidated Statements of Operations until such transaction settles or expires. The initial fair value liability of the embedded cash conversion option was classified within "Other long-term liabilities" and simultaneously reduced the carrying value of "Convertible debt, net of current portion" in the Company's Condensed Consolidated Balance Sheets.

During the three and nine months ended September 29, 2013, the Company recognized a non-cash loss of $35.9 million and $94.3 million, respectively, recorded in "Other, net" in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the embedded cash conversion option. During the three and nine months ended September 30, 2012, the Company recognized a non-cash gain of $0.9 million and non-cash loss of $0.8 million, respectively, recorded in "Other, net" in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the embedded cash conversion option.

Call Spread Overlay with Respect to 4.50% Debentures

Concurrent with the issuance of the 4.50% debentures due 2015, the Company entered into privately negotiated convertible debenture hedge transactions (collectively, the "4.50% Bond Hedge") and warrant transactions (collectively, the "4.50% Warrants" and together with the 4.50% Bond Hedge, the “CSO2015”), with certain of the initial purchasers of the 4.50% cash convertible debentures or their affiliates. The CSO2015 transactions represent a call spread overlay with respect to the 4.50% debentures due 2015, whereby the cost of the 4.50% Bond Hedge purchased by the Company to cover the cash

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outlay upon conversion of the debentures is reduced by the sales prices of the 4.50% Warrants. Assuming full performance by the counterparties (and 4.50% Warrants strike prices in excess of the conversion price of the 4.50% debentures due 2015), the transactions effectively reduce the Company's potential payout over the principal amount on the 4.50% debentures due 2015 upon conversion of the 4.50% debentures due 2015.

Under the terms of the 4.50% Bond Hedge, the Company bought from affiliates of certain of the initial purchasers options to acquire, at an exercise price of $22.53 per share, subject to customary adjustments for anti-dilution and other events, cash in an amount equal to the market value of up to 11.1 million shares of the Company's common stock. Under the terms of the amended 4.50% Warrants the Company sold to affiliates of certain of the initial purchasers of the 4.50% cash convertible debentures warrants to acquire, at an exercise price of $24.00 per share, up to 11.1 million shares of the Company's common stock. Each 4.50% Bond Hedge and 4.50% Warrant transaction is a separate transaction, entered into by the Company with each counterparty, and is not part of the terms of the 4.50% debentures due 2015.

The 4.50% Bond Hedge, which is indexed to the Company's common stock, is a derivative instrument that requires mark-to-market accounting treatment due to the cash settlement features until such transactions settle or expire. The initial fair value of the 4.50% Bond Hedge was classified as "Other long-term assets" in the Company's Condensed Consolidated Balance Sheets.

During the three and nine months ended September 29, 2013, the Company recognized a non-cash gain of $36.0 million and $94.3 million, respectively, in "Other, net" in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the 4.50% Bond Hedge. During the three and nine months ended September 30, 2012, the Company recognized a non-cash loss of $0.9 million and a non-cash gain of $0.8 million, respectively, in "Other, net" in the Company's Condensed Consolidated Statement of Operations related to the change in fair value of the 4.50% Bond Hedge.

4.75% Debentures

In May 2009, the Company issued $230.0 million in principal amount of its 4.75% senior convertible debentures ("4.75% debentures due 2014"). Interest on the 4.75% debentures due 2014 is payable on April 15 and October 15 of each year. Holders of the 4.75% debentures due 2014 are able to exercise their right to convert the debentures at any time into shares of the Company's common stock at a conversion price equal to $26.40 per share. The applicable conversion rate may adjust in certain circumstances, including upon a non-stock fundamental change, as described in the indenture governing the 4.75% debentures. If not earlier converted, the 4.75% debentures due 2014 mature on April 15, 2014. Holders may also require the Company to repurchase all or a portion of their 4.75% debentures due 2014 upon a fundamental change at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, such as the Company's failure to make certain payments or perform or observe certain obligations thereunder, Wells Fargo, the trustee, or holders of a specified amount of then-outstanding 4.75% debentures due 2014 will have the right to declare all amounts then outstanding due and payable.

Call Spread Overlay with Respect to the 4.75% Debentures

Concurrently with the issuance of the 4.75% debentures due 2014, the Company entered into certain convertible debenture hedge transactions (the "4.75% Bond Hedge") and warrant transactions (the "4.75% Warrants") with affiliates of certain of the underwriters of the 4.75% debentures (together, the "CSO2014"), whereby the cost of the 4.75% Bond Hedges purchased by the Company to cover the potential share outlays upon conversion of the debentures is reduced by the sales prices of the 4.75% Warrants. The CSO2014 are not subject to mark-to-market accounting treatment since they may only be settled by issuance of the Company's common stock.

The 4.75% Bond Hedge allows the Company to purchase up to 8.7 million shares of the Company's common stock. The 4.75% Bond Hedge will be settled on a net share basis. Each 4.75% Bond Hedge and 4.75% Warrant is a separate transaction, entered into by the Company with each counterparty, and is not part of the terms of the 4.75% debentures. Holders of the 4.75% debentures due 2014 do not have any rights with respect to the 4.75% Bond Hedges and 4.75% Warrants. The exercise prices of the 4.75% Bond Hedge are $26.40 per share of the Company's common stock, subject to customary adjustment for anti-dilution and other events.

Under the amended 4.75% Warrants, the Company sold warrants to acquire up to 8.7 million shares of the Company's common stock at an exercise price of $26.40 per share of the Company's common stock, subject to adjustment for certain anti-dilution and other events. The 4.75% Warrants expire in 2014.

1.25% Debentures

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In fiscal 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures and received net proceeds of $194.0 million. On February 16, 2012, based upon the exercise of the holders' put rights, the Company repurchased the outstanding 1.25% debentures at a cash price of $199.8 million, representing 100% of the principal amount plus accrued and unpaid interest. None of the 1.25% debentures remained issued and outstanding after the repurchase.

July 2007 Share Lending Arrangement

Concurrent with the offering of the Company's 0.75% debentures due 2015, the Company lent 1.8 million shares of its former class A common stock to Credit Suisse International ("CSI"), an affiliate of Credit Suisse Securities (USA) LLC ("Credit Suisse"), one of the underwriters of the 0.75% debentures due 2015. The loaned shares were to be used to facilitate the establishment by investors in the 1.25% debentures due 2012 and the 0.75% debentures due 2015 of hedged positions in the Company's common stock. In connection with the Company's repurchase of 100% of the principal amount of the 1.25% debentures, on February 23, 2012, the 1.8 million shares of the Company's common stock lent to CSI were returned and the share lending agreement was thereby terminated.

Other Debt and Credit Sources

Mortgage Loan Agreement with IFC

On May 6, 2010, the Company entered into a mortgage loan agreement with IFC. Under the loan agreement, the Company may borrow up to $75.0 million during the first two years, and shall repay the amount borrowed, starting 2 years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. On October 3, 2012, IFC granted a temporary waiver of a financial covenant for the fourth quarter of fiscal 2012 through the fourth quarter of fiscal 2013. Subsequent to the waiver, the Company is required to pay interest of LIBOR plus 3% per annum on outstanding borrowings through January 5, 2013; interest of LIBOR plus 4.25% per annum on outstanding borrowings from January 6, 2013 through September 30, 2013; interest of LIBOR plus 5% per annum on outstanding borrowings from October 1, 2013 through January 5, 2014; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. If we utilize the waiver for the fourth quarter of 2013, the 2013 rates would continue to apply in 2014. If the Company does not need to utilize the waiver, it is required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. The Company may prepay all or a part of the outstanding principal, subject to a 1% prepayment premium. The Company has pledged certain assets as collateral supporting its repayment obligations (see Note 4). Additionally, in accordance with the terms of the agreement, the Company is required to establish a debt service reserve account which shall contain the amount, as determined by IFC, equal to the aggregate principal and interest due on the next succeeding interest payment date after such date. As of September 29, 2013 and December 30, 2012, the Company had restricted cash and cash equivalents of $9.2 million and $6.4 million, respectively, related to the IFC debt service reserve.

The Company's outstanding borrowings under the mortgage loan agreement with IFC on its Condensed Consolidated Balance Sheets are as follows:
 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Short-term debt
 
$
15,000

 
$
12,500

Long-term debt
 
47,500

 
62,500

 
 
$
62,500

 
$
75,000


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

On December 29, 2010, the Company borrowed the proceeds of the $30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation - Headquarters Project) Series 2010 (the "Bonds") maturing April 1, 2031 under a loan agreement with CEDA. The Company's obligations under the loan agreement are contained in a promissory note dated December 29, 2010 issued by the Company to CEDA, which assigned the promissory note, along with all right, title and interest in the loan agreement, to Wells Fargo, as trustee, with respect to the Bonds for the benefit of the holders of the Bonds. The Bonds initially bore interest at a variable interest rate (determined weekly), but in June 2011, at the Company's option, were converted into fixed-rate bonds at 8.50% per annum (which include covenants of, and

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other restrictions on the Company). Additionally, in accordance with the terms of the loan agreement, the Company is required to keep all loan proceeds on deposit with Wells Fargo, the trustee, until funds are withdrawn by it for use in relation to the design and leasehold improvements of its new corporate headquarters in San Jose, California. As of both September 29, 2013 and December 30, 2012, the Company had restricted cash and cash equivalents of $3.0 million, for design and leasehold improvements and debt service reserves under the CEDA loan agreement.

The Company's outstanding borrowings under the loan agreement with CEDA on its Condensed Consolidated Balance Sheets is as follows:
 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Long-term debt
 
$
30,000

 
$
30,000


July 2013 Revolving Credit Facility with Credit Agricole

On July 3, 2013, the Company entered into the July 2013 revolving credit facility with Credit Agricole, as administrative agent, and certain financial institutions, under which the Company may borrow up to $250 million until the earliest of: (i) July 3, 2016; (ii) December 31, 2014, if the Company has not repaid, exchanged or repurchased its outstanding 4.50% debentures due 2015 by September 30, 2014 and is not in compliance with certain liquidity requirements as of such date; and (iii) January 31, 2014, if the conditions precedent to the Restructuring (as defined below) have not been met or waived as of such date (the earliest of the above events, the "Maturity Date"). The July 2013 revolving credit facility allows the Company to request increases to the available capacity of the revolving credit facility to an aggregate of $300.0 million, subject to the satisfaction of certain conditions. The July 2013 revolving credit facility includes representations, covenants, and events of default customary for financing transactions of this type. On or about January 31, 2014 (the “Restructuring Date”), (i) the Company's obligations under the July 2013 revolving credit facility will become secured by a pledge of certain accounts receivable and inventory of the Company and certain of its subsidiaries, (ii) certain of the Company's subsidiaries will enter into guaranties of the July 2013 revolving credit facility, and (iii) Total S.A.'s guarantee of the Company's obligations under the July 2013 revolving credit facility will expire (collectively, the “Restructuring”). Amounts borrowed may be repaid and reborrowed until the Maturity Date.

Prior to the Restructuring Date, the Company is required to pay interest on outstanding borrowings under the July 2013 revolving credit facility and fees of (a) with respect to any LIBOR rate loan, 0.60% plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; (b) with respect to any alternative base rate loan, 0.25% plus the greater of (1) the prime rate, (2) the Federal funds rate plus 0.50%, and (3) the one month LIBOR rate plus 1%; (c) a commitment fee of 0.06% per annum on funds available for borrowing and not borrowed; and (d) an upfront fee of 0.20% of the Revolving Loan Commitment.

Following the Restructuring Date, the Company will be required to pay interest on outstanding borrowings under the July 2013 revolving credit facility and fees of (a) with respect to any LIBOR rate loan, an amount ranging from 1.50% to 2.00% (depending on the Company's leverage ratio from time to time) plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against “Eurocurrency liabilities” as specified in Regulation D; (b) with respect to any alternate base rate loan, an amount ranging from 0.50% to 1.00% (depending on the Company's leverage ratio from time to time) plus the greater of (1) the prime rate, (2) the Federal Funds rate plus 0.50%, and (3) the one-month LIBOR rate plus 1%; and (c) a commitment fee ranging from 0.25% to 0.35% (depending on the Company's leverage ratio from time to time) per annum on funds available for borrowing and not borrowed.

The July 2013 revolving credit facility was entered into in conjunction with the delivery by Total S.A. of a guarantee of the Company's obligations under the related facility. 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. 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 below, increased the capacity available under the Liquidity Support Facility by $25.0 million.

As of September 29, 2013, the Company had no outstanding borrowing under the July 2013 revolving credit facility.

September 2011 Revolving Credit Facility with Credit Agricole


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On September 27, 2011, the Company entered into the September 2011 revolving credit facility with Credit Agricole, as administrative agent, and certain financial institutions, under which the Company was able to borrow up to $275.0 million until September 27, 2013. Amounts borrowed were to be repaid and reborrowed until September 27, 2013.

On December 24, 2012, the Company amended the facility to reflect Total S.A.'s guarantee of its obligations under the facility. The facility amendment extended the maturity date to January 31, 2014, reduced interest rates payable and removed certain financial and restrictive covenants. Subsequent to the amendment, the Company was required to pay interest on outstanding borrowings of (a) with respect to any LIBOR loan, 0.6% plus the LIBOR divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; and (b) with respect to any alternative base loan, 0.25% plus the greater of (1) the prime rate, (2) the Federal Funds rate plus 0.5%, and (3) the one month LIBOR plus 1%; and a commitment fee equal to 0.06% per annum on funds available for borrowing and not borrowed.

On July 3, 2013, the Company terminated its September 2011 revolving credit facility after establishing the July 2013 revolving credit facility, as described above. There were no outstanding borrowings under the September 2011 revolving credit facility upon termination.

The Company's outstanding borrowings under the September 2011 revolving credit facility on its Condensed Consolidated Balance Sheets is as follows:
 
 
As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Long-term debt
 
$

 
$
275,000



Liquidity Support Agreement with Total S.A.

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 (see Note 2). As of September 29, 2013, $350.0 million remained available to the Company under the facility.

Other Debt

In order to facilitate the construction and sale of certain solar projects, the Company obtains non-recourse project loans which in certain cases permit customers to assume the loans at the time of sale. These loans are contemplated as part of the structure of the sales transaction and not guaranteed or otherwise supported by SunPower. As of September 29, 2013, the Company has drawn down ILS 214.5 million (or approximately $60.4 million based on the exchange rate as of September 29, 2013) under two project loans with a consortium of lenders to facilitate the development of two 10 MW utility and power plant projects under construction in Israel.

During the second quarter of fiscal 2013, the Company entered into a long-term non-recourse loan agreement with a third-party financial institution to finance a 4.5 MW utility and power plant operating in Arizona. The outstanding balance of the loan as of September 29, 2013 was $9.1 million.

Other debt is further comprised of non-recourse project loans related to Tenesol established in 2003 and 2008 which are scheduled to mature through 2028 and totaled $1.1 million as of September 29, 2013 and December 30, 2012, respectively. Also, the Company's sublessor has made improvements to one of the Company's operating leases, reimbursable by the Company at monthly installments over the remaining lease term. The outstanding balance of the loan as of September 29, 2013 was $0.2 million.

The Company's other outstanding borrowings on its Condensed Consolidated Balance Sheets are as follows:

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As of
(In thousands)
 
September 29, 2013
 
December 30, 2012
Short-term debt
 
$
60,855

 
$
134

Long-term debt
 
9,928

 
1,234

 
 
$
70,783

 
$
1,368


August 2011 Letter of Credit Facility with Deutsche Bank

On August 9, 2011, the Company entered into a letter of credit facility agreement with Deutsche Bank, as issuing bank and as administrative agent, and certain financial institutions, which was amended on December 20, 2011. Payment of obligations under the letter of credit facility is guaranteed by Total S.A. pursuant to the Credit Support Agreement. The letter of credit facility provides for the issuance, upon request by the Company, of letters of credit by the issuing banks thereunder in order to support certain obligations of the Company, in an aggregate amount not to exceed (a) $725.0 million until December 31, 2012; and (b) $771.0 million for the period from January 1, 2013 through December 31, 2013. Aggregate letter of credit amounts may be increased upon the agreement of the parties but, otherwise, may not exceed (i) $878.0 million for the period from January 1, 2014 through December 31, 2014; (ii) $936.0 million for the period from January 1, 2015 through December 31, 2015; and (iii) $1.0 billion for the period from January 1, 2016 through June 28, 2016. Each letter of credit issued under the letter of credit facility must have an expiration date no later than the second anniversary of the issuance of that letter of credit, provided that up to 15% of the outstanding value of the letters of credit may have an expiration date of between two and three years from the date of issuance.

As of September 29, 2013 and December 30, 2012, letters of credit issued under the August 2011 letter of credit facility with Deutsche Bank totaled $758.9 million and $725.3 million, respectively.

September 2011 Letter of Credit Facility with Deutsche Bank Trust

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

As of September 29, 2013 and December 30, 2012, letters of credit issued under the Deutsche Bank Trust facility amounted to $2.0 million and $17.5 million, respectively, which were fully collateralized with restricted cash on the Condensed Consolidated Balance Sheets.

Note 10. FOREIGN CURRENCY DERIVATIVES

The Company has non-U.S. subsidiaries that operate and sell the Company's products in various global markets, primarily in Europe. As a result, the Company is exposed to risks associated with changes in foreign currency exchange rates. It is the Company's policy to use various techniques, including entering into foreign currency derivative instruments, to manage the exposures associated with forecasted revenues, purchases of foreign sourced equipment and non-U.S. dollar denominated monetary assets and liabilities. The Company does not enter into foreign currency derivative financial instruments for speculative or trading purposes.

The Company is required to recognize derivative instruments as either assets or liabilities at fair value in its Balance Sheets. It is the Company's policy to present all derivative fair value amounts gross on its Condensed Consolidated Balance Sheets regardless of legal right of offset. The Company utilizes the income approach and mid-market pricing to calculate the fair value of its option and forward contracts based on market volatilities, spot and forward rates, interest rates, and credit default swaps rates from published sources. The following table presents information about the Company's hedge instruments measured at fair value on a recurring basis as of September 29, 2013 and December 30, 2012, all of which utilize Level 2 inputs under the fair value hierarchy:

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Table of Contents

(In thousands)
 
Balance Sheet Classification
 
September 29, 2013
 
December 30, 2012
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 Prepaid expenses and other current assets
 
$
627

 
$
519

Foreign currency option contracts
 
Other long-term assets
 
384

 

 
 
 
 
$
1,011

 
$
519

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
 Prepaid expenses and other current assets
 
$
73

 
$
25

Foreign currency forward exchange contracts
 
 Prepaid expenses and other current assets
 
1,498

 
731

 
 
 
 
$
1,571

 
$
756

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
Accrued liabilities
 
$
974

 
$
387

Foreign currency forward exchange contracts
 
Accrued liabilities
 
498

 
23

Foreign currency option contracts
 
Other long-term liabilities
 
495

 

 
 
 
 
$
1,967

 
$
410

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency option contracts
 
Accrued liabilities
 
$
79

 
$
26

Foreign currency forward exchange contracts
 
Accrued liabilities
 
5,699

 
4,455

 
 
 
 
$
5,778

 
$
4,481


Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. The selection of a particular technique to value an over-the-counter ("OTC") foreign currency derivative depends upon the contractual term of, and specific risks inherent with, the instrument as well as the availability of pricing information in the market. The Company generally uses similar techniques to value similar instruments. Valuation techniques utilize a variety of inputs, including contractual terms, market prices, yield curves, credit curves and measures of volatility. For OTC foreign currency derivatives that trade in liquid markets, such as generic forward and option contracts, inputs can generally be verified and selections do not involve significant management judgment.

The following table summarizes the pre-tax amount of unrealized gain or loss recognized in "Accumulated other comprehensive income" ("OCI") in "Stockholders' equity" in the Condensed Consolidated Balance Sheets:

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Table of Contents

 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013

September 30, 2012
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) in Accumulated OCI at the beginning of the period
 
$
1,238

 
$
2,346

 
$
(243
)
 
$
10,473

Unrealized gain (loss) recognized in OCI (effective portion)
 
(1,454
)
 
(253
)
 
550

 
(1,386
)
Less: Gain reclassified from Accumulated OCI to revenue (effective portion)
 
(551
)
 
(2,358
)
 
(1,074
)
 
(9,352
)
Net loss on derivatives
 
$
(2,005
)
 
$
(2,611
)
 
$
(524
)
 
$
(10,738
)
Loss in Accumulated OCI at the end of the period
 
$
(767
)
 
$
(265
)
 
$
(767
)
 
$
(265
)

The following table summarizes the amount of gain or loss recognized in "Other, net" in the Condensed Consolidated Statements of Operations in the three and nine months ended September 29, 2013 and September 30, 2012:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Loss recognized in "Other, net" on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
$
(1,620
)
 
$
(749
)
 
$
(2,123
)
 
$
(1,176
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Gain (loss) recognized in "Other, net"
 
$
(1,950
)
 
$
520

 
$
(5,103
)
 
$
6,824


Foreign Currency Exchange Risk

Designated Derivatives Hedging Cash Flow Exposure

The Company's cash flow exposure primarily relates to anticipated third party foreign currency revenues and expenses. To protect financial performance, the Company enters into foreign currency forward and option contracts designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than their functional currencies.
 
As of September 29, 2013, the Company had designated outstanding cash flow hedge option contracts and forward contracts with an aggregate notional value of $117.5 million and $72.4 million, respectively. As of December 30, 2012, the Company had designated outstanding cash flow hedge option contracts and forward contracts with an aggregate notional value of $71.0 million and $26.4 million, respectively. The Company designates either gross external or intercompany revenue up to its net economic exposure. These derivatives have a maturity of 15 months or less and consist of foreign currency option and forward contracts. The effective portion of these cash flow hedges are reclassified into revenue when third party revenue is recognized in the Condensed Consolidated Statements of Operations.

The Company expects to reclassify the majority of its net gains or losses related to these option and forward contracts that are included in accumulated other comprehensive loss as of September 29, 2013 to revenue in the next 12 months. The Company uses the spot to spot method to measure the effectiveness of its cash flow hedges. Under this method for each reporting period, the change in fair value of the forward contracts attributable to the changes in spot exchange rates (the effective portion) is reported in accumulated other comprehensive income (loss) on its consolidated balance sheet and the remaining change in fair value of the forward contract (the excluded and the ineffective portions, if any) is recognized in other income (expense), net, in its Condensed Consolidated Statement of Operations. The premium paid or time value of an option on the date of purchase is recorded as an asset in the Condensed Consolidated Balance Sheets. Thereafter, any change in value related to time value is included in "Other, net" in the Condensed Consolidated Statements of Operations.

Under cash flow hedge accounting rules for foreign currency derivatives, the Company reflects the effective gains and losses on its hedged transactions in accumulated other comprehensive income (loss) and will subsequently reclassify amounts into earnings when the hedged transactions occur. If the Company determines that the anticipated hedged transactions are

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Table of Contents

probable not to occur, the corresponding amounts in OCI would be reclassified into its Condensed Consolidated Statement of Operations. During the three and nine months ended September 29, 2013, the Company determined that all its anticipated hedged transactions were probable to occur.

Non-Designated Derivatives Hedging Transaction Exposure

Other derivatives not designated as hedging instruments consist of forward and option contracts used to hedge re-measurement of foreign currency denominated monetary assets and liabilities primarily for intercompany transactions, receivables from customers, and payables to third parties. Changes in exchange rates between the Company's subsidiaries' functional currencies and the currencies in which these assets and liabilities are denominated can create fluctuations in the Company's reported consolidated financial position, results of operations and cash flows. The Company enters into forward contracts, which are originally designated as cash flow hedges, and de-designates them upon recognition of the anticipated transaction to protect resulting non-functional currency monetary assets. These forward contracts as well as additional forward contracts are entered into to hedge foreign currency denominated monetary assets and liabilities against the short-term effects of currency exchange rate fluctuations. The Company records its derivative contracts that are not designated as hedging instruments at fair value with the related gains or losses recorded in "Other, net" in the Condensed Consolidated Statements of Operations. The gains or losses on these contracts are substantially offset by transaction gains or losses on the underlying balances being hedged. As of September 29, 2013 and December 30, 2012, the Company held forward contracts with an aggregate notional value of $106.4 million and $121.8 million, respectively, and option contracts with an aggregate notional value of $20.7 million and zero, respectively, to hedge balance sheet exposure. The maturity dates of these contracts range from October 2013 to January 2014.

Credit Risk

The Company's option and forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counterparties of its option and forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any single counterparty. In addition, the derivative contracts are limited to a time period of 15 months or less and the Company continuously evaluates the credit standing of its counterparties.
 
Note 11. INCOME TAXES

In the three and nine months ended September 29, 2013, the Company's income tax benefit of $4.6 million and income tax provision of $2.9 million, respectively, on income before income taxes and equity in earnings of unconsolidated investees of $81.2 million and $30.3 million, respectively, was primarily due to projected tax expense in profitable foreign jurisdictions as well as minimum taxes and the recognition of a previously unrecognized tax benefit. In the three and nine months ended September 30, 2012, the Company's income tax provision was $0.6 million and $12.5 million, respectively, on a loss before income taxes and equity in earnings (loss) of unconsolidated investees of $48.5 million and $192.9 million, respectively, was primarily due to projected tax expense in profitable foreign jurisdictions and a change in the valuation allowance on deferred tax assets.

Note 12. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
 
The Company calculates net income (loss) per share by dividing earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period.

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

The following table presents the calculation of basic and diluted net income (loss) per share:

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Table of Contents

 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share amounts)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
108,386

 
$
(48,538
)
 
$
73,255

 
$
(207,249
)
Denominator
 
 
 
 
 
 
 
 
Basic weighted-average common shares
 
121,314

 
118,952

 
120,604

 
116,408

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
0.89

 
$
(0.41
)
 
$
0.61

 
$
(1.78
)
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders
 
$
108,386

 
$
(48,538
)
 
$
73,255

 
$
(207,249
)
Add: Interest expense incurred on the 0.75% debentures due 2018, net of tax
 
551

 

 
744

 

Add: Interest expense incurred on the 4.75% debentures due 2014, net of tax
 
2,677

 

 

 

Net income (loss) available to common stockholders
 
$
111,614

 
$
(48,538
)
 
$
73,999

 
$
(207,249
)
Denominator
 
 
 
 
 
 
 
 
Basic weighted-average common shares
 
121,314

 
118,952

 
120,604

 
116,408

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
119

 

 
106

 

Restricted stock units
 
5,328

 

 
4,302

 

Upfront Warrants (held by Total)
 
6,377

 

 
4,429

 

0.75% debentures due 2018
 
12,026

 

 
5,418

 

4.75% debentures due 2014
 
8,712

 

 

 

Dilutive weighted-average common shares
 
153,876

 
118,952

 
134,859

 
116,408

 
 
 
 
 
 
 
 
 
Dilutive net income (loss) per share
 
$
0.73

 
$
(0.41
)
 
$
0.55

 
$
(1.78
)

The Upfront Warrants, issued on February 28, 2012, allow Total to acquire up to 9,531,677 shares of the Company's common stock at an exercise price of $7.8685. If the market price per share of the Company's common stock for the period exceeds the established strike price, the Upfront Warrants will have a dilutive effect on its diluted net income per share using the treasury-stock-type method.

Holders of the amended and restated Warrants under the CSO2015, upon exercise of the 4.50% Warrants, may acquire up to 11.1 million shares of the Company's common stock at an exercise price of $24.00. If the market price per share of the Company's common stock for the period exceeds the established strike price, the 4.50% Warrants will have a dilutive effect on its diluted net income per share using the treasury-stock-type method.

Holders of the Company's 0.75% debentures due 2018 and the 4.75% debentures due 2014 may convert the debentures into shares of the Company's common stock, at the applicable conversion rate, at any time on or prior to maturity. These debentures are included in the calculation of diluted net income per share if their inclusion is dilutive under the if-converted method.

Holders of the Company's 4.50% debentures due 2015 may, under certain circumstances at their option, convert the debentures into cash, and not into shares of the Company's common stock (or any other securities). Therefore, the 4.50% debentures due 2015 are excluded from the net income per share calculation.


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Table of Contents

The following is a summary of outstanding anti-dilutive potential common stock which was excluded from income (loss) per diluted share in the following periods:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 20121
 
September 29, 2013
 
September 30, 20121
Stock options
 
184

 
334

 
205

 
377

Restricted stock units
 
1,537

 
8,829

 
2,047

 
6,904

Upfront Warrants (held by Total)
 

 
*

 

 
*

Warrants (under the CSO2015)
 
*

 
*

 
*

 
*

0.75% debentures due 2018
 

 
n/a

 

 
n/a

4.75% debentures due 2014
 

 
8,712

 
8,712

 
8,712

1 
As a result of the net loss per share for the three and nine months ended September 30, 2012, the inclusion of all potentially dilutive stock options, restricted stock units, and common shares under noted warrants and convertible debt would be anti-dilutive. Therefore, those stock options, restricted stock units and shares were excluded from the computation of the weighted-average shares for diluted net loss per share for such period.

* The Company's average stock price during the period did not exceed the conversion price for the related warrants.



Note 13. STOCK-BASED COMPENSATION

The following table summarizes the consolidated stock-based compensation expense by line item in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Cost of Americas revenue
 
$
1,295

 
$
1,590

 
$
3,209

 
$
4,745

Cost of EMEA revenue
 
803

 
795

 
1,862

 
3,158

Cost of APAC revenue
 
827

 
368

 
2,081

 
1,125

Research and development
 
1,390

 
1,045

 
3,737

 
3,920

Sales, general and administrative
 
7,767

 
5,473

 
20,214

 
20,231

Total stock-based compensation expense
 
$
12,082

 
$
9,271

 
$
31,103

 
$
33,179


The following table summarizes the consolidated stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Employee stock options
 
$

 
$
35

 
$

 
$
638

Restricted stock units
 
12,402

 
8,969

 
31,599

 
32,411

Change in stock-based compensation capitalized in inventory
 
(320
)
 
267

 
(496
)
 
130

Total stock-based compensation expense
 
$
12,082

 
$
9,271

 
$
31,103

 
$
33,179


Note 14. SEGMENT INFORMATION

The Company's President and Chief Executive Officer, as the CODM, has organized the Company, manages resource allocations and measures performance of the Company's activities among three 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.


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Table of Contents

The CODM assesses the performance of the three regional segments using information about their revenue and gross margin after certain adjustments to reflect the substance of the revenue transactions for certain utility and power plant projects, and adding back certain non-cash expenses such as stock-based compensation expense and interest expense, as well as other items including gain on contract termination, loss on change in European government incentives, accelerated depreciation associated with the Company's manufacturing step reduction program, and amortization of other intangible assets. The CODM does not review asset information by segment.

The following tables present information by segment, including revenue, cost of revenue, gross margin, and depreciation. Revenue is based on the destination of the shipments.

 
 
Three Months Ended
 
Nine Months Ended
(In thousands):
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Revenue
 
 
 
 
 
 
 
 
Americas
 
$
442,091

 
$
502,373

 
$
1,293,822

 
$
1,176,148

EMEA
 
120,712

 
88,547

 
296,374

 
400,074

APAC
 
94,317

 
58,028

 
278,873

 
162,754

Total Revenue
 
657,120

 
648,948

 
1,869,069

 
1,738,976

Cost of revenue
 
 
 
 
 
 
 
 
Americas
 
306,024

 
409,432

 
1,008,044

 
978,062

EMEA
 
100,605

 
111,622

 
289,495

 
422,922

APAC
 
57,261

 
47,121

 
211,126

 
138,471

Total cost of revenue
 
463,890

 
568,175

 
1,508,665

 
1,539,455

Gross margin
 
$
193,230

 
$
80,773

 
$
360,404

 
$
199,521


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Table of Contents

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Revenue by region (in thousands):
 
 
 
 
 
 
 
 
Americas (as reviewed by CODM)
 
$
404,422

 
$
460,105

 
$
1,269,552

 
$
1,274,907

Utility and power plant projects
 
37,669

 
42,268

 
24,270

 
(98,759
)
Americas
 
$
442,091

 
$
502,373

 
$
1,293,822

 
$
1,176,148

 
 
 
 
 
 
 
 
 
EMEA (as reviewed by CODM)
 
$
120,712

 
$
88,547

 
$
296,374

 
$
399,881

Other
 

 

 

 
193

EMEA
 
$
120,712

 
$
88,547

 
$
296,374

 
$
400,074

 
 
 
 
 
 
 
 
 
APAC (as reviewed by CODM)
 
$
94,317

 
$
58,028

 
$
278,201

 
$
162,754

Other
 

 

 
672

 

APAC
 
$
94,317

 
$
58,028

 
$
278,873

 
$
162,754


Cost of revenue by region (in thousands):
 
 
 
 
 
 

 
 
Americas (as reviewed by CODM)
 
$
318,654

 
$
367,067

 
$
946,967

 
$
1,035,870

Utility and power plant projects
 
11,346

 
36,453

 
82,227

 
(73,890
)
Stock-based compensation expense
 
1,295

 
1,589

 
3,209

 
4,743

Non-cash interest expense
 
291

 
308

 
802

 
731

Gain on contract termination
 
(25,604
)
 

 
(25,604
)
 

Other
 
42

 
4,015

 
443

 
10,608

Americas
 
$
306,024

 
$
409,432

 
$
1,008,044

 
$
978,062

 
 
 
 
 
 
 
 
 
EMEA (as reviewed by CODM)
 
$
109,090

 
$
108,515

 
$
296,474

 
$
410,532

Stock-based compensation expense
 
803

 
795

 
1,862

 
3,158

Non-cash interest expense
 
107

 
112

 
368

 
425

Gain on contract termination
 
(9,395
)
 

 
(9,395
)
 

Other
 

 
2,200

 
186

 
8,807

EMEA
 
$
100,605

 
$
111,622

 
$
289,495

 
$
422,922

 
 
 
 
 
 
 
 
 
APAC (as reviewed by CODM)
 
$
73,229

 
$
45,634

 
$
225,233

 
$
134,106

Stock-based compensation expense
 
827

 
368

 
2,081

 
1,125

Non-cash interest expense
 
193

 
81

 
542

 
190

Gain on contract termination
 
(16,988
)
 

 
(16,988
)
 

Other
 

 
1,038

 
258

 
3,050

APAC
 
$
57,261

 
$
47,121

 
$
211,126

 
$
138,471

Gross margin by region:
 
 
 
 
 
 

 
 
Americas (as reviewed by CODM)
 
21
%
 
20
 %
 
25
 %
 
19
 %
EMEA (as reviewed by CODM)
 
10
%
 
(23
)%
 
 %
 
(3
)%
APAC (as reviewed by CODM)
 
22
%
 
21
 %
 
19
 %
 
18
 %
Americas
 
31
%
 
19
 %
 
22
 %
 
17
 %
EMEA
 
17
%
 
(26
)%
 
2
 %
 
(6
)%
APAC
 
39
%
 
19
 %
 
24
 %
 
15
 %

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Three Months Ended
 
Nine Months Ended
Depreciation by region (in thousands):
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Americas
 
$
10,987

 
$
14,931

 
$
32,725

 
$
44,564

EMEA
 
6,429

 
5,510

 
17,944

 
26,835

APAC
 
7,306

 
3,944

 
22,224

 
11,348

 
 
Three Months Ended
 
Nine Months Ended
(As a percentage of total revenue):
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Significant Customers:
Business Segment
 
 
 
 
 
 
 
 
NRG Solar, Inc.
Americas
 
*

 
46
%
 
23
%
 
32
%
MidAmerican Energy Holdings Company
Americas
 
33
%
 
*

 
21
%
 
*

* denotes less than 10% during the period

 
 
Three Months Ended
 
Nine Months Ended
Revenue by Significant Category (in thousands):
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Solar power products
 
$
223,952

 
$
211,157

 
$
648,235

 
$
764,942

Solar power systems1
 
378,477

 
400,757

 
1,083,002

 
886,755

Residential leases
 
31,575

 
15,662

 
95,498

 
50,302

Other revenue2
 
23,116

 
21,372

 
42,334

 
36,977

 
 
$
657,120

 
$
648,948

 
$
1,869,069

 
$
1,738,976

1 
Solar power systems represents revenue recognized in connection with our construction and development contracts.
2 
Other revenue includes revenue related to our solar power services and solutions, such as post-installation systems monitoring and maintenance in connection with construction contracts, and commercial PPA agreements.


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

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect to,” “plan to” and similar expressions to identify forward looking statements, which include, but are not limited to statements concerning: (a) our plans and expectations regarding future financial results; (b) expected operating results; (c) business strategies, including plans to expand our business in certain markets; (d) projected costs and cost reduction; (e) our products, their efficiency, reliability, and our ongoing research and development efforts relating to our products; (f) our plans and risks we identify relating to our residential lease program; (g) competitive market positions; (h) management's plans and objectives for ongoing and future operations and projects, including our significant construction and development projects; (i) the sufficiency of our cash and our liquidity; (j) the availability of credit and liquidity support from Total S.A. under the Credit Support Agreement and Liquidity Support Agreement; (k) industry trends, including trends in average selling prices; (l) expected capital expenditures; (m) warranty matters; (n) our exposure to foreign exchange, interest and credit risk; (o) general business and economic conditions; (p) impact of changes in government incentives; (q) expected restructuring charges; and (r) the likelihood of any impairment of project assets, long-lived assets and intangible assets.

These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control, and include: (1) competition in the industry and downward pressure on average selling prices; (2) our liquidity, substantial indebtedness, and our ability to obtain additional financing for our projects and our customers; (3) our ability to meet our cost reduction targets; (4) regulatory changes and the availability of

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economic incentives promoting use of solar energy; (5) challenges inherent in constructing and maintaining certain of our large projects, such as the California Valley Solar Ranch and the Solar Star Projects; (6) the success of our ongoing research and development efforts and commercialization of new products and services; (7) fluctuations in our operating results; (8) manufacturing difficulties that could arise; (9) challenges managing our joint ventures; and (10) the factors set forth in "Part II. Item 1A: Risk Factors" herein and our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 30, 2012 as amended (the "fiscal 2012 Form 10-K"). These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

The following information should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year, which periods end on the Sunday closest to the calendar month end.

Corporate History

We were originally incorporated in California in 1985 and subsequently reincorporated in Delaware during 2005 in connection with our initial public offering. In November 2011, our stockholders approved the reclassification of all outstanding former class A common stock and class B common stock into a single class of common stock listed on the Nasdaq Global Select Market under the symbol "SPWR". In June 2011, we became a 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."). Total acquired 60% of our former class A and class B common stock as of June 13, 2011. In January 2012, we issued and sold additional shares of our common stock to Total, thereby increasing Total's ownership to approximately 66% of our outstanding common stock.

Company Overview

We are 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. Of all the solar cells available for the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity.

We believe that there are several factors that set us apart when compared with various competitors:

A go-to-market platform that is broad and deep, given our more than eight years in rooftop and ground mount channels, including turn-key systems:

High performance delivered by enhancing energy delivery and financial return through systems technology design;

Cutting edge systems designed to meet customer needs and reduce cost, including non-penetrating, fast roof installation technologies; and

Expanded reach enhanced by Total S.A.'s long-established presence in many countries where significant solar installation goals are being established;

A technological advantage which includes being the only solar company manufacturing back-contact, back-junction cells, and our modules producing more electricity, lasting longer and degrading more slowly:

Superior performance, including the ability to generate up to 50% more power per unit area than conventional solar cells;

Superior aesthetics, with our uniformly black surface design that eliminates highly visible reflective grid lines and metal interconnection ribbons;

Superior reliability, as confirmed by multiple independent reports and internal reliability data;

Superior energy production per rated watt of power, as confirmed by multiple independent reports;


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The ability to transport more KW per pound using less packaging, resulting in lower distribution costs; and

More efficient use of silicon, a key raw material used in the manufacture of solar cells;

Costs that are decreasing faster and more steadily in comparison to many other solar companies as a result of an aggressive, but we believe achievable, cost reduction plan as well as value that benefits all customers:

We offer a significantly lower area-related cost structure for our customers because our solar panels require a substantially smaller roof or land area than conventional solar technology and half or less of the roof or land area of many commercial solar thin film technologies;

Through our leasing program, customers can get high efficiency solar products for no money down at competitive energy rates; and

Solar power systems designed to generate electricity over a system life typically exceeding 25 years; and

Strong balance sheet backed by Total S.A. that gives us an advantage in today's challenging environment.

Segments Overview

We manage resource allocations and measure performance 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.

Seasonal Trends

Our business is subject to industry-specific seasonal fluctuations. Sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two calendar quarters of a fiscal year. Lower seasonal demand normally results in reduced shipments and revenues in the first two calendar quarters of a fiscal year. There are various reasons for this seasonality, mostly related to economic incentives and weather patterns. For example, in European countries with feed-in tariffs, the construction of solar power systems may be concentrated during the second half of the calendar year, largely due to the fact that the coldest winter months in the Northern Hemisphere are January through March. In the United States, customers will sometimes make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. In addition, sales in the new home development market are often tied to construction market demands which tend to follow national trends in construction, including declining sales during cold weather months.

Unit of Power

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

Levelized Cost of Energy ("LCOE")

The LCOE equation is an evaluation of the life-cycle energy cost and life-cycle energy production of an energy producing system. It allows alternative technologies to be compared when different scales of operation, investment, or operating time periods exist. It captures capital costs and ongoing system-related costs, along with the amount of electricity produced, and converts them into a common metric. Key drivers for LCOE reduction for photovoltaic products include panel efficiency, capacity factors, reliable system performance, and the life of the system.

Fiscal Years

We have a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Both fiscal years 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.

Outlook

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During fiscal 2012 and 2011 we saw a decline in overall demand for solar systems, primarily in Europe, as a result of the decline in European government incentives. The resulting over-supply environment drove down average selling prices across all product and service lines. Pricing pressures are expected to generally continue throughout fiscal 2013.

We further are focused on reducing the cost of our solar panels and systems and are working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies and expanding economies of scale. We continue to emphasize improvement of our solar cell efficiency and LCOE performance through enhancement of our existing products, development of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies.

We plan to continue to expand our business in growing and sustainable markets, including South America, the Middle East, and Africa. In fiscal 2012 we commenced commercial production of our next generation solar cell with demonstrated efficiencies of up to 24%. In fiscal 2013 we announced the completion of the first commercial deployment of our SunPower® C-7 Tracker technology currently operating under a power purchase agreement and launched our SunPower X-Series Solar Panels, a new panel line for the residential market with demonstrated efficiencies of up to 21.5%.

Projects Sold / Under Contract

The table below presents significant construction and development projects sold or under contract as of September 29, 2013:
Project
 
Location
 
Size (MW)
 
Third Party Owner / Purchaser
 
Power Purchase Agreement(s)
 
Expected Completion of Revenue Recognition
Solar Star Projects
 
California
 
579
 
MidAmerican Energy Holdings Company
 
Southern California Edison
 
2016
California Valley Solar Ranch
 
California
 
250
 
NRG Solar, Inc.
 
PG&E
 
2014
Project Salvador1
 
Chile
 
68
 
Total S.A.,
Etrion Corporation,
Solventus Energias Renovables
 
N/A
 
2015
1 
The Company has entered into a Engineering, Procurement and Construction ("EPC") agreement and a long-term fixed price operations and maintenance ("O&M") agreement with the owners of Project Salvador.

As of September 29, 2013, an aggregate of over $2 billion of remaining revenue is expected to be recognized on projects reflected in the table above through the expected completion dates noted. Projects will be removed from the table above in the period in which substantially all of the revenue for such project has been recognized.

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

The table below presents significant construction and development projects with executed power purchase agreements, but not sold or under contract as of September 29, 2013:
Project
 
Location
 
Size (MW)
 
Power Purchase Agreement(s)
 
Expected Completion of Revenue Recognition
Henrietta Solar Project
 
California
 
100
 
PG&E
 
2016
Quinto Solar Project
 
California
 
110
 
Southern California Edison
 
2016

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


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Residential Leasing Program

In fiscal 2011, we launched our residential lease program with dealers in the United States, in partnership with a third-party financial institution, which allows customers to obtain SunPower systems under lease agreements up to 20 years, subject to financing availability. We have entered into multiple facilities with financial institutions that will provide financing to support additional residential solar lease projects. The program includes system maintenance and warranty coverage as well as an early buy-out option after six years or at any time when the lessees sell their home. Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines. We plan to continue to expand our customer finance programs in the United States as well as Europe.

The program does not yet represent a material portion of our revenue. However, we may face additional material risks as the program expands, including our ability to obtain additional financing partners as well as our ability to collect finance and rent receivables in view of the general challenging credit markets worldwide. We believe that our concentration of credit risk is limited because of our large number of customers, credit quality of the customer base, small account balances for most of these customers, and customer geographic diversification. We have applied and will apply for the §48(c) solar commercial investment tax credit ("ITC") and Treasury Grant payments under Section 1603 of the American Recovery and Reinvestment Act (the "Cash Grant"), which is administered by the U.S. Internal Revenue Services ("IRS") and Treasury Department, for residential leases. We have structured the tax incentive applications, both in timing and amount, to be in accordance with the guidance provided by Treasury and IRS. If the amount or timing of the ITC or Cash Grant payments received in connection with the residential lease program varies from what we have projected, this may impact our revenues and margins and we may have to recognize losses, which may adversely impact our results of operations and cash flows. We make certain assumptions in accounting for the residential lease program, including, among others, the residual value of the leased systems. As the residential lease program grows, if the residual value of leased systems does not materialize as assumed, our results of operations would be adversely affected.

Results of Operations

Revenue
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Americas
 
$
442,091

 
$
502,373

 
(12)%
 
$
1,293,822

 
$
1,176,148

 
10%
EMEA
 
120,712

 
88,547

 
36%
 
296,374

 
400,074

 
(26)%
APAC
 
94,317

 
58,028

 
63%
 
278,873

 
162,754

 
71%
Total revenue
 
$
657,120

 
$
648,948

 
1%
 
$
1,869,069

 
$
1,738,976

 
7%

Total Revenue:  Our total revenue increased 1% during the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 primarily due to an overall increase in components sales generally made under long-term supply agreements. The increase was partially offset by a decrease in revenue from solar power systems primarily due to timing of revenue recognition on certain large-scale solar power systems involving real estate, as well as projects which were substantially completed during the interim period. During the three months ended September 29, 2013 we recognized revenue on 251.6 MW as compared to 210.0 MW in the three months ended September 30, 2012, which represents a volume increase of 20% period over period.

Our total revenue increased 7% during the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily driven by the commencement of revenue recognition on additional large, utility-scale power systems in North America as well as an overall increase in component sales generally made under long-term supply agreements. These increases were partially offset by lower project construction and development activities and related revenue in the EMEA region. During the nine months ended September 29, 2013 we recognized revenue on 701.2 MW as compared to 637.9 MW in the nine months ended September 30, 2012, which represents a volume increase of 10% period over period.

Concentrations: Sales outside the Americas Segment represented approximately 33% and 23% of total revenue recognized during the three months ended September 29, 2013 and September 30, 2012, respectively. The decrease in percentage of sales within the Americas Segment is driven by additional component sales within the APAC Segment, primarily in Japan, as well as expanded business activities outside of Europe, including the Middle East and Africa. Sales outside the Americas Segment represented approximately 31% and 32% of total revenue recognized during the nine months ended September 29, 2013 and September 30, 2012, respectively. The increase in percentage of sales within the Americas Segment

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was primarily due to the commencement of revenue recognition on additional large-scale utility projects in North America, coupled with lower project construction and development activities and related revenue in Europe due to reductions in government incentives and the resulting change in market demands. The increase was partially offset by additional component sales within the APAC Segment, primarily in Japan.

The table below represents our significant customers that accounted for greater than 10 percent of total revenue in each of the three months and nine months ended September 29, 2013 and September 30, 2012, respectively.
 
 
Three Months Ended
 
Nine Months Ended
Revenue
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Significant Customers:
 
Business Segment
 
 
 
 
 
 
 
 
NRG Solar, Inc.
 
Americas
 
*

 
46
%
 
23
%
 
32
%
MidAmerican Energy Holdings Company
 
Americas
 
33
%
 
*

 
21
%
 
*

*
denotes less than 10% during the period

Americas Revenue: Americas revenue decreased 12% during the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 primarily as a result of lower component sales within the region, coupled with timing of revenue recognition on certain large-scale development projects in North America, and projects which were substantially completed during the interim period.

Americas revenue increased 10% during the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily as a result of an increase in the number and size of the various utility-scale solar power systems, which includes revenue recognition on the 579 MW Solar Star Projects, formerly known as Antelope Valley Solar Projects, in California and the 250 MW California Valley Solar Ranch ("CVSR") project in San Luis Obispo County, California. This increase was partially offset by projects which were substantially completed during the interim period as well as a decrease in component sales within the region.

EMEA Revenue:  EMEA revenue increased 36% during the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 due to an increase in utility-scale solar projects and related revenue, including revenue recognized on two solar power systems totaling 30 MW under construction in South Africa.

EMEA revenue decreased 26% during the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily due to lower project construction and development activities and related revenue in Europe due to changes in market demand resulting from reductions in European government incentives.

APAC Revenue: APAC revenue increased 63% and 71% during the three and nine months ended September 29, 2013, respectively, as compared to the three and nine months ended September 30, 2012 primarily driven by additional component sales in Japan, partially offset by declines in average selling prices.

Revenue recognized during the three and nine months ended September 29, 2013 and September 30, 2012 for each of the below categories was as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Solar power products
 
$
223,952

 
$
211,157

 
6%
 
$
648,235

 
$
764,942

 
(15)%
Solar power systems1
 
378,477

 
400,757

 
(6)%
 
1,083,002

 
886,755

 
22%
Residential leases
 
31,575

 
15,662

 
102%
 
95,498

 
50,302

 
90%
Other revenue2
 
23,116

 
21,372

 
8%
 
42,334

 
36,977

 
14%
 
 
$
657,120

 
$
648,948

 
1%
 
$
1,869,069

 
$
1,738,976

 
7%
1 
Solar power systems represents revenue recognized in connection with our construction and development contracts.
2 
Other revenue includes revenue related to our solar power services and solutions, such as post-installation systems monitoring and maintenance in connection with construction contracts, and commercial PPA agreements.


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Solar Power Products: We sell solar panels and balance of system components primarily to dealers, system integrators and distributors. Revenue related to such solar power products increased $12.8 million, or 6% in the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 due to an overall increase in component sales made under long-term supply agreements, primarily within the APAC region, partially offset by a decrease in direct sales made through our global dealer network.

Revenue related to solar power products decreased $116.7 million, or 15%, in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily as a result of a decrease in direct sales made through our global dealer network coupled with increased demand for solar power products available under our residential lease program. The decrease was partially offset by an overall increase in component sales made under long-term supply agreements primarily within the APAC region.

Solar Power Systems: We design, manufacture and sell high-performance solar power systems. Revenue related to construction contracts which do not involve real estate are recognized using the percentage-of-completion method. Revenue related to our development projects, which generally include the sale or lease of related real estate, are recognized using specific guidance for real estate sales. Revenue related to our solar power systems decreased $22.3 million, or 6%, in the three months ended September 29, 2013 as compared to the three months ended September 30, 2012. The decrease was primarily due to timing of revenue recognition on certain large-scale solar power systems involving real estate, as well as substantial completion of revenue recognition on other construction and development contracts during the period.

Revenue related to our solar power systems increased $196.2 million, or 22%, in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012. The increase is primarily due to the commencement of revenue recognition on additional large utility-scale solar power systems involving real estate, including the 579 MW Solar Star Projects, formerly known as Antelope Valley Solar Projects. These increases were partially offset by the substantial completion of revenue recognition on other construction and development contracts during the period.

Residential Leases: In fiscal 2011 we launched our residential lease program with dealers in the United States, in partnership with third-party financial institutions, which allows customers to obtain SunPower systems under lease agreements up to 20 years. Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines. Revenue recognized in connection with our residential lease program increased $15.9 million and $45.2 million in the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012, respectively. The increase over both periods is primarily attributable to revenue recognized on additional leased solar power systems placed in service.

Cost of Revenue
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Americas
 
$
306,024

 
$
409,432

 
(25)%
 
$
1,008,044

 
$
978,062

 
3%
EMEA
 
100,605

 
111,622

 
(10)%
 
289,495

 
422,922

 
(32)%
APAC
 
57,261

 
47,121

 
22%
 
211,126

 
138,471

 
52%
Total cost of revenue
 
$
463,890

 
$
568,175

 
(18)%
 
$
1,508,665

 
$
1,539,455

 
(2)%
Total cost of revenue as a percentage of revenue
 
71
%
 
88
%
 
 
 
81
%
 
89
%
 
 
Total gross margin percentage
 
29
%
 
12
%
 
 
 
19
%
 
11
%
 
 

Total Cost of Revenue: Our total cost of revenue decreased $104.3 million, or 18%, in the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 primarily as a result of the timing of revenue recognition for certain large-scale development projects in North America coupled with an overall decrease in material costs. A $52.0 million gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013 also contributed to the decrease (see Note 7 of our Notes to Condensed Consolidated Financial Statements).

Our total cost of revenue decreased $30.8 million, or 2%, in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 driven by an overall decrease in material costs as well as a $52.0 million gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013 (see Note 7 of our Notes to

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Condensed Consolidated Financial Statements). The decrease was partially offset by an increase in the number and size of large-scale utility projects in North America.

Gross Margin
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
Change
 
September 29, 2013
 
September 30, 2012
 
Change
Americas
 
31%
 
19%
 
12%
 
22%
 
17%
 
5%
EMEA
 
17%
 
(26)%
 
43%
 
2%
 
(6)%
 
8%
APAC
 
39%
 
19%
 
20%
 
24%
 
15%
 
9%

Americas Gross Margin: Gross margin for our Americas Segment increased 12 percentage points and 5 percentage points during the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012, respectively. Gross margin increased period over period as a result of: (i) favorable margins on large utility-scale solar power systems recognized during fiscal 2013; (ii) lower material costs; and (iii) a $25.6 million gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013.

EMEA Gross Margin: Gross margin for our EMEA Segment increased 43 percentage points and 8 percentage points during the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012 as a result of increased activity in utility-scale solar projects within the region, as well as a $9.4 million gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013.

APAC Gross Margin: Gross margin for our APAC Segment increased 20 percentage points and 9 percentage points during the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012, respectively, as a result of reductions in material and other costs at a rate greater than declines in average selling prices as well as a $17.0 million gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013.

Research and Development ("R&D")
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
R&D Expense
 
$
14,903

 
$
14,956

 
—%
 
$
41,108

 
$
45,786

 
(10)%
As a percentage of revenue
 
2
%
 
2
%
 
 
 
2
%
 
3
%
 
 

R&D expense remained flat during the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 primarily resulting from continued investment costs related to the improvement of our current manufacturing and solar cell technologies. R&D expense decreased $4.7 million, or 10%, in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily driven by additional costs incurred during fiscal 2012 associated with the implementation of our manufacturing step reduction program included as part of our cost reduction roadmap, as well as $1.3 million of contributions from Total received in fiscal 2013 in connection with projects under the R&D Agreement (see Note 2 of our Notes to Condensed Consolidated Financial Statements).

Sales, General and Administrative ("SG&A")
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Total SG&A
 
$
63,229

 
$
69,714

 
(9)%
 
$
195,356

 
$
208,388

 
(6)%
As a percentage of revenue
 
10
%
 
11
%
 
 
 
10
%
 
12
%
 
 

SG&A expense decreased $6.5 million, or 9%, during the three months ended September 29, 2013 as compared to the three months ended September 30, 2012 primarily as a result of our cost-control strategy implemented in response to the changes in the European market and the resulting restructuring activities in fiscal 2012 as well as a decrease in acquisition and integration costs which were incurred during fiscal 2012 as a result of our acquisition Tenesol S.A in January 2012.

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Additionally contributing to the decrease was a reduction in legal expenses as a result of the settlement of the securities class action lawsuit in the fourth quarter of fiscal 2012 (see Note 7 of our Notes to Condensed Consolidated Financial Statements).

SG&A expense decreased $13.0 million, or 6%, during the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012 primarily as a result of our cost-control strategy implemented in response to the changes in the European market and the resulting restructuring activities in fiscal 2012.

Restructuring Charges
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
October 2012 Plan
 
$
56

 
$

 
100%
 
$
(777
)
 
$

 
100%
Legacy Restructuring Plans
 
1,058

 
10,544

 
(90)%
 
2,482

 
61,189

 
(96)%
Restructuring charges
 
$
1,114

 
$
10,544

 
(89)%
 
$
1,705

 
$
61,189

 
(97)%
As a percentage of revenue
 
0
%
 
2
%
 
 
 
0
%
 
4
%
 
 

Total restructuring charges decreased 89% and 97% during the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012 due to the substantial completion of the activities associated with legacy restructuring plans approved in fiscal 2012 and 2011.

October 2012 Plan: On October 12, 2012, our 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, we expect to eliminate approximately 900 positions primarily in the Philippines, representing approximately 15% of our global workforce. As a result, we expect 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. We expect greater than 90% of these charges to be cash.

Legacy Restructuring Plans: During fiscal 2012 and 2011, we implemented approved restructuring plans, related to all segments, to align with changes in the global solar market which included the consolidation of our 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. We expect to continue to incur restructuring costs as we revise 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.

See Note 6 of our Notes to Condensed Consolidated Financial Statements for further information regarding our restructuring plans.

Goodwill and Other Intangible Asset Impairment
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Goodwill impairment
 
$

 
$
46,734

 
n/a
 
$

 
$
46,734

 
n/a
Other intangible asset impairment
 

 
12,847

 
n/a
 

 
12,847

 
n/a
 
 
$

 
$
59,581

 
n/a
 
$

 
$
59,581

 
n/a
As a percentage of revenue
 
0
%
 
9
%
 
 
 
0
%
 
3
%
 
 

We conduct our 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 our reporting unit level. Management determined that the Americas Segment, the EMEA Segment, and the APAC Segment are also our reporting units. Based on the impairment test as of September 30, 2012, we determined that the carrying value of the Americas and EMEA reporting units exceeded their fair value. We calculated that

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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.

We additionally review our 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, we determined that the carrying value of certain intangible assets in Europe were no longer recoverable and therefore recognized an impairment loss of $12.8 million in the three and nine months ended September 30, 2012.

See Note 3 of our Notes to Condensed Consolidated Financial Statements for further information regarding goodwill and other intangible asset impairment.

Other Income (Expense), Net
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Interest income
 
$
258

 
$
94

 
174%
 
$
839

 
$
762

 
10%
Interest expense
 
(28,861
)
 
(25,834
)
 
12%
 
(80,765
)
 
(63,935
)
 
26%
Gain on share lending arrangement
 

 
50,645

 
(100)%
 

 
50,645

 
(100)%
Other, net
 
(4,159
)
 
594

 
(800)%
 
(11,972
)
 
(4,984
)
 
140%
Other income (expense), net
 
$
(32,762
)
 
$
25,499

 
(228)%
 
$
(91,898
)
 
$
(17,512
)
 
425%
As a percentage of revenue
 
(5
)%
 
4
%
 
 
 
(5
)%
 
(1
)%
 
 
    
Other expense, net increased $58.3 million in the three months ended September 29, 2013 as compared to the three months ended September 30, 2012. The overall increase was primarily driven by (i) a $50.6 million gain recorded in the third quarter of fiscal 2012 related to the recovery of claims related to unreturned shares under our former share lending arrangement with Lehman Brothers International (Europe) Limited; (ii) a $4.9 million net unfavorable change in foreign exchange and derivatives resulting from expensing the time value of option contracts and forward points on forward exchange contracts of effective cash flow hedges; and (iii) a $3.0 million increase in interest expense primarily due to additional long-term financing arrangements outstanding during the period; offset by a decrease in other net expense of $0.2 million.

Other expense, net increased $74.4 million in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012. The overall increase was primarily driven by (i) a $50.6 million gain recorded in the third quarter of fiscal 2012 related to the recovery of claims related to unreturned shares under our former share lending arrangement with Lehman Brothers International (Europe) Limited; (ii) a $16.8 million increase in interest expense primarily due to additional non-cash interest expense as a result of amortization expense recorded for warrants issued to Total in connection with the Liquidity Support Agreement as well as additional long-term financing arrangements outstanding during the period; (iii) a $8.9 million net unfavorable change in foreign exchange and derivatives resulting from expensing the time value of option contracts and forward points on forward exchange contracts of effective cash flow hedges; and (iv) $5.5 million in charges related to impairment of investments in unconsolidated investees. The above increase was partially offset by (i) a $6.9 million impairment charge recorded in the second quarter of fiscal 2012 as we determined current market and operating conditions indicated an inability to recover the carrying amount of one of our equity investments; and (ii) a decrease in other net expenses of $0.5 million.

Income Taxes
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Benefit from (provision for) income taxes
 
$
4,575

 
$
(593
)
 
(872)%
 
$
(2,920
)
 
$
(12,542
)
 
(77)%
As a percentage of revenue
 
1
%
 
 %
 
 
 
 %
 
(1
)%
 
 


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In the three and nine months ended September 29, 2013, our income tax benefit of $4.6 million and income tax provision of $2.9 million, respectively, on income before income taxes and equity in earnings of unconsolidated investees of $81.2 million and $30.3 million, respectively, was primarily due to projected tax expense in profitable foreign jurisdictions as well as minimum taxes and the recognition of a previously unrecognized tax benefit.

In the three and nine months ended September 30, 2012, our income tax provision of $0.6 million and $12.5 million, respectively, on a loss before income taxes and equity in earnings (loss) of unconsolidated investees of $48.5 million and $192.9 million, respectively, was primarily due to projected tax expense in profitable foreign jurisdictions and a change in the valuation allowance on deferred tax assets.

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

We record a valuation allowance to reduce our United States and French deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with the estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount, or if we subsequently determine that realization of an amount previously recorded is unlikely, we would record an adjustment to the deferred tax asset valuation allowance, which would change income tax in the period of adjustment. As of September 29, 2013, we believe there is insufficient evidence to realize additional deferred tax assets in fiscal 2013.

Equity in Earnings (Loss) of Unconsolidated Investees
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Equity in earnings (loss) of unconsolidated investees
 
$
1,585

 
$
578

 
174%
 
$
2,261

 
$
(1,772
)
 
(228)%
As a percentage of revenue
 
0.2
%
 
0.1
%
 
 
 
0.1
%
 
(0.1
)%
 
 

Our equity in earnings of unconsolidated investees increased $1.0 million and $4.0 million in the three and nine months ended September 29, 2013 as compared to the three and nine months ended September 30, 2012 and was primarily driven by increased activities at our joint venture, AUO SunPower Sdn. Bhd. ("AUOSP").

Net Income (Loss)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Net income (loss)
 
$
108,386

 
$
(48,538
)
 
(323)%
 
$
73,255

 
$
(207,249
)
 
(135)%

Net income increased $156.9 million and moved from a net loss to a net income position in the three months ended September 29, 2013 as compared to the three months ended September 30, 2012. The increase in net income was primarily driven by: (i) a $112.5 million increase in gross margin due to an increase in the number and size of the various utility-scale solar power systems under construction in North America and timing of recognition, as well as a $52.0 million non-cash gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013 (see Note 7 of our Notes to Condensed Consolidated Financial Statements), and (ii) a $75.5 million decrease in operating expenses attributable to $59.6 million of goodwill and other intangible asset impairment recorded in the third quarter of fiscal 2012 and from our cost-control strategy implemented in response to the changes in the European market and resulting restructuring activities in fiscal 2012. These increases were partially offset by a $50.6 million gain recorded in the third quarter of fiscal 2012 related to the recovery of claims related to unreturned shares under our former share lending arrangement with LBIE following their bankruptcy.


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Net income increased $280.5 million and moved from a net loss to a net income position in the nine months ended September 29, 2013 as compared to the nine months ended September 30, 2012. The increase in net income was driven by: (i) a $160.9 million increase in gross margin primarily due to an increase in the number and size of the various utility-scale solar power systems under construction in North America and timing of recognition as a $52.0 million non-cash gain associated with the termination of a third-party supply contract in the third quarter of fiscal 2013 (see Note 7 of our Notes to Condensed Consolidated Financial Statements), and (ii) a $136.8 million decrease in operating expenses primarily attributable to $59.6 million of goodwill and other intangible asset impairment recorded in the third quarter of fiscal 2012 and $61.2 million of restructuring charges incurred in fiscal 2012. These increases were partially offset by (i) a $50.6 million gain recorded in the third quarter of fiscal 2012 related to the recovery of claims related to unreturned shares under our former share lending arrangement with LBIE following their bankruptcy, and (ii) a $16.8 million increase in interest expense due to additional non-cash interest expense as a result of amortization expense recorded for warrants issued to Total in connection with the Liquidity Support Agreement as well as additional long-term financing arrangements outstanding during the period.

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

Net Loss Attributable to Noncontrolling Interests
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
 
% Change
 
September 29, 2013
 
September 30, 2012
 
% Change
Net loss attributable to noncontrolling interests
 
$
21,004

 
$

 
100%
 
$
43,577

 
$

 
100%

Beginning in the first quarter of fiscal 2013, we have entered into facilities with third-party investors under which the investors were determined to hold noncontrolling interests in certain of our consolidated subsidiaries. We attribute the net assets of the less than wholly owned subsidiaries to the controlling and noncontrolling interests under the hypothetical liquidation at book value method as this method most closely mirrors the economics of the governing contractual arrangements. We allocate 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.

Liquidity and Capital Resources
 
Cash Flows

A summary of the sources and uses of cash and cash equivalents is as follows:
 
 
Nine Months Ended
(In thousands)
 
September 29, 2013
 
September 30, 2012
Net cash provided by (used in) operating activities
 
$
129,553

 
$
(112,301
)
Net cash used in investing activities
 
(93,882
)
 
(118,961
)
Net cash provided by (used in) financing activities
 
249,323

 
(115,017
)

Operating Activities

Net cash provided by operating activities in the nine months ended September 29, 2013 was $129.6 million and was primarily the result of: (i) a net income of $29.7 million; (ii) a $107.4 million increase in accounts payable and other accrued liabilities (iii) a decrease of $48.4 million in prepaid expense and other assets primarily related to deferred costs associated with several large utility-scale solar projects under construction in North America; (iv) a $27.8 million increase in billings in excess of costs and estimated earnings; and (v) other net non-cash charges of $143.3 million primarily related to depreciation, non-cash interest charges, and stock based compensation, net with a non-cash gain of $52.0 million on contract termination. This was partially offset by: (i) a $80.7 million increase in inventory and project assets for construction of future and current projects primarily in North America; (ii) an increase in accounts receivable of $46.4 million; and (iii) an increase of $47.9 million in other operating assets, net of changes to operating liabilities.

Net cash used in operating activities in the nine months ended September 30, 2012 was $112.3 million and was primarily the result of: (i) a net loss of $207.2 million; (ii) increase in inventories and project assets of $152.0 million for construction of future and current projects primarily in North America; (iii) increases in prepaid expense and other assets of $35.4 million

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primarily related to deferred costs associated with the construction of the 250 MW California Valley Solar Ranch project as well as deferred costs associated with the build of systems under our residential leasing program; (iv) an increase in advance to suppliers of $30.0 million; and (v) an increase of $44.9 million in other operating liabilities, net of changes in operating assets. This was partially offset by (i) a decrease in accounts receivable of $124.9 million; (ii) a loss of $56.4 million on retirement of property, plant and equipment as a result of a restructuring plan; (iii) non-cash impairment changes of $8.9 million related to the write-down of third party inventory; (iv) non-cash impairment charges totaling $59.6 million associated with goodwill and other intangible asset impairment in the third quarter of fiscal 2012; an increase of $74.9 million in other operating assets, net of changes to operating liabilities; and (iv) other non-cash charges of $158.1 million primarily related to depreciation and amortization, stock based compensation, and non-cash interest charges, net with a $50.6 million gain in connection with our former share lending arrangement with Lehman Brothers International (Europe) Limited ("LBIE") which was classified as cash from financing activities.

Investing Activities

Net cash used in investing activities in the nine months ended September 29, 2013 was $93.9 million, which included: (i) $109.1 million related to costs associated with solar power systems leased and to be leased, as well as capital expenditures primarily associated with improvements to our current generation solar cell manufacturing technology; (ii) $99.9 million in purchases of marketable securities; (iii) $1.4 million paid for investments in unconsolidated investees. This was partially offset by (i) $100.9 million in proceeds from sales or maturities of marketable securities; (ii) $14.9 million of restricted cash released back to us due to expirations of fully cash-collateralized letter of credits under the September 2011 Letter of Credit Facility with Deutsche Bank Trust and transition of outstanding letter of credits into the August 2011 Deutsche Bank facility under which payment of obligations is uncollateralized and guaranteed by Total S.A; and (iii) $0.6 million in proceeds from the sale of equipment to a third-party.

Net cash used in investing activities in the nine months ended September 30, 2012 was $119.0 million which included: (i) $100.7 million in costs associated with solar power systems leased and to be leased; (ii) $79.0 million related to capital expenditures primarily associated with improvements to our current generation solar cell manufacturing technology, leasehold improvements associated with our San Jose, California office, and the build out of our new solar panel assembly facility in Mexicali, Mexico, and other projects; (iii) $10.0 million paid for investments in unconsolidated investees; and (iv) $1.4 million in purchases of marketable securities. This was partially offset by (i) $54.3 million of restricted cash released back to us due to expirations of fully cash-collateralized letters of credit under the September 2011 Letter of Credit Facility with Deutsche Bank Trust and transition of outstanding letters of credit into the August 2011 Deutsche Bank facility under which payment of obligations is guaranteed by Total S.A.; (ii) $17.4 million in proceeds from the sale of our equity interest in Woongjin Energy on the open market; and (iii) $0.4 million in proceeds from the sale of equipment to a third-party.

Financing Activities

Net cash provided by financing activities in the nine months ended September 29, 2013 was $249.3 million reflects: (i) $296.3 million of proceeds, net of issuance costs, from the issuance of our 0.75% debentures during the second quarter of fiscal 2013 ("the 0.75% debentures due 2018"); (ii) $68.2 million from project loans; (iii) $83.4 million of financing proceeds associated with our residential lease program; (iv) $73.4 million of contributions from noncontrolling interests; and (v) $40.8 million of proceeds associated with sale leaseback financing arrangements. This was partially offset by: (i) $290.1 million repayments of our outstanding borrowings primarily under the Credit Agricole revolving credit facility, project loans and other debt; (ii) $17.6 million in purchases of stock for tax withholding obligations on vested restricted stock; and (iii) $5.1 million in repayments of sale leaseback financing.

Net cash used in financing activities in the nine months ended September 30, 2012 of $115.0 million reflects: (i) $198.6 million paid to fully repurchase the outstanding 1.25% convertible debentures; (ii) $178.3 million of cash distributions in connection with the transfer of entities under common control; (iii) repayment of $126.4 million of our outstanding balance under the Credit Agricole revolving credit facility and capital lease obligations; and (iv) $5.4 million in purchases of stock for tax withholding obligations on vested restricted stock. This was partially offset by: (i) $163.6 million in proceeds from the sale of 18.6 million shares of our common stock to Total; (ii) drawdowns of $125.0 million under the Credit Agricole revolving credit facility; (iii) $50.6 million of proceeds from the recovery of a claim in connection with our former share lending arrangement with LBIE; (iv) $27.6 million from project loans; and (iv) $26.8 million of financing proceeds associated with our residential lease program.

Debt and Credit Sources

Convertible Debentures

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As of September 29, 2013, an aggregate principal amount of $300.0 million of the 0.75% debentures due 2018 remain issued and outstanding. The 0.75% debentures due 2018 were issued on May 29, 2013. Interest on the 0.75% debentures due 2018 is payable on June 1 and December 1 of each year, beginning on December 1, 2013. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price equal to $24.95 per share. The applicable conversion rate may be subject to adjustment in certain circumstances. The maximum number of shares of our common stock that may be issued through the conversion is 15,533,957, subject to anti-dilution and certain other adjustments. If not earlier converted, the 0.75% debentures due 2018 mature on June 1, 2018. Holders may require us to repurchase all or a portion of their 0.75% debentures due 2018, upon a fundamental change, as described in the governing agreement, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control fundamental change, as described in the governing agreement, the 0.75% debentures due 2018 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.75% debentures due 2018 will have the right to declare all amounts then outstanding due and payable.

As of both September 29, 2013 and December 30, 2012, an aggregate principal amount of $250.0 million of the 4.50% debentures remain issued and outstanding. Interest on the 4.50% debentures is payable on March 15 and September 15 of each year. The 4.50% debentures mature on March 15, 2015. The 4.50% debentures are convertible only into cash, and not into shares of our common stock (or any other securities). Prior to December 15, 2014, the 4.50% debentures are convertible only upon specified events and, thereafter, they will be convertible at any time, based on an initial conversion price of $22.53 per share of our common stock. The conversion price will be subject to adjustment in certain events, such as distributions of dividends or stock splits. Upon conversion, we will deliver an amount of cash calculated by reference to the price of our common stock over the applicable observation period. We may not redeem the 4.50% debentures prior to maturity. Holders may also require us to repurchase all or a portion of their 4.50% debentures upon a fundamental change, as defined in the debenture agreement, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, such as our failure to make certain payments or perform or observe certain obligations thereunder, Wells Fargo, the trustee, or holders of a specified amount of then-outstanding 4.50% debentures will have the right to declare all amounts then outstanding due and payable. Concurrent with the issuance of the 4.50% debentures, we entered into privately negotiated convertible debenture hedge transactions and warrant transactions which represent a call spread overlay with respect to the 4.50% debentures (the "CSO2015"), assuming full performance of the counterparties and 4.50% Warrants strike prices in excess of the conversion price of the 4.50% debentures.  Please see "Conversion of our outstanding 4.75% debentures, our warrants related to our outstanding 4.50% and 4.75% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease." in "Part I. Item 1A: Risk Factors" in our fiscal 2012 Form 10-K.

As of both September 29, 2013 and December 30, 2012, an aggregate principal amount of $230.0 million of the 4.75% senior convertible debentures ("4.75% debentures") remain issued and outstanding. Interest on the 4.75% debentures is payable on April 15 and October 15 of each year. Holders of the 4.75% debentures are able to exercise their right to convert the debentures at any time into shares of our common stock at a conversion price equal to $26.40 per share. The applicable conversion rate may adjust in certain circumstances, including upon a fundamental change, as defined in the indenture governing the 4.75% debentures. If not earlier converted, the 4.75% debentures mature on April 15, 2014. Holders may also require us to repurchase all or a portion of their 4.75% debentures upon a fundamental change at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, such as our failure to make certain payments or perform or observe certain obligations thereunder, Wells Fargo, the trustee, or holders of a specified amount of then-outstanding 4.75% debentures will have the right to declare all amounts then outstanding due and payable. Concurrently with the issuance of the 4.75% debentures, we entered into certain convertible debenture hedge transactions (the "4.75% Bond Hedge") and warrant transactions (the "4.75% Warrants") with affiliates of certain of the underwriters of the 4.75% debentures.  Please see "Conversion of our outstanding and 4.75% debentures, our warrants related to our outstanding 4.50% and 4.75% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease." in "Part I. Item 1A: Risk Factors" in our fiscal 2012 Form 10-K.

Mortgage Loan Agreement with IFC

On May 6, 2010, we entered into a mortgage loan agreement with IFC. Under the loan agreement, we may borrow up to $75.0 million during the first two years, and are required to repay the amount borrowed, starting 2 years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. On October 3, 2012, IFC granted a temporary

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waiver of a financial covenant for the fourth quarter of fiscal 2012 through the fourth quarter of fiscal 2013. Subsequent to the waiver, we are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings through January 5, 2013; interest of LIBOR plus 4.25% per annum on outstanding borrowings from January 6, 2013 through September 30, 2013; interest of LIBOR plus 5% per annum on outstanding borrowings from October 1, 2013 through January 5, 2014; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. If we utilize the waiver for the fourth quarter of 2013, the 2013 rates would continue to apply in 2014. If we do not need to utilize the waiver, we are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. We may prepay all or a part of the outstanding principal, subject to a 1% prepayment premium. We have pledged certain assets as collateral supporting repayment obligations.
  
As of September 29, 2013 and December 30, 2012, we had $62.5 million and $75.0 million, respectively, outstanding under the mortgage loan agreement. Additionally, in accordance with the terms of the mortgage loan agreement, we are required to establish a debt service reserve account which shall contain the amount, as determined by IFC, equal to the aggregate principal and interest due on the next succeeding interest payment date after such date.

As of September 29, 2013 and December 30, 2012, we had restricted cash and cash equivalents of $9.2 million and $6.4 million, respectively, related to the IFC debt service reserve.

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

On December 29, 2010, we borrowed from CEDA the proceeds of the $30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation - Headquarters Project) Series 2010 (the "Bonds") maturing April 1, 2031 under a loan agreement with CEDA. Certain of our obligations under the loan agreement were contained in a promissory note dated December 29, 2010 issued by us to CEDA, which assigned the promissory note, along with all right, title and interest in the loan agreement, to Wells Fargo, as trustee, with respect to the Bonds for the benefit of the holders of the Bonds. The Bonds initially bore interest at a variable interest rate (determined weekly), but in June 2011, at our option were converted into fixed-rate bonds at 8.50% per annum (which include covenants of, and other restrictions on, us). Additionally, in accordance with the terms of the loan agreement, we are required to keep all loan proceeds on deposit with Wells Fargo, the trustee, until funds are withdrawn by us for use in relation to the design and leasehold improvements of our new corporate headquarters in San Jose, California. As of both September 29, 2013 and December 30, 2012, we had restricted cash and cash equivalents of $3.0 million for design and leasehold improvements and debt service reserves under the CEDA loan agreement.

As of both September 29, 2013 and December 30, 2012, the $30.0 million aggregate principal amount of the Bonds was classified as "Long-term debt" in our Condensed Consolidated Balance Sheets.

July 2013 Revolving Credit Facility with Credit Agricole

On July 3, 2013, we entered into a revolving credit agreement with Credit Agricole, as administrative agent, and certain financial institutions, under which we may borrow up to $250.0 million until the earliest of: (i) July 3, 2016; (ii) December 31, 2014, if we have not repaid, exchanged or repurchased our outstanding 4.50% debentures due 2015 by September 30, 2014 and are not in compliance with certain liquidity requirements as of such date; and (iii) January 31, 2014, if the conditions precedent to the Restructuring (as defined below) have not been met or waived as of such date (the "Maturity Date"). The July 2013 revolving credit facility allows us to request increases to the available capacity of the revolving credit facility to an aggregate of $300.0 million, subject to the satisfaction of certain conditions. The July 2013 revolving credit facility includes representations, covenants, and events of default customary for financing transactions of this type. On or about January 31, 2014 (the “Restructuring Date”), (i) our obligations under the July 2013 revolving credit facility will become secured by a pledge of certain accounts receivable and inventory of the Company and certain of its subsidiaries, (ii) certain of our subsidiaries will enter into guaranties of the July 2013 revolving credit facility, and (iii) Total S.A.'s guarantee of the our obligations under the July 2013 revolving credit facility will expire (collectively, the “Restructuring”). Amounts borrowed may be repaid and reborrowed until the Maturity Date.

Prior to the Restructuring Date, we will be required to pay interest on outstanding borrowings under the facility of (a) with respect to any LIBOR rate loan, 0.60% plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; (b) with respect to any alternative base rate loan, 0.25% plus the greater of (1) the prime rate, (2) the Federal funds rate plus 0.5%, and

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(3) the one month LIBOR rate plus 1%; and (c) a commitment fee of 0.06% per annum on funds available for borrowing and not borrowed.

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

The July 2013 revolving credit facility was entered into in conjunction with the delivery by Total S.A. of a guarantee of our obligations under the related facility. We are required to pay Total S.A. an annual guarantee fee of 2.75% of the outstanding amount under the 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 below, increases the capacity available under the Liquidity Support Facility by $25.0 million.

As of September 29, 2013, the Company had no outstanding borrowing under the July 2013 revolving credit facility.

September 2011 Revolving Credit Facility with Credit Agricole

On September 27, 2011, we entered into a revolving credit agreement with Credit Agricole, as administrative agent, and certain financial institutions, under which we were able to borrow up to $275.0 million until September 27, 2013. On December 24, 2012, we amended the facility to reflect Total S.A.'s guarantee of our obligations under the facility. The facility amendment extended the maturity date to January 31, 2014, reduced interest rates payable and removed certain financial and restrictive covenants. Subsequent to the amendment, we were required to pay interest on outstanding borrowings of (a) with respect to any LIBOR loan, 0.6% plus the LIBOR divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; and (b) with respect to any alternative base loan, 0.25% plus the greater of (1) the prime rate, (2) the Federal Funds rate plus 0.5%, and (3) the one month LIBOR plus 1%, and a commitment fee equal to 0.06% per annum on funds available for borrowing and not borrowed.

On July 3, 2013, the Company terminated its September 2011 revolving credit facility subsequent to the establishment of the July 2013 revolving credit facility, as described above. There were no outstanding borrowings under the September 2011 revolving credit facility upon termination.

August 2011 Letter of Credit Facility with Deutsche Bank

On August 9, 2011, we entered into a letter of credit facility agreement with Deutsche Bank, as issuing bank and as administrative agent, and certain financial institutions, and further amended on December 20, 2011. Payment of obligations under the letter of credit facility is guaranteed by Total S.A. pursuant to the Credit Support Agreement between us and Total S.A. The letter of credit facility provides for the issuance, upon our request, of letters of credit by the issuing banks thereunder in order to support certain of our obligations, in an aggregate amount not to exceed (a) $725.0 million until December 31, 2012; and (b) $771.0 million for the period from January 1, 2013 through December 31, 2013. Aggregate letter of credit amounts may be increased upon the agreement of the parties, but otherwise may not exceed (i) $878.0 million for the period from January 1, 2014 through December 31, 2014; (ii) $936.0 million for the period from January 1, 2015 through December 31, 2015; and (iii) $1.0 billion for the period from January 1, 2016 through June 28, 2016. Each letter of credit issued under the letter of credit facility must have an expiration date no later than the second anniversary of the issuance of that letter of credit, provided that up to 15% of the outstanding value of the letters of credit may have an expiration date of between two and three years from the date of issuance.

As of September 29, 2013, letters of credit issued under the August 2011 letter of credit facility with Deutsche Bank totaled $758.9 million.

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

On September 27, 2011, we entered into a letter of credit facility with Deutsche Bank Trust which provides for the issuance, upon request by us, letters of credit to support our obligations in an aggregate amount not to exceed $200.0 million.

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Each letter of credit issued under the facility is fully cash-collateralized and we have entered into a security agreement with Deutsche Bank Trust, granting them a security interest in a cash collateral account established for this purpose.

As of September 29, 2013 letters of credit issued under the Deutsche Bank Trust facility amounted to $2.0 million which were fully collateralized with restricted cash as classified on the Condensed Consolidated Balance Sheets.

Liquidity

As of September 29, 2013, we had unrestricted cash and cash equivalents of $743.6 million as compared to $457.5 million as of December 30, 2012. Our cash balances are held in numerous locations throughout the world and as of September 29, 2013, we had approximately $247.6 million held outside of the United States. This offshore cash is used to fund operations of our EMEA and APAC business units as well as non-U.S. manufacturing operations, which require local payment for product materials and other expenses.  The amounts held outside of the United States represent the earnings of our foreign subsidiaries which, if repatriated to the United States under current law, would be subject to United States federal and state tax less applicable foreign tax credits. Repatriation of earnings that have not been subjected to U.S. or foreign withholding tax and which have been indefinitely reinvested outside the U.S. could result in additional United States federal income tax or foreign withholding tax payments in future years.

On July 5, 2010, we formed our AUOSP joint venture. Under the terms of the joint venture agreement, our subsidiary SunPower Technology, Ltd. ("SPTL") and AU Optronics Singapore Pte. Ltd. ("AUO") each own 50% of AUOSP. Both SPTL and AUO are obligated to provide additional funding to AUOSP in the future. Under the joint venture agreement, each shareholder agreed to contribute additional amounts to the joint venture through 2014 amounting to $241.0 million, or such lesser amount as the parties may mutually agree (see the Contractual Obligations table below). In addition, if AUOSP, SPTL, or AUO requests additional equity financing to AUOSP, then SPTL and AUO will each be required to make additional cash contributions of up to $50.0 million in the aggregate. Further, we could in the future guarantee certain financial obligations of AUOSP.

Our 4.50% debentures are convertible into cash. Under the terms of the 4.50% Warrants, we sold to affiliates of certain of the initial purchasers of the 4.50% cash convertible debentures warrants to acquire, subject to anti-dilution adjustments, up to 11.1 million shares of our common stock. The bond hedge and warrants described in Note 9 of Notes to the Condensed Consolidated Financial Statements represent a call spread overlay with respect to the 4.50% debentures. Assuming full performance by the counterparties (and 4.50% Warrants strike prices in excess of the conversion price of the 4.50% debentures), the transactions effectively reduce our potential payout over the principal amount on the 4.50% debentures upon conversion of the 4.50% debentures.

We expect total capital expenditures related to purchases of property, plant and equipment in the range of $45 million to $55 million in fiscal 2013 in order to improve our current and next generation solar cell manufacturing technology and other projects. In addition, we expect to invest a significant amount of capital to develop solar power systems and plants for sale to customers. The development of solar power plants can require long periods of time and substantial initial investments. Our efforts in this area may consist of all stages of development, including land acquisition, permitting, financing, construction, operation and the eventual sale of the projects. We often choose to bear the costs of such efforts prior to the final sale to a customer, which involves significant upfront investments of resources (including, for example, large transmission deposits or other payments, which may be non-refundable), land acquisition, permitting, legal and other costs, and in some cases the actual costs of constructing a project, in advance of the signing of PPAs and EPC contracts and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Any delays in disposition of one or more projects could have a negative impact on our liquidity.

Certain of our customers also require performance bonds issued by a bonding agency or letters of credit issued by financial institutions, which are returned to us upon satisfaction of contractual requirements. If there is a contractual dispute with the customer, the customer may withhold the security or make a draw under such security, which could have an adverse impact on our liquidity position. Obtaining letters of credit may require adequate collateral. All letters of credit issued under our August 2011 Deutsche Bank facility are guaranteed by Total S.A. pursuant to the Credit Support Agreement. Our letter of credit facility with Deutsche Bank Trust is fully collateralized by restricted cash, which reduces the amount of cash available for operations. As of September 29, 2013 letters of credit issued under the Deutsche Bank Trust facility amounted to $2.0 million which were fully collateralized with restricted cash on the Condensed Consolidated Balance Sheets.

In fiscal 2011, we launched our residential lease program with dealers in the United States, in partnership with a third-party financial institution, which allows customers to obtain SunPower systems under lease agreements up to 20 years, subject to financing availability. We have entered into facilities with financial institutions that will provide financing to support

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additional residential solar lease projects. Under the terms of certain programs we receive upfront payments for periods under which the third-party financial institution has agreed to assume collection risk for certain residential leases. Changes in the amount or timing of upfront payments received from the financial institutions may have an impact on our cash position within the next twelve months. The normal collection of monthly rent payments for leases placed in service is not expected to have a material impact on our cash position within the next twelve months. In the first quarter of fiscal 2013, we entered into a facility with a third-party investor under which both parties will invest in an entity which holds SunPower solar power systems and leases with residential customers. We were determined to hold a controlling interest in the less than wholly owned entity and has fully consolidated this entity as a result (see Note 1 of Notes to the Condensed Consolidated Financial Statements). We are actively arranging additional third-party financing for our residential lease program; however, due to the general challenging credit markets worldwide, we may be unable to arrange additional financing partners for our residential lease program in future periods, which could have a negative impact on our sales. In the unlikely event that we enter into a material number of additional leases without promptly obtaining corresponding third-party financing, our cash and working capital could be negatively impacted.

We believe that our current cash, cash equivalents and cash expected to be generated from operations will be sufficient to meet our working capital and fund our committed capital expenditures over the next 12 months, including the development and construction of solar power systems and plants over the next 12 months, as well as repay our current indebtedness, including our 4.75% debentures due 2014 (described below). In addition, we have $250 million available to us under our July 2013 revolving credit facility with Credit Agricole. However, there can be no assurance that our liquidity will be adequate over time. A significant portion of our revenue is generated from a limited number of customers and large projects and our inability to execute these projects, or to collect from these customers or for these projects, would have a significant negative impact on our business. Our capital expenditures and use of working capital may be greater than we expect if we decide to make additional investments in the development and construction of solar power plants and sales of power plants and associated cash proceeds are delayed, or if we decide to accelerate increases in our manufacturing capacity internally or through capital contributions to joint ventures. We require project financing in connection with the construction of solar power plants, which financing may not be available on terms acceptable to us. In addition, we could in the future make additional investments in our joint ventures or guarantee certain financial obligations of our joint ventures, which could reduce our cash flows, increase our indebtedness and expose us to the credit risk of our joint ventures. See also "A limited number of customers and large projects are expected to continue to comprise a significant portion of our revenues and any decrease in revenue from these customers or projects, payments of liquidated damages, or an increase in related expenses, could have a significant adverse effect on us," and "Due to the general economic environment, the continued market pressure driving down the average selling prices of our solar power products and other factors, we may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments as planned" in Part I, Item 1A "Risk Factors" in our fiscal 2012 Form 10-K.

We are 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, we 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 us, or cause to be provided, additional liquidity under certain circumstances to a maximum amount of $600 million (the "Liquidity Support Facility"). Total S.A. is required to provide liquidity support to us under the facility, and we are required to accept such liquidity support from Total S.A., if either our actual or projected unrestricted cash, cash equivalents, and unused borrowing capacity are reduced below $100 million, or we fail to satisfy any financial covenant under our indebtedness. In either such event, subject to a $600 million aggregate limit, Total S.A. is required to provide us with sufficient liquidity support to increase the amount of our unrestricted cash, cash equivalents and unused borrowing capacity to above $100 million, and to restore compliance with our financial covenants. On July 3, 2013, Total S.A. provided a guarantee to our July 2013 revolving credit facility with Credit Agricole, which will expire on or about January 31, 2014. The capacity available under the Liquidity Support Facility was $350 million, subsequent to this guarantee. 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 and all outstanding debt under the facility will become due (except for the Total S.A. guarantee of our Credit Agricole facility which will expire on or about January 31, 2014).

In return for Total S.A.'s agreement to provide the Liquidity Support Facility, on February 28, 2012, we issued to Total a seven-year warrant to purchase 9,531,677 shares of our common stock at an exercise price of $7.8685 per share. During the term of the facility, we must pay Total S.A. a quarterly fee equal to 0.25% of the unused portion of the facility. 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 our indebtedness or other forms of liquidity support agreed to by us, depending on the amount outstanding under the facility immediately prior to provision of the applicable support among other factors.  We are required to compensate

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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. 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 we have agreed to conduct our operations, and use any proceeds from such facility in ways that minimize the likelihood of Total S.A. being required to provide further support.

As of September 29, 2013, $230 million of the 4.75% debentures have a maturity of less than 12 months and are classified as short term debt on our Condensed Consolidated Balance Sheets. We have $250 million available to us under our July 2013 revolving credit facility with Credit Agricole and may request increases to the available capacity of the revolving credit facility to an aggregate of $300.0 million, subject to the satisfaction of certain conditions. Proceeds from our July 2013 revolving credit facility with Credit Agricole may be used for general corporate purposes. We are evaluating options to repay or refinance such indebtedness during 2013 or 2014, but there are no assurances that we will have sufficient available cash to repay such indebtedness or we will be able to refinance such indebtedness on similar terms to the expiring indebtedness. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing, including under the Liquidity Support Facility. The current economic environment, however, could limit our ability to raise capital by issuing new equity or debt securities on acceptable terms, and lenders may be unwilling to lend funds on acceptable terms that would be required to supplement cash flows to support operations. The sale of additional equity securities or convertible debt securities, including under the Liquidity Support Agreement, would result in additional dilution to our stockholders (and potential for further dilution upon the exercise of warrants or the conversion of convertible debt issued under the Liquidity Support Facility) and may not be available on favorable terms or at all, particularly in light of the current conditions in the financial and credit markets. Additional debt would result in increased expenses and would likely impose new restrictive covenants which may be similar or different than those restrictions contained in the covenants under our current loan agreements and debentures. In addition, financing arrangements, including project financing for our solar power plants and letters of credit facilities, may not be available to us, or may not be available in amounts or on terms acceptable to us.
 
Contractual Obligations

The following summarizes our contractual obligations as of September 29, 2013:
 
 
 
 
Payments Due by Period
(In thousands)
 
Total
 
2013 (remaining 3 months)
 
2014-2015
 
2016-2017
 
Beyond 2017
Convertible debt, including interest1
 
$
812,817

 
$
6,106

 
$
501,267

 
$
4,500

 
$
300,944

IFC mortgage loan, including interest2
 
67,314

 
842

 
32,997

 
30,971

 
2,504

CEDA loan, including interest3
 
74,626

 
638

 
5,100

 
5,100

 
63,788

Other debt, including interest4
 
79,098

 
32,389

 
33,336

 
2,265

 
11,108

Future financing commitments5
 
243,890

 
147,120

 
96,770

 

 

Operating lease commitments6
 
147,423

 
6,085

 
29,768

 
26,184

 
85,386

Sale-leaseback financing7
 
39,229

 
2,361

 
4,524

 
4,421

 
27,923

Capital lease commitments8
 
6,716

 
259

 
2,068

 
1,940

 
2,449

Non-cancellable purchase orders9
 
249,019

 
249,019

 

 

 

Purchase commitments under agreements10
 
2,282,413

 
342,467

 
894,350

 
528,617

 
516,979

Total
 
$
4,002,545

 
$
787,286

 
$
1,600,180

 
$
603,998

 
$
1,011,081

1 
Convertible debt, including interest, relates to the aggregate of $780.1 million in outstanding principal amount of our senior convertible debentures on September 29, 2013. For the purpose of the table above, we assume that all holders of the outstanding debentures will hold the debentures through the date of maturity, and upon conversion, the values of the senior convertible debentures will be equal to the aggregate principal amount with no premiums.

2 
IFC mortgage loan, including interest, relates to the $62.5 million borrowed as of September 29, 2013. Under the loan agreement, we are required to repay the amount borrowed, starting 2 years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. Subsequent to a waiver received from IFC, we are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings through January 5, 2013, LIBOR plus 4.25% per annum on outstanding borrowings from January 6, 2013 through September 30, 2013, LIBOR plus 5% per annum on outstanding borrowings from October 1, 2013 through January 5, 2014,

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and LIBOR plus 3% per annum on outstanding borrowings from January 6, 2014 through maturity. If we utilize the waiver for the fourth quarter of fiscal 2013, the fiscal 2013 rates would continue to apply in fiscal 2014. If we do not need to utilize the waiver, we are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed.

3 
CEDA loan, including interest, relates to the proceeds of the $30.0 million aggregate principal amount of the Bonds. The Bonds mature on April 1, 2031. On June 1, 2011 the Bonds were converted to bear interest at a fixed rate of 8.50% through maturity.

4 
Other debt, including interest, primarily relates to long-term non-recourse project loans as described in Note 9 of Notes to the Condensed Consolidated Financial Statements.

5 
We and AUO agreed in the joint venture agreement to contribute additional amounts to AUOSP in fiscal 2012 through 2014 amounting to $241.0 million by each shareholder, or such lesser amount as the parties may mutually agree. Further, in connection with a purchase agreement with a non-public company we will be required to provide additional financing to such party of up to $2.9 million, subject to certain conditions.

6 
Operating lease commitments primarily relate to certain solar power systems leased from unaffiliated third parties over minimum lease terms of up to 20 years and various lease agreements for our headquarters in San Jose, California, sales and support offices throughout the United States and Europe and a solar module facility in Mexicali, Mexico.

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

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

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

10 
Purchase commitments under agreements relate to arrangements entered into with several suppliers, including joint ventures, for polysilicon, ingots, wafers, solar cells and solar panels as well as agreements to purchase solar renewable energy certificates from solar installation owners. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 10 years and there are certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that we terminate the arrangements.
 
Liabilities Associated with Uncertain Tax Positions

Due to the complexity and uncertainty associated with our tax positions, we cannot make a reasonably reliable estimate of the period in which cash settlement will be made for our liabilities associated with uncertain tax positions in other long-term liabilities. Therefore, they have been excluded from the table above. As of September 29, 2013, total liabilities associated with uncertain tax positions were $25.2 million and are included in "Other long-term liabilities" in our Condensed Consolidated Balance Sheets as they are not expected to be paid within the next twelve months.

Off-Balance-Sheet Arrangements

As of September 29, 2013, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Exchange Risk

Our exposure to movements in foreign currency exchange rates is primarily related to sales to European customers that are denominated in Euros. Revenue generated from European customers represented 18% and 16% of our total revenue in the three and nine months ended September 29, 2013, respectively, and 14% and 23% of our total revenue during the three and nine months ended September 30, 2012, respectively. A 10% change in the Euro exchange rate would have impacted our revenue by approximately $12.1 million and $29.6 million in the three and nine months ended September 29, 2013, respectively, and $8.9 million and $40.0 million in the three and nine months ended September 30, 2012, respectively.

In the past, we have experienced an adverse impact on our revenue, gross margin and profitability as a result of foreign currency fluctuations. When foreign currencies appreciate against the U.S. dollar, inventories and expenses denominated in foreign currencies become more expensive. Strengthening of the Malaysian Ringgit against the U.S. dollar would increase AUOSP's liability under the facility agreement with the Malaysian government which in turn would negatively impact our equity in earnings (loss) of the unconsolidated investee. An increase in the value of the U.S. dollar relative to foreign currencies could make our solar power products more expensive for international customers, thus potentially leading to a reduction in demand, our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies.

We currently conduct hedging activities which involve the use of option and forward currency contracts that are designed to address our exposure to changes in the foreign exchange rate between the U.S. dollar and other currencies. As of September 29, 2013, we had outstanding hedge option currency contracts and forward currency contracts with aggregate notional values of $138.2 million and $178.8 million, respectively. As of December 30, 2012, we held option and forward contracts totaling $71.0 million and $148.2 million, respectively, in notional value. Because we hedge some of our expected future foreign exchange exposure, if associated revenues do not materialize we could experience a reclassification of ineffective gains or losses into earnings. Such a reclassification could adversely impact our revenue, margins and results of operations. We cannot predict the impact of future exchange rate fluctuations on our business and operating results.

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

We enter into agreements with vendors that specify future quantities and pricing of polysilicon to be supplied for periods up to 10 years. Under certain agreements, we are required to make prepayments to the vendors over the terms of the arrangements. As of September 29, 2013 and December 30, 2012, advances to suppliers totaled $365.1 million and $351.4 million, respectively. Two suppliers accounted for approximately 75% and 24% of total advances to suppliers as of September 29, 2013, and approximately 76% and 23% of total advances to suppliers as of December 30, 2012. We may be unable to recover such prepayments if the credit conditions of these suppliers materially deteriorate.

We enter into foreign currency derivative contracts and convertible debenture hedge transactions with high-quality financial institutions and limit the amount of credit exposure to any single counterparty. The foreign currency derivative contracts are limited to a time period of 15 months or less. We regularly evaluate the credit standing of our counterparty financial institutions.

Interest Rate Risk

We are exposed to interest rate risk because many of our customers depend on debt financing to purchase our solar power systems. An increase in interest rates could make it difficult for our customers to obtain the financing necessary to purchase our solar power systems on favorable terms, or at all, and thus lower demand for our solar power products, reduce revenue and adversely impact our operating results. An increase in interest rates could lower a customer's return on investment in a system or make alternative investments more attractive relative to solar power systems, which, in each case, could cause our customers to seek alternative investments that promise higher returns or demand higher returns from our solar power

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systems, reduce gross margin and adversely impact our operating results. This risk is significant to our business because our sales model is highly sensitive to interest rate fluctuations and the availability of credit, and would be adversely affected by increases in interest rates or liquidity constraints.
 
Our interest expense would increase to the extent interest rates rise in connection with our variable interest rate borrowings. As of September 29, 2013, the outstanding principal balance of our variable interest borrowings was $62.5 million. We do not believe that an immediate 10% increase in interest rates would have a material effect on our financial statements. In addition, lower interest rates have an adverse impact on our interest income. Our investment portfolio primarily consists of $308.0 million in money market funds as of September 29, 2013 which exposes us to interest rate risk. Due to the relatively short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our money market funds. Since we believe we have the ability to liquidate substantially all of this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

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

Our investments held in joint ventures and other non-public companies expose us to equity price risk. As of September 29, 2013 and December 30, 2012, investments of $113.8 million and $111.5 million, respectively, are accounted for using the equity method, and $12.4 million and $14.9 million, respectively, are accounted for using the cost method. These strategic investments in third parties are subject to risk of changes in market value, which if determined to be other-than-temporary, could result in realized impairment losses. We generally do not attempt to reduce or eliminate our market exposure in equity and cost method investments. We monitor these investments for impairment and record reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices and declines in operations of the issuer. There can be no assurance that our equity and cost method investments will not face risks of loss in the future.

Interest Rate Risk and Market Price Risk Involving Convertible Debt

The fair market value of our outstanding convertible debentures is subject to interest rate risk, market price risk and other factors due to the convertible feature of the debentures. The fair market value of the debentures will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair market value of the debentures will generally increase as the market price of our common stock increases and decrease as the market price of our common stock falls. The interest and market value changes affect the fair market value of the debentures, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligations, except to the extent increases in the value of our common stock may provide the holders of our 4.50% debentures due 2015, and/or 0.75% debentures due 2015 the right to convert such debentures into cash in certain instances. The aggregate estimated fair value of our outstanding convertible debentures was $946.3 million as of September 29, 2013. The aggregate estimated fair value of our outstanding convertible debentures was $447.8 million as of December 30, 2012. Estimated fair values are based on quoted market prices as reported by an independent pricing source. A 10% increase in quoted market prices would increase the estimated fair value of our then-outstanding debentures to $1,041.0 million and $492.6 million as of September 29, 2013 and December 30, 2012, respectively, and a 10% decrease in the quoted market prices would decrease the estimated fair value of our then-outstanding debentures to $851.7 million and $403.0 million as of September 29, 2013 and December 30, 2012, respectively.


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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 29, 2013 at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

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


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PART II

ITEM 1. LEGAL PROCEEDINGS

The disclosure under "Legal Matters" in "Note 7. Commitments and Contingencies" in "Part I. Financial Information, Item 1. Financial Statements: Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to other information set forth in this report, readers should carefully consider the risk factors discussed in "Part I. Item 1A: Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K related to our outstanding convertible indebtedness should be read to include our 0.75% convertible debentures due 2018, as applicable. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results, as could the following:

We currently have a significant amount of debt outstanding. Our substantial indebtedness and other contractual commitments could adversely affect our business, financial condition and results of operations, as well as our ability to meet any of our payment obligations under our debentures and our other debt.

We currently have a significant amount of debt and debt service requirements. As of September 29, 2013, we have approximately $921.4 million of outstanding debt for borrowed money.

This level of debt could have material consequences on our future operations, including:

making it more difficult for us to meet our payment and other obligations under our debentures and our other outstanding debt;

resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements (with certain covenants becoming more restrictive over time), which event of default could result in all of our debt becoming immediately due and payable if not cured pursuant to the Liquidity Support Facility;

reducing the availability of our cash flow to fund working capital, capital expenditures, project development, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our credit agreement with Credit Agricole;

limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Our indebtedness may increase if we require liquidity support from Total S.A. under the Liquidity Support Facility, and in general the economic cost of such indebtedness will increase, both in absolute dollars and in our cost per dollar borrowed, if the aggregate amount of liquidity support we require increases. In the event our joint ventures are consolidated with our financial statements, such consolidation could significantly increase our indebtedness.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debentures and our other debt or cause us to be unable to meet our planned expansion or generate operating results at the levels we have publicly forecast. In addition, we also have significant contractual commitments for the purchase of polysilicon, some of which involve prepayments, and we may enter into additional, similar long-term supply agreements in the future. Further, if the holders of our outstanding 4.50% debentures due 2015 are entitled to, and do, convert their debentures, the principal amount must be settled in cash. These commitments, the enforcement of certain prepayment obligations under the agreements by our suppliers and future conversions could materially and adversely affect our liquidity and our ability to meet our payment obligations under our debt.

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Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future, which, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing or any future credit facilities or otherwise, in an amount sufficient to enable us to meet our payment obligations under our debentures and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including our debentures, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our debentures and our other debt and other obligations.

Our debentures are effectively subordinated to our existing and any future secured indebtedness and structurally subordinated to existing and future liabilities and other indebtedness of our current and any future subsidiaries.

Our debentures are general, unsecured obligations and rank equally in right of payment with all of our existing and any future unsubordinated, unsecured indebtedness. Our debentures are effectively subordinated to our existing and any future secured indebtedness we may have, including $62.5 million in principal amount of loan proceeds from the International Finance Corporation, to the extent of the value of the assets securing such indebtedness, and structurally subordinated to our existing and any future liabilities and other indebtedness of our subsidiaries. These liabilities may include indebtedness, trade payables, guarantees, lease obligations and letter of credit obligations. Our debentures do not restrict us or our current or any future subsidiaries from incurring indebtedness, including senior secured indebtedness, in the future, nor do they limit the amount of indebtedness we can issue that is equal in right of payment.

Recent regulatory actions may adversely affect the trading price and liquidity of our debentures.

We believe that many investors in our debentures employ, or will seek to employ, a convertible arbitrage strategy with respect to our debentures. Investors that employ a convertible arbitrage strategy with respect to convertible debt instruments typically implement that strategy by selling short the common stock underlying the convertible debt instruments and dynamically adjusting their short position while they hold the debt instruments. Investors may also implement this strategy by entering into swaps on the common stock underlying the convertible debt instruments in lieu of or in addition to short selling the common stock. As a result, any specific rules regulating equity swaps or short selling of securities or other governmental action that interferes with the ability of market participants to effect short sales or equity swaps with respect to our common stock could adversely affect the ability of investors in our debentures to conduct the convertible arbitrage strategy that we believe they employ, or will seek to employ, with respect to our debentures. This could, in turn, adversely affect the trading price and liquidity of our debentures.

The SEC and other regulatory and self-regulatory authorities have implemented various rules and may adopt additional rules in the future that may impact those engaging in short selling activity involving equity securities (including our common stock). In particular, Rule 201 of SEC Regulation SHO generally restricts short selling when the price of a “covered security” triggers a “circuit breaker” by falling 10% or more from the security's closing price as of the end of regular trading hours on the prior day. If this circuit breaker is triggered, short sale orders can be displayed or executed for the remainder of that day and the following day only if the order price is above the then-current national best bid, subject to certain limited exceptions. Because our common stock is a “covered security,” these Rule 201 restrictions, if triggered, may interfere with the ability of investors in our debentures to effect short sales in our common stock and conduct a convertible arbitrage strategy.

In addition, the SEC recently approved two proposals submitted by the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) concerning extraordinary market volatility that may impact the ability of investors to effect a convertible arbitrage strategy. One initiative is the “Limit Up-Limit Down” plan, which requires securities exchanges, alternative trading systems, broker-dealers and other trading centers to establish policies and procedures that prevent the execution of trades or the display of bids or offers outside of specified price bands. If the bid or offer quotations for a security are at the far limit of the price band for more than 15 seconds, trading in that security will be subject to a five-minute trading pause. The Limit Up-Limit Down plan became effective, on a one-year pilot basis, on April 8, 2013.

The second initiative revised existing stock exchange and FINRA rules that establish the market-wide circuit breaker system. The market-wide circuit breaker system provides for specified market-wide halts in trading of stock for certain periods following specified market declines. The recent changes lowered the percentage-decline thresholds for triggering a market-wide trading halt and shortened the amount of time that trading is halted. Market declines under the new system are measured based on a decline in the S&P 500 Index compared to the prior day's closing value rather than a decline in the Dow Jones Industrial Average compared to the prior quarterly closing value. The changes to the market-wide circuit breaker system

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became effective, on a one-year pilot basis, on April 8, 2013. The potential restrictions on trading imposed by the Limit Up-Limit Down plan and the market-wide circuit breaker system may interfere with the ability of investors in our debentures to effect short sales in our common stock and conduct a convertible arbitrage strategy.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, on July 21, 2010 also introduced regulatory uncertainty that may impact trading activities relevant to our debentures. As a result of this legislation, certain interest rate swaps and credit default swaps are currently required to be cleared through regulated clearinghouses. Certain other swaps and security-based swaps are likely going to be required to be cleared through regulated clearinghouses in the future. In addition, certain swaps and security-based swaps will be required to be traded on exchanges or comparable trading facilities. Furthermore, swap dealers, security-based swap dealers, major swap participants and major security-based swap participants will be required to comply with margin and capital requirements. In addition, certain market participants are required to comply with public reporting requirements to provide transaction and pricing data on both cleared and uncleared swaps. Public reporting requirements will also apply with respect to security-based swaps in the future. These requirements could adversely affect the ability of investors in our debentures to maintain a convertible arbitrage strategy with respect to our debentures (including increasing the costs incurred by such investors in implementing such strategy). This could, in turn, adversely affect the trading price and liquidity of our debentures. Although some of the implementing rules have been adopted and are currently effective, we cannot predict how the SEC and other regulators will ultimately implement the legislation or the magnitude of the effect that this legislation will have on the trading price or liquidity of our debentures.

Although the direction and magnitude of the effect that the amendments to Regulation SHO, FINRA and securities exchange rule changes and/or implementation of the Dodd-Frank Act may have on the trading price and the liquidity of our debentures will depend on a variety of factors, many of which cannot be determined at this time, past regulatory actions have had a significant impact on the trading prices and liquidity of convertible debentures. For example, between July 2008 and September 2008, the SEC issued a series of emergency orders placing restrictions on the short sale of the common stock of certain financial services companies. The orders made the convertible arbitrage strategy that many convertible debentures employ difficult to execute and adversely affected both the liquidity and trading price of convertible debentures issued by many of the financial services companies subject to the prohibition. Any governmental action that similarly restricts the ability of investors in our debentures to effect short sales of our common stock, including the amendments to Regulation SHO, FINRA and exchange rule changes and the implementation of the Dodd-Frank Act, could similarly adversely affect the trading price and the liquidity of our debentures.


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

Issuer Purchases of Equity Securities

The following table sets forth all purchases made by or on behalf of us or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of our common stock during each of the indicated periods.
Period
 
Total Number of Shares Purchased1
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
July 1, 2013 through July 28, 2013
 
427

 
$
24.62

 

 

July 29, 2013 through August 25, 2013
 
49,141

 
$
22.04

 

 

August 26, 2013 through September 29, 2013
 
14,174

 
$
21.69

 

 

 
 
63,742

 
$
21.98

 

 

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



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ITEM 6: EXHIBITS
 
EXHIBIT INDEX
Exhibit Number
 
Description
10.1*†
 
Revolving Credit Agreement, dated July 3, 2013 by and among SunPower Corporation and Credit Agricole Corporate and Investment Bank, and the financial institutions party thereto.
31.1*
 
Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2*
 
Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1*
 
Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*+
 
XBRL Instance Document.
101.SCH*+
 
XBRL Taxonomy Schema Document.
101.CAL*+
 
XBRL Taxonomy Calculation Linkbase Document.
101.LAB*+
 
XBRL Taxonomy Label Linkbase Document.
101.PRE*+
 
XBRL Taxonomy Presentation Linkbase Document.
101.DEF*+
 
XBRL Taxonomy Definition Linkbase Document.

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

Exhibits marked with an extended cross (†) are subject to a request for confidential treatment filed with the Securities and Exchange Commission.

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


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SIGNATURES

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

 
SUNPOWER CORPORATION
 
 
 
Dated: October 31, 2013
By:  
/s/  CHARLES D. BOYNTON
 
 
 
 
 
Charles D. Boynton
 
 
Executive Vice President and
 
 
Chief Financial Officer




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Index to Exhibits
Exhibit Number
 
Description
10.1*†
 
Revolving Credit Agreement, dated July 3, 2013 by and among SunPower Corporation and Credit Agricole Corporate and Investment Bank, and the financial institutions party thereto.
31.1*
 
Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2*
 
Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1*
 
Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*+
 
XBRL Instance Document.
101.SCH*+
 
XBRL Taxonomy Schema Document.
101.CAL*+
 
XBRL Taxonomy Calculation Linkbase Document.
101.LAB*+
 
XBRL Taxonomy Label Linkbase Document.
101.PRE*+
 
XBRL Taxonomy Presentation Linkbase Document.
101.DEF*+
 
XBRL Taxonomy Definition Linkbase Document.

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

Exhibits marked with an extended cross (†) are subject to a request for confidential treatment filed with the Securities and Exchange Commission.

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


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