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INTRODUCTORY NOTES
Trademarks
The following terms, among others, are our trademarks and may be used in this report: SunPower®, Maxeon®, Oasis®, OasisGEO™, EnergyLink™, InvisiMount®, Tenesol®, Greenbotics®, Customer Cost of Energy™ ("CCOE™"), SunPower Spectrum™, Helix™, Equinox™, Signature™, SolarBridge®, and The Power of One™. Other trademarks appearing in this report are the property of their respective owners.
Unit of Power
When referring to our solar power systems, our facilities’ manufacturing capacity, and total sales, the unit of electricity in watts for kilowatts ("KW"), megawatts ("MW"), and gigawatts ("GW") is direct current ("DC"), unless otherwise noted as alternating current ("AC").
Levelized Cost of Energy ("LCOE")
LCOE is an evaluation of the life-cycle energy cost and life-cycle energy production of an energy producing system. It allows alternative technologies to be compared to different scales of operation, investment or operating time periods. 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.
Customer Cost of Energy™ ("CCOE™" ("CCOE")
Our customers are focused on reducing their overall cost of energy by intelligently integrating solar and other distributed generation, energy efficiency, energy management, and energy storage systems with their existing utility-provided energy. The CCOE™CCOE measurement is an evaluation of a customer’s overall cost of energy, taking into account the cost impact of each individual generation source (including the utility), energy storage systems, and energy management systems. The CCOE measurement includes capital costs and ongoing operating costs, along with the amount of electricity produced, stored, saved, or re-sold, and converts all of these variables into a common metric. The CCOE metric allows a customer to compare different portfolios of generation sources, energy storage, and energy management, and to tailor towards optimization.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not represent historical facts and the assumptions underlying such statements. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "potential," "will," "would," "should," and similar expressions to identify forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, the sufficiency of our cash and our liquidity, projected costs and cost reduction measures, development of new products and improvements to our existing products, the impact of recently adopted accounting pronouncements, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, our ability to monetize utilityour solar projects, legislative actions and regulatory compliance, competitive positions, management's plans and objectives for future operations, the sufficiency of our cash and our liquidity, our ability to obtain financing, our ability to comply with debt covenants or cure any defaults, our ability to repay our obligations as they come due, our ability to continue as a going concern, our ability to complete certain divestiture, spin-off or other strategic transactions, trends in average selling prices, the success of our joint ventures and acquisitions, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, expected restructuring charges, risks related to privacy and data security, and the likelihood of any impairment of project assets, long-lived assets, and long-lived assets.investments. These forward-looking statements are based on information available to us as of the date of this Annual Report on Form 10-K and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Please see "Item 1A. Risk Factors" herein and our other filings with the Securities and Exchange Commission ("SEC") for additional information on risks and uncertainties that could cause actual results to differ. 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 Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Our fiscal year ends
on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year, which end on the Sunday closest to the calendar month end.
PART I
ITEM 1. BUSINESS
Corporate History
SunPower has been a leader in the solar industry for over 30 years, originally incorporated in California in 1985 and reincorporated in Delaware during 2004 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 fiscal 2011, we became a majority owned subsidiary of Total Energies Nouvelles Activités USA,Solar INTL SAS, formerly known as Total Solar International SAS, Total Gas & Power USA, SAS and Total Energies Nouvelles Activités USA ("Total"), a subsidiary of Total S.A. ("Total S.A.").
Company Overview
We are a leading global energy company dedicated to changing the way our world is powered. We deliver complete solar solutions to residential, commercial, and power plant customers worldwide by offering:
Cutting-edge•cutting-edge solar module technology and solar power systems that are designed to generate electricity over a system life typically exceeding 25 years;
Integrated Smart Energy•integrated storage and software solutions that enable customers to effectively manage and optimize their CCOE measurement;energy usage and expenses;
Installation,•installation, construction, and ongoing maintenance and monitoring services; and
Financing•financing solutions that provide customers with a variety of options for purchasing or leasing high efficiency solar products at competitive energy rates.
Our global reach is enhanced by Total S.A.'s long-standing presence in many countries where significant solar installation goals are being established.
ResidentialRecent Developments
Announcement of Separation Transaction
On November 11, 2019, we announced plans to separate into two independent, complementary, strategically aligned and publicly-traded companies – SunPower and Maxeon Solar Technologies, Pte. Ltd. (“Maxeon Solar”). Each company will focus on distinct offerings built on extensive experience across the solar value chain.
•SunPower will continue as the leading North American distributed generation, storage and energy services company.
•Newly-formed Maxeon Solar will be the leading global technology innovator, manufacturer and marketer of premium solar panels.
Concurrent with the transaction, an equity investment of $298 million will be made in Maxeon Solar by long-time partner Tianjin Zhonghuan Semiconductor Co., Ltd. ("TZS"), a premier global supplier of silicon wafers, to help finance the scale-up of A-Series (Maxeon 5) production capacity.
The separation is expected to occur through a spin-off (the "Spin-Off") and distribution of all of the shares of Maxeon Solar held by SunPower to SunPower shareholders, followed by the TZS investment. The Spin-Off is intended to be tax-free to
SunPower stockholders. After the completion of the transactions, TZS will own approximately 28.848% of the diluted ordinary shares of Maxeon Solar and approximately 71.152% will be owned by SunPower shareholders, as of the record date of the spin-off. SunPower expects to complete the separation and Maxeon Solar capital injection in the second quarter of fiscal 2020. The investment by TZS, and consequently, the separation, is subject to certain conditions, including, among others, obtaining approvals from antitrust regulatory authorities in the Peoples Republic of China, as well as execution of internal reorganization and separation tax plan to impact to the tax-free nature of the transaction for federal income tax purposes and the effectiveness of a Form 20-F filing with the SEC for Maxeon Solar.
In order to effect the Spin-Off, on November 8, 2019, we entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) with Maxeon Solar. The Separation and Distribution Agreement governs the principal corporate transactions required to effect the separation and the Spin-Off distribution, and provides for the allocation between SunPower and Maxeon Solar of the assets, liabilities, and obligations of the respective companies as of the separation. In addition, the Separation and Distribution Agreement, together with certain Ancillary Agreements (defined below), provide a framework for the relationship between SunPower and Maxeon Solar subsequent to the completion of the Spin-Off.
Pursuant to the Separation and Distribution Agreement, consummation of the distribution is subject to certain conditions being satisfied or waived by us or Maxeon Solar, including, among other things: (1) completion of the transactions to complete the separation; (2) obtaining all necessary corporate approvals; (3) completion of all necessary filings under the U.S. securities laws; (4) receipt by our Board of Directors of one or more opinions from an independent valuation firm confirming the solvency and financial viability of each of us and Maxeon Solar immediately after the consummation of the distribution in a form acceptable to us; (5) receipt of an opinion regarding the qualification of the distribution as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355 of the U.S. Internal Revenue Code to our stockholders; (6) if applicable, the receipt of a waiver from the Singapore Securities Industry Council from the applicability of the Singapore Code on Take-overs and Mergers to the distribution; (7) the absence of any legal impediments prohibiting the distribution; and (8) the satisfaction or waiver of certain conditions precedent to the TZS investment set forth in the Investment Agreement (as further described below).
Also on November 8, 2019, we entered into an Investment Agreement (the “Investment Agreement”) with Maxeon Solar, TZS, and, for the limited purposes set forth therein, Total, pursuant to which TZS will purchase from Maxeon Solar ordinary shares that will, in the aggregate, represent approximately 28.848% of the outstanding ordinary shares of Maxeon Solar on a fully diluted basis after giving effect to the Spin-Off for $298 million. Pursuant to the Investment Agreement, we, Maxeon Solar, TZS and, with respect to certain provisions, Total have agreed to certain customary representations, warranties and covenants, including certain representations and warranties as to the financial statements, contracts, liabilities, and other attributes of Maxeon Solar, certain business conduct restrictions and covenants requiring efforts to complete the transactions.
Pursuant to the Investment Agreement, consummation of the TZS investment is subject to certain conditions being satisfied or waived by us or Maxeon Solar on the one hand, and TZS, on the other hand, including, among other things: (1) the completion of the separation and the distribution in accordance with the Separation and Distribution Agreement; (2) Maxeon Solar entering into definitive agreements for a term loan facility in an amount not less than $325 million; (3) Maxeon Solar obtaining certain additional financing in the form of a revolving credit facility of not less than $100 million or, alternatively, making certain working capital adjustment arrangements; (4) Maxeon Solar having no more than $138 million in debt and no less than $50 million in Cash (as defined in the Investment Agreement) immediately prior to the TZS investment; (5) execution of certain ancillary agreements and a shareholders agreement; (6) receipt of required governmental approvals; (7) completion of all necessary filings under the U.S. securities laws; (8) receipt by our Board of Directors of one or more opinions from an independent valuation firm confirming the solvency and financial viability of each of us and Maxeon Solar immediately after the consummation of the distribution in a form acceptable to us; (9) if applicable, the receipt of a waiver from the Singapore Securities Industry Council from the applicability of the Singapore Code on Take-overs and Mergers to the distribution and the investment; and (10) the absence of any legal impediments prohibiting the investment. Moreover, the obligations of us and Maxeon Solar, on the one hand, and TZS, on the other hand, to consummate the investment are subject to certain other conditions, including, among other things, (A) the accuracy of the other party’s representations and warranties (subject to certain materiality qualifiers) and (B) the other party’s performance of its agreements and covenants contained in the investment Agreement in all material respects. In addition, the obligation of TZS to consummate the investment is subject to the absence of any Material Adverse Effect (as defined in the Investment Agreement) on Maxeon Solar occurring from the date of the Investment Agreement through the closing of the Investment, subject, in each case, to certain exclusions set forth in the Investment Agreement.
The Investment Agreement provides certain termination rights for each of us and TZS, and further provides that, if the Investment Agreement is terminated, a termination fee may be payable under specified circumstances, including: (1) if we
terminate to accept a superior proposal (as described in the Investment Agreement), a fee of $80 million payable by us to TZS; (2) if our Board of Directors recommends an alternative transaction that would constitute a sale of us and TZS terminates the Investment Agreement, a fee of $80 million payable by us to TZS; (3) if, as a result of an intentional breach by us or Maxeon Solar of our respective representations, warranties or covenants and, as a result, either (a) the transactions are not capable of being satisfied by August 8, 2020 (or such other extended date as contemplated under the Investment Agreement) (the “Outside Date”), (b) any final, non-appealable government order prohibiting the transactions has been issued, or (c) the closing conditions related to representations, warranties and covenants of us and Maxeon Solar are not capable of being satisfied, then a fee of $20 million payable by us to TZS; (4) if certain approvals by the Chinese government are not obtained, then a fee of $35 million payable by TZS to us; or (5) if, as a result of an intentional breach by TZS of its representations, warranties or covenants and, as a result, either (a) the transactions are not capable of being satisfied by the Outside Date, (b) any final, non-appealable government order prohibiting the transactions has been issued, or (c) the closing conditions related to representations, warranties and covenants of TZS are not capable of being satisfied, then a fee of $35 million payable by TZS to us. In addition, under the Investment Agreement, in the event that, within seven months after termination of the Investment Agreement because the TZS investment could not be completed by the Outside Date, (1) we enter into an agreement for or consummate an alternative transaction that would constitute a sale of our company, and prior to the termination of the Investment Agreement a third party had submitted a proposal for a transaction that would constitute a sale of us, then we are obligated to pay TZS a fee of $80 million, or (2) we (a) enter into an agreement for or consummate an alternative transaction that constitutes a sale of (i) 50% or more of Maxeon Solar’s equity or assets or (ii) 50% or more of the business being contributed to Maxeon Solar in the separation and (b) prior to the termination of the Investment Agreement a third party had submitted a proposal for an alternative transaction that constitutes a sale of (i) 50% or more of Maxeon Solar’s equity or assets or (ii) 50% or more of the business being contributed to Maxeon Solar in the separation, then we are obligated to pay TZS a fee of $20 million.
The Separation and Distribution Agreement and Investment Agreement contemplate certain additional agreements be entered into between us, Maxeon Solar and other parties in connection with the Spin-Off and related investment by TZS, including a tax matters agreement, employee matters agreement, transition services agreement, brand framework agreement, cross license agreement, collaboration agreement and supply agreement (collectively, the “Ancillary Agreements”), each as we previously noted in our announcement of the contemplated transaction.
We expect to incur total costs associated with the separation activities of $57.6 million through the completion of the separation. Furthermore, we have also concluded on the legal form of the separation and determined that Maxeon Solar will be the spinnee in the U.S. Accordingly, during the first half of fiscal 2020, we expect to effect certain internal reorganizations of, and transactions among, our wholly owned subsidiaries and operating activities in preparation for the legal form of separation.
Common Stock Offering
On November 25, 2019, we completed an offering of 25,300,000 shares of our common stock at a price of $7.0 per share, which included 3,300,000 shares issued and sold pursuant to the underwriter's exercise in full of its option to purchase additional shares, for gross proceeds of $177.1 million. We received net proceeds of $171.8 million from the offering, after deducting underwriter discounts which were recorded as a reduction of Additional Paid In Capital ("APIC"). We incurred other expenses of $1.1 million for the transaction which was recorded in APIC. We intend to use the net proceeds from the offering for general corporate purposes, including partially funding the repayment of our senior convertible debentures. Refer to "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements— Note 18. Subsequent Events" for further details.
Financing for Safe Harbor Panels Inventory
In September 2019, we entered into the Solar Sail LLC ("Solar Sail") and Solar Sail Commercial Holdings, LLC ("Solar Sail Commercial") joint ventures with Hannon Armstrong Sustainable Infrastructure Capital, Inc. (“Hannon Armstrong”), to finance the purchase of 200 megawatts of panel inventory, in accordance with IRS safe harbor guidance, to preserve the 30% federal Investment Tax Credit (“ITC”) for third-party owned commercial and residential systems. As of December 29, 2019, we had $100.6 million borrowed and outstanding under this agreement. We have the ability to draw up to $112.8 million under this agreement as of December 29, 2019. A portion of the value of the safe harbored panels was funded by equity contributions in the joint venture of $6.0 million each by us and Hannon Armstrong.
The ITC for systems placed into service in 2020 is 26%, and will step down to 22% in 2021 and then remain at 10%
for commercial customers and zero for residential customers in 2022 and beyond. The safe harbor facility is expected to
preserve 30% ITC value for projects placed in service from now through mid-2022, based on forecasted deployment of the panels.
Sale and Leaseback of Hillsboro Facility
In September 2019, we completed the sale of our manufacturing facility buildings in Hillsboro, Oregon, to RagingWire Data Centers, Inc., through its affiliate for a purchase price of $63.5 million (the "Sale-Leaseback Transaction”). In connection with the Sale-Leaseback Transaction, we also entered into a lease agreement to lease back a portion of the facility, consisting of the module assembly building for three years. Further, we agreed to complete the decommissioning of certain equipment and structures in the buildings, which was completed in the fourth quarter of fiscal 2019.
Net cash consideration of $39.7 million was received at the closing, net of fees and expenses of $3.8 million, and a holdback amount of $20.0 million for timely completion of decommissioning services. The holdback amount of $20.0 million was received by us in the fourth quarter of fiscal 2019, as the related decommissioning services were completed.
In connection with the sale transaction, we recognized a total gain of $25.2 million, which is included within "Cost of revenue" in our consolidated statements of operations for fiscal 2019. As of December 29, 2019, we have a deferred gain of $3.8 million that represents the excess of fair market value of the building leased back to be recognized over the leaseback term of three years.
For additional information, refer to "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4. Business Divestitures and Sale of Assets."
Sale of Residential Lease Assets
In fiscal 2018, we created SunStrong Capital Holdings, LLC (“SunStrong”) to own and operate a portion of our residential lease assets (“Residential Lease Portfolio”), and subsequently contributed to SunStrong our controlling equity interests in a number of solar project entities that we controlled. As previously disclosed, on November 5, 2018, we entered into a Purchase and Sale Agreement (the “PSA”) with HA SunStrong Capital LLC (“HA SunStrong Parent”), a subsidiary of Hannon Armstrong, to sell 49.0% of the SunStrong membership interests. Following the closing of the PSA, we do not have the power to unilaterally make decisions that affect the performance of SunStrong, and accordingly, we deconsolidated SunStrong, thereby deconsolidating majority of our residential lease assets portfolio.
On September 27, 2019, we sold the remainder of the residential lease assets still owned by us, that were not previously sold. These residential lease assets were sold under a new assignment of interest agreement entered into with SunStrong. SunStrong also assumed debts related to the residential lease assets sold. We recognized a net loss of $7.2 million on this sale within "Loss on sale and impairment of residential lease assets" on our consolidated statements of operations for fiscal 2019.
For additional information, refer "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4. Business Divestitures and Sale of Assets."
Sale of Commercial Sale-Leaseback Portfolio
On March 26, 2019, we entered into a Membership Interest Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with a wholly-owned subsidiary of Goldman Sachs Renewable Power LLC. Pursuant to the Purchase and Sale Agreement, we agreed to sell, in exchange for cash consideration of up to $86.9 million, leasehold interests in operating solar photovoltaic electric generating projects (the “Projects”) subject to sale-leaseback financing arrangements with one or more financiers (each a "Lessor"). The Projects are located at approximately 200 sites across the United States, and represent in aggregate, approximately 233 MW of generating capacity. The portfolio of Projects financed by each Lessor represents a separate asset (a “Portfolio”) for which the price is separately agreed and stated in the Purchase and Sale Agreement. Upon the sale of the applicable membership interests, the related assets have been deconsolidated from our balance sheet.
In connection with the sale transaction, we received aggregate consideration of $81.3 million and recognized a total gain of $143.4 million, which is included within "Gain on business divestiture" in our consolidated statements of operations for fiscal 2019.
For additional information, refer "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4. Business Divestitures and Sale of Assets."
SegmentsOverview
Consistent with fiscal 2018, our segment reporting consists of our upstream and downstream structures. Under this segmentation, the SunPower Energy Services Segment ("SunPower Energy Services" or "Downstream") refers to sales of solar energy solutions in the North America region previously included in the legacy Residential Segment and Commercial Segment (collectively previously referred to as "Distributed Generation" or "DG") including direct sales of turn-key engineering, procurement and construction ("EPC") services, sales to our third-party dealer network, sales of energy under power purchase agreements ("PPAs"), storage solutions, cash sales and long-term leases directly to end customers, and sales to resellers. SunPower Energy Services Segment also includes sales of our global Operations and Maintenance ("O&M") services. The SunPower Technologies Segment ("SunPower Technologies" or "Upstream") refers to our technology development, worldwide solar panel manufacturing operations, equipment supply to resellers, commercial and residential end-customers outside of North America ("International DG"), and worldwide power plant project development and project sales.
Our Chief Executive Officer, as the chief operating decision maker (“CODM”), reviews our business, manages resource allocations and measures performance of our activities based on financial information for the SunPower Energy Services Segment and SunPower Technologies Segment.
SunPower Energy Services
North America Residential Channels
Residential Systems
We offer a complete set of residential solutions that deliver value to homeowners and our dealer partners. We have developed the capability to deliver AC panels with factory-integrated microinverters. The AC system architecture, as compared with DC systems, facilitates direct panel installation, eliminating the need to mount or assemble additional components on the roof or the side of a building, driving down system costs, improving overall system reliability, and providing improved, cleaner design aesthetics. As part of our complete solution approach, we offer our Equinox™Equinox residential market product, a fully-integrated solar platform utilizing Maxeon® cells, AC panel architecture,microinverter, and EnergyLink™EnergyLink monitoring hardware to combine solar power production and energy management, allowing residential customersinstallers to quickly and easily complete their system installations and to ensure always-on connectivity so homeowners can easily access their data anytime, anywhere. The Equinox platform is also sold with our Smart EnergyEnergyLink software analytics, which provides our customers with detailed information about their energy consumption and production, enabling them to further reduce their energy costs.
Concurrent with the sale of certain assets and intellectual property related to the production of microinverters to Enphase on August 9, 2018, we entered into a Master Supply Agreement (the “MSA”) pursuant to which, with certain exceptions, we have agreed to exclusively procure module-level power electronics (“MLPE”) and AC cables from Enphase to meet all of our needs for MLPE and AC cables for the manufacture and distribution of AC modules and discrete MLPE system solutions for the U.S. residential market, including our current Equinox solution and any AC module-based successor products. We have also agreed not to pair any third-party MLPE or AC cables with any of our modules for use in the grid-tied U.S. residential market where an Enphase MLPE is qualified and certified for such module. The initial term of the MSA is through December 31, 2023, and the MSA term will automatically be extended for successive two-year periods unless either party provides written notice of non-renewal.
We offer the SunPower® InvisiMount® residential mounting system in our product portfolio. The InvisiMount® system is designed specifically for use with our panels and reduces installation time through pre-assembled parts and integrated grounding. The InvisiMount system is well-suited for residential sloped roof applications and provides design flexibility and enhanced aesthetics by delivering a unique, "floating" appearance.
We support our hardware development with investments in our proprietary set of advanced monitoring applications (the "SunPower Monitoring System") and our EnergyLink™EnergyLink customer portal, which enable customers to gain visibility into their solar system production and household energy consumption. This software is available for use on the web or through the SunPower mobile application on smartphones and tablets. In fiscal 2016, we issued nine software upgrades to our EnergyLink customer portal offering and, as a result, have experienced increases in customer traffic, engagement, satisfaction, and referrals.
Residential Sales Channels, Residential Leasing Program, and other Financing Options
We sell our residential solar energy solutions to end customers through a variety of means, including cash sales and long-term leases directly to end customers, sales to resellers, including the Company'sour third-party global dealer network, and sales of the Company'sour operations and maintenance (“O&M”) services.
We offer financing programs that are designed to offer customers a variety of options to obtain high efficiency solar products and systems, including loans arranged through our third-party lending partners, in some cases for no money down, or by leasing high efficiency solar systems at competitive energy rates. OurSince its launch in 2011, our residential lease program, in partnership with third-party investors, provides U.S. customers SunPower systems under 20-year lease agreements that include system maintenance and warranty coverage, including warranties on system performance. SunPower residential lease customers have the option to purchase their leased solar systems upon the sale or transfer of their home. These financing options enhance our ability to provide individually-tailored solar solutions to a broad range of residential customers.
As part of our strategic goals to de-lever our balance sheet and simplify our financial statements, we announced during the fourth quarter of 2017 our decision to monetize our interest in more than 400 MW of residential lease assets that historically have been consolidated in our balance sheets. On November 5, 2018, we sold a portion of our interest in certain entities that have historically held the assets and liabilities comprising our residential lease business to an affiliate of Hannon Armstrong. On September 27, 2019, we sold the majority of the remainder of our residential lease assets.
Commercial Sales Channels and Financing Options
We also have the abilitysell our commercial solar energy solutions to sell residential systemscommercial and public entity end customers through sales to 8point3 Energy Partners LP, a joint Yieldco vehicle in which we have an approximately 37% ownership stake, through transactions in which we sell portfolios of residential leases. our third-party dealer network
For additional information, on transactions with 8point3 Energy Partners LP, please seerefer to "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4. Business Divestitures and Sale of Assets, Note 7. Solar Services, Note 10. Equity Method Investments" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.Investments, and Note 11. Debt and Credit Sources."
North America Commercial Direct
Commercial Roof, Carport, and Ground Mounted Systems
As part of our complete solution product approach, we offer our Helix™Helix commercial market product. The Helix system is a pre-engineered, modular solution that combines our industry-leading solar module technology with integrated plug-and-play power stations, cable management systems, and mounting hardware that is built to last and fast to install, enabling customers to scale their solar programs quickly with minimal business disruption. The Helix platform is standardized across rooftop, carport, and ground installations and designed to lower system cost while improving performance. The Helix platform is also bundled with our Smart Energy software analytics, which provides our customers with detailed information about their energy consumption and production, enabling them to further reduce their energy costs.
We also offer a variety of commercial solutions designed to address a wide range of site requirements for commercial rooftop, parking lot, and open space applications, including a portfolio of solutions utilizing framed panels and a variety of internally or externally developed mounting methods for flat roof and high tilt roof applications. Our commercial flat rooftop systems are designed to be lightweight and to interlock, enhancing wind resistance and providing for secure, rapid installations.
We offer parking lot structures designed specifically for SunPower panels, balance of system components, and inverters and in fiscal 2015 expanded our capability to design and install innovative solar structures and systems for carport applications. These systems are typically custom design-build projects that utilize standard templates and design best practices to create a solution tailored to unique site conditions. SunPower's highest efficiency panels are especially well suited to stand-alone structures, such as those found in parking lot applications, because our systems require less steel and other materials per unit of power or energy produced as compared with our competitors.
Sales Channels and Financing Options
We sell our commercial solar energy solutions to commercial and public entity end customers through a variety of means, including direct sales of turn-key engineering, procurement and construction ("EPC") services, salesselling energy to our third-party global dealer network and to 8point3 Energy Partners,customers under power purchase agreements ("PPAs"), and sales of our O&M services. We also offer some of our commercial customers alternatives to purchasing systems, such as selling energy to them under power purchase agreements ("PPAs").
Power Plants
Power Plant Systems
We offer the industry's first modular solar power block, the Oasis® system, which combines SunPower solar panels and tracker technology into a scalable 1.5 MW solar power block, which streamlines the construction process while optimizing the use of available land by conforming to the contours of the production site. The power block kits are shipped pre-assembled to
the job site for rapid field installation. The Oasis operating system is designed to support future grid interconnection requirements for large-scale solar power plants, such as voltage ride-through and power factor control. More than 2 GW of the Oasis system is installed or under contract worldwide. The Oasis system was deployed at the 748 MW Solar Star Projects in California, formerly known as Antelope Valley Solar Projects, the world's largest solar power project to date. Our robotic solar power plant cleaning system technology has been deployed on many of the utility-scale solar power systems for which we provide O&M services. The robots may be configured for use with a variety of solar panels and mounting types, including fixed-tilt arrays and single access trackers and significantly reduce water use and improve system performance.
Our single axis tracking systems automatically pivot solar panels to track the sun's movement throughout the day. This tracking feature increases the amount of sunlight that is captured and converted into energy by up to 30% over flat or fixed-tilt systems, depending on geographic location and local climate conditions. A single motor and drive mechanism can control 10 to 20 rows, or more than 200 KW, of solar panels. This multi-row feature represents a cost advantage for our customers over dual axis tracking systems, as such systems require more motors, drives, land, and power to operate per KW of capacity.
Utility-Scale Solar Power System Construction and Development
Our global project teams have established a scalable, fully integrated, vertical approach to constructing and developing utility-scale photovoltaic power plants in a sustainable way. Our industry experienced power plant development and project finance teams evaluate sites for solar developments; obtain land rights through purchase and lease options; conduct environmental and grid transmission studies; and obtain building, construction and grid-interconnection permits, licenses, and regulatory approvals.
We enter into turnkey EPC agreements with customers under which we design, engineer, construct, commission, and deliver functioning rooftop- and ground-mounted solar power systems. This includes the development, execution, and sale of solar power plants, which generally include the sale or lease of related real estate. Under such development projects, the plants and project development rights, initially owned by us, are later sold to third parties. In the United States, commercial and electric utility customers typically choose to purchase solar electricity under a PPA with an investor or financing company that buys the system from us. In other areas, such as the Middle East, Africa, and South America, projects are typically purchased by an investor or financing company and operated as central-station solar power plants.
Sales Channels and Financing
Our power plant business refers to sales of our large-scale solar products and systems, including power plant project development and project sales, EPC services for power plant construction, power plant O&M services and component sales for power plants developed by third parties, sometimes on a multi-year, firm commitment basis. Our utility-scale solar power systems are typically purchased by an investor or financing company and operated as central-station solar power plants. We also sell utility-scale solar power plants to 8point3 Energy Partners.
We are able to utilize various means to finance our utility-scale power plant development and construction projects, which include arranging tax equity financing structures, utilizing non-recourse project debt facilities, and executing our HoldCo strategy in conjunction with project sales to 8point3 Energy Partners.
Operations and& Maintenance
Our solar power systems are designed to generate electricity over a system life typically exceeding 25 years. We offer our customers various levels of post-installation O&M services with the objective of optimizing our customers' electrical energy production over the life of the system. The terms and conditions of post-installation O&M services may provide for remote monitoring of system production and performance, including providing performance reports, preventative maintenance, including solar module cleanings, corrective maintenance, and rapid-response outage restoration, including repair or replacement of all system components covered under warranty or major maintenance agreements.
We incorporate leading information technology platforms to facilitate the management of our solar power systems operating worldwide.globally. Real-time flow of data from our customers' sites is aggregated centrally where an engine applies advanced solar specific algorithms to detect and report potential performance issues. Our work management system routes any anomalies to the appropriate responders to help ensure timely resolution. Our performance model, PVSim, was developed over the last 2021 years and has been audited by independent engineers. Solar panel performance coefficients are established through independent third-party testing. The SunPower Monitoring System also provides customers real-time performance status of their solar power system, with access to historical or daily system performance data through our customer website (www.sunpowermonitor.com). The SunPower Monitoring System is available through applications on Apple® and Android™
devices. Some customers choose to install "digital signs" or kiosks to display system performance information from the lobby of their facility. We believe these displays enhance our brand and educate the public and prospective customers about solar power.
We typically provide a system output performance warranty, separate from our standard solar panel product warranty, to customers that have subscribed to our post-installation O&M services. The system output performance warranty expires upon termination of the post-installation O&M services related to the system. In connection with system output performance warranties, we agree to pay liquidated damages in the event the system does not perform to the stated specifications, with certain exclusions. The warranty excludes system output shortfalls attributable to force majeure events, customer curtailment, irregular weather, and other similar factors. In the event that the system output falls below the warrantied performance level during the applicable warranty period, and provided that the shortfall is not caused by a factor that is excluded from the performance warranty, the warranty provides that SunPower will pay the customer an amount based on the value of the shortfall of energy produced relative to the applicable warrantied performance level. For leased systems, we provide a system output performance warranty with similar terms and conditions as that for non-leased systems.
We calculate our expectation of system output performance based on a particular system’s design specifications, including the type of panels used, the type of inverters used, site irradiation measures derived from historical weather data, our historical experience as a manufacturer, EPC services provider, and project developer as well as other unique design considerations such as system shading. The warrantied system output performance level varies by system depending on the characteristics of the system and the negotiated agreement with the customer, and the level declines over time to account for the expected degradation of the system. Actual system output is typically measured annually for purposes of determining whether warrantied performance levels have been met.
Our primary remedy for the system output performance warranty is our ongoing O&M services which enable us to quickly identify and remediate potential issues before they have a significant impact on system performance. We also have remedies in the form of our standard product warranties and third-party original equipment manufacturer warranties that cover certain components, such as inverters, to prevent potential losses under our system output performance warranties or to minimize further losses.
In September 2019, we signed a definitive agreement to sell our O&M business. We expect to complete the sale of our O&M business during the first half of fiscal 2020 subject to the satisfaction of customary conditions precedent, including receipt of certain third-party consents and approvals.
Technology
We believe that we possess a technological advantage as the leading manufacturer of back-contact, back-junction cells that enables our panels to produce more electricity, last longer and resist degradation more effectively. We believe that our technology allows us to deliver:
superior performance, including the ability to generate up to 45% 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; and
solar power systems that are designed to generate electricity over a system life typically exceeding 25 years.
With industry-leading conversion efficiencies, we continuously improve our Maxeon® solar cells and believe they perform better and are tested more extensively to deliver maximum return on investment when compared with the products of our competitors.
Panels
Solar panels are solar cells electrically connected together and encapsulated in a weatherproof panel. Solar cells are semiconductor devices that convert sunlight into direct current electricity. Our solar cells are designed without highly reflective metal contact grids or current collection ribbons on the front of the solar cell, which provides additional efficiency and allows our solar cells to be assembled into solar panels with a more uniform appearance. Our X-Series solar panels, made with our Maxeon Gen 3 solar cells, have demonstrated panel efficiencies exceeding 22% in high-volume production. In fiscal 2016, one of our standard production modules set a world record for aperture area efficiency as tested by National Renewable Energy Laboratory ("NREL"). We believe our X-Series solar panels are the highest efficiency solar panels available for the mass market, and we continue to focus on increasing cell efficiency even as we produce solar cells with over 25% efficiency in a lab
setting. Because our solar cells are more efficient relative to conventional solar cells, when our solar cells are assembled into panels, the assembly cost per watt is less because more power can be incorporated into a given size panel. Higher solar panel efficiency allows installers to mount a solar power system with more power within a given roof or site area and can reduce per watt installation costs. Our suite of SunPower solar panels provides customers a variety of features to fit their needs, including the SunPower® Signature™ Black design which allows the panels to blend seamlessly into the rooftop. We offer panels that can be used both with inverters that require transformers as well as with the highest performing transformer-less inverters to maximize output. Both our X-Series and E-Series panels have proven performance with low levels of degradation, as validated by third-party performance tests. Additionally, in fiscal 2016, we launched a new line of solar panels under the Performance Series product name. These products utilize a proprietary manufacturing process to assemble conventional silicon solar cells into panels with increased efficiency and reliability compared with conventional panels. Designed to target a new set of customers and global markets, we expect Performance Series panels to contribute to the growth of all three of SunPower’s business segments.
Balance of System Components
"Balance of system components" are components of a solar power system other than the solar panels, and include mounting structures, charge controllers, grid interconnection equipment, and other devices, depending on the specific requirements of a particular system and project. We possess advanced module-level control electronics in our technology portfolio that enable longer series strings and significant balance of system components cost reductions in large arrays.
Inverters
Every solar power system needs an inverter to transform the direct current electricity collected from the solar panels into utility-grade AC power that is ready for use. We sell inverters manufactured by third parties, some of which are SunPower-branded. We also have integrated microinverter technology that converts DC generated by a single solar photovoltaic panel into AC directly on the panel. We are utilizing this technologySubsequent to develop next generationthe sale of our microinverter business in August 2018, we exclusively procure microinverters for use with our high efficiency solar panels.the manufacture and distribution of AC modules and discrete MLPE system solutions for the U.S. residential market from Enphase. Panels with these factory-integrated microinverters perform better in shaded applications compared to conventional string inverters and allow for optimization and monitoring at the solar panel level, enabling maximum energy production by the solar system.
Warranties
SunPower provides a 25-year standard solar panel product warranty for defects in materials and workmanship. The solar panel product warranty also warrants that the panel will provide 95% of the panel’s minimum peak power rating for the first five years, declining due to expected degradation by no more than 0.4% per year for the following 20 years, such that the power output at the end of year 25 will be at least 87% of the panel’s minimum peak power rating. Our warranty provides that we will repair or replace any defective solar panels during the warranty period. We also pass through long-term warranties from the original equipment manufacturers of certain system components to customers for periods ranging from five to 20 years. In addition, we generally warrant our workmanship on installed systems for periods ranging up to 25 years.
Smart Energy
We see “Smart Energy” as a way to harness our world’s energy potential by connecting the most powerful and reliable solar systems on the market with an increasingly vast array of actionable data that can help our customers make smarter decisions about their energy use. Our Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids—all personalized through easy-to-use customer interfaces. In order to enhance the portfolio of Smart Energy solutions we offer, we continue to invest in integrated technology solutions to help customers manage and optimize their CCOE measurement.
We have an investment in Tendril Networks, Inc. and have licensed its data-driven Energy Services Management Platform. We believe that this open, cloud-based software platform provides the infrastructure, analytics and understanding required to power the development of new Smart Energy applications that will deliver personalized energy services to our residential customers.
We have also negotiated several agreements with residential and commercial energy storage providers to integrate storage technology into our residential and commercial solar solutions. By combining storage with energy management, we lower our customers' cost of energy through improvements in self-consumption, rate arbitrage, demand management, and grid and market participation. We continue to work to make combined solar and storage solutions broadly commercially available.
We are developingcontinue to work with Enphase to develop next generation microinverters for use with our high efficiency solar panels in order to enhance our portfolio of Smart Energy solutions. Panels with these factory-integrated microinverters can convert direct current generated by the solar panel into alternating current, enabling optimization and monitoring at the solar panel level to ensure maximum energy production by the solar system.
SunPower Technologies
Our SunPower Technologies Segment refers to our technology development, worldwide solar panel manufacturing operations, equipment supply to resellers, commercial and residential end-customers outside of North America ("International DG"), and worldwide power plant project development and project sales.
As part of our separation transaction announced on November 11, 2019, we formed Maxeon Solar in the third quarter of 2019 in Singapore to serve as the holding company of businesses to be contributed to Maxeon Solar by SunPower in connection with a spin-off of the following businesses that are currently held by SunPower (collectively, the “Maxeon Business”):
•SunPower’s non-U.S. manufacturing business, including solar cell and module manufacturing facilities located in France, Malaysia, Mexico and the Philippines;
•SunPower’s international sales and distribution business outside of the 50 U.S. states, the District of Columbia and Canada;
•a 20% interest in Huansheng Photovoltaic (Jiangsu) Co., Ltd. (formerly known as Dongfang Huansheng Photovoltaic (Jiangsu) Co., Ltd.) (“Huansheng”), a joint venture to manufacture Performance solar panels (the “Performance Line” or “P-Series”) in China;
•an 80% interest in SunPower Systems International Limited, an international sales company based in Hong Kong;
•a 25% interest in Huaxia CPV Power Co. Ltd., a joint venture to manufacture and deploy low-concentration photovoltaic concentrator technology in Inner Mongolia and other regions in China; and
•a 3.7% interest in Deca Technologies Inc. (“Deca Tech”), a privately held wafer-level interconnect foundry business with headquarters in Tempe, Arizona and manufacturing in the Philippines.
Our Products
Our primary products are the Maxeon Line of interdigitated back contact ("IBC") solar cells and panels, and the Performance Line (P-Series) of shingled solar cells and panels. We believe the Maxeon Line of solar panels are the highest-efficiency solar panels on the market with an aesthetically pleasing design, and the Performance Line of solar panels offer a high-value, cost-effective solution for applications compared to conventional solar panels. The Maxeon Line, which includes E-
Series (Maxeon 2), X-Series (Maxeon 3) and A-Series (Maxeon 5) solar panels, is primarily targeted at residential and commercial customers across the globe. The Performance Line is primarily targeted at the utility-scale power plant market.
Solar panels are made using solar cells electrically connected together and encapsulated in a weatherproof panel. Solar cells are semiconductor devices that convert sunlight into direct current electricity. Our solar cells are designed without highly reflective metal contact grids or current collection ribbons on the front of the solar cell, which provides additional efficiency and allows our solar cells to be assembled into solar panels with a more uniform appearance. Our X-Series (Maxeon 3) solar panels, made with our X-Series (Maxeon 3) solar cells, have demonstrated panel efficiencies exceeding 22% in high-volume production. In fiscal 2016, one of our standard production modules set a world record for aperture area efficiency as tested by the National Renewable Energy Laboratory. We believe our X-Series (Maxeon 3) solar panels are the highest efficiency solar panels available for the mass market, incorporating Gen 3 solar cells with average efficiency of over 25%. Because our solar cells are more efficient relative to conventional solar cells, when our solar cells are assembled into panels, the assembly cost per watt is less because more power is incorporated into a given size panel. Higher solar panel efficiency allows installers to mount a solar power system with more power within a given roof or site area and can reduce per watt installation costs. Our suite of solar panels provides customers a variety of features to fit their needs, including the SunPower Signature black design which allows the panels to blend seamlessly into the rooftop. Both our X-Series (Maxeon 3) and E-Series (Maxeon 2) panels have proven performance with low levels of degradation, as validated by third-party performance tests. Our latest technology, or A-Series (Maxeon 5), offers solar cell efficiency of up to 25%, roughly in line with our X-Series (Maxeon 3) technology. When fully ramped, we expect A-Series (Maxeon 5) panels to be significantly less expensive to manufacture than E-Series (Maxeon 2) and X-Series (Maxeon 3) technology. We eventually plan to transform all of our legacy E-Series (Maxeon 2) production capacity in Fab 3 to A-Series (Maxeon 5). Due to higher manufacturing equipment throughput, we expect to be able to retrofit Fab 3 with approximately 1.9 gigawatts of A-Series (Maxeon 5) capacity—more than twice that of our legacy E-Series (Maxeon 2) technology.
Since fiscal 2016, we launched a line of solar panels under the P-Series and Performance product names, which is now referred to as our Performance Line of solar panels. These products utilize a proprietary manufacturing process to assemble conventional silicon solar cells into panels with increased efficiency and reliability compared with conventional panels. Performance Line solar panels are produced by Huansheng, a Yixing, China based joint venture in which we will own a 20% equity stake at the time of distribution. Huansheng currently has a capacity to produce approximately 1.9 gigawatts per year of Performance Line solar panels and has indicated that it plans to expand capacity to approximately 5 gigawatts per year by 2021. We have the right to take up to 33% of Huansheng’s capacity for sale directly into global DG markets, and a further 33% for sale into global power plant markets through a marketing joint venture in which we own an 80% stake.
Our proprietary technology platforms, including the Maxeon Line and Performance Line, target distinct market segments, serving both the distributed generation and power plant markets. This ability to address the full market spectrum allows us to benefit from a range of diverse industry drivers and retain a balanced and diversified customer base.
We believe that our Maxeon Line of IBC technology stands apart from the competition in key metrics that our customers value, including efficiency, energy yield, reliability and aesthetics.
We believe the combination of these characteristics enables the delivery of an unparalleled product and value proposition to our customers. Our A-Series (Maxeon 5) panels deliver 60% more energy in any given amount of roof space over the first 25 years, as compared to conventional panels.
We believe that we possess a technological advantage as the leading manufacturer of back-contact, back-junction cells that enables our panels to produce more electricity, last longer and resist degradation more effectively. We believe that our technology allows us to deliver:
•superior performance, including the ability to generate up to 35% 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; and
•solar power systems that are designed to generate electricity over a system life typically exceeding 25 years.
With industry-leading conversion efficiencies, we continuously improve our Maxeon solar cells and believe they perform better and are tested more extensively to deliver maximum return on investment when compared with the products of our competitors.
Warranties
SunPower provides a combined 25-year standard solar panel product and power warranty for defects in materials and workmanship. The solar product warranty also warrants that Maxeon panels will provide 98% of the panel’s minimum peak power ("MPP") rating for the first year, declining due to expected degradation by no more than 0.25% per year for the following 24 years, such that the power output at the end of year 25 will be at least 92% of the panel’s MPP rating. Our Performance panels are warranted to provide 97% of the panel’s MPP rating for the first year, declining due to expected degradation by no more than 0.6% per year for the following 24 years, such that the power output at the end of year 25 will be at least 82.6% of the panel’s MPP rating. Our warranty provides that we will repair or replace or reimburse any defective solar panels during the warranty period. We also pass through long-term warranties from the original equipment manufacturers of certain system components to customers for periods ranging from five to 20 years. In addition, we generally warrant our workmanship on installed systems for periods ranging up to 25 years.
Research and Development
We engage in extensive research and development efforts to improve solar cell efficiency through the enhancement of our existing products, development of new techniques, and reducingby reductions in manufacturing cost and complexity. Our research and development group works closely with our manufacturing facilities, our equipment suppliers and our customers to improve our solar cell design and to lower solar cell, solar panel and system product manufacturing and assembly costs. In addition, we have dedicated employees who work closely with our current and potential suppliers of crystalline silicon, a key raw material used in the manufacture of our solar cells, to develop specifications that meet our standards and ensure the high quality we require, while at the same time controlling costs. Under our Research & Collaboration Agreement with Total, our majority stockholder, we have established a joint committeeRefer to engage in long-term research and development projects with continued focus on maintaining and expanding our technology position in the crystalline silicon domain and ensuring our competitiveness. Please see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operations—Research and Development.Development."
Supplier Relationships,
Manufacturing and Panel AssemblySuppliers
We purchase polysilicon, ingots, wafers, solar cells, balance of system components, and inverters from various manufacturers on both a contracted and a purchase order basis. We have contracted with some of our suppliers for multi-year supply agreements. Under such agreements, we have annual minimum purchase obligations and in certain cases prepayment obligations. Please seeRefer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations"Obligations" for further information regarding the amount of our purchase obligations in fiscal 20172020 and beyond. Under other supply agreements, we are required to make prepayments to vendors over the terms of the arrangements. As of January 1, 2017,December 29, 2019, advances to suppliers totaled $284.8$121.4 million. We may be unable to recover such prepayments if the credit conditions of these suppliers materially deteriorate or if we are otherwise unable to fulfill our obligations under these supply agreements. For further information regarding our future prepayment obligations, please seerefer to "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies—Advances to Suppliers.Suppliers." We currently believe our supplier relationships and various short- and long-term contracts will afford us the volume of material and services required to meet our planned output over the next several years. For more information about risks related to our supply chain, please seeincluding without limitation risks relating to announced tariffs on solar cells and modules imported into the U.S., refer to "Item 1A. Risk Factors—Risks Related to Our Supply Chain.Chain."
We 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. Crystalline silicon is the principal commercial material for solar cells and is used in several forms, including single-crystalline, or monocrystalline silicon, multicrystalline,multi-crystalline, or polycrystalline silicon, ribbon and sheet silicon, and thin-layer silicon. Our solar cell value chain starts with high purity silicon called polysilicon. Polysilicon is created by refining quartz or sand.
Polysilicon is melted and grown into crystalline ingots and sawed into wafers by business partners specializing in those processes. The wafers are processed into solar cells in our manufacturing facilities located in the Philippines and Malaysia. During fiscal 2016, we substantially completed the construction of theOur solar cell manufacturing facility that we own and operate in the Philippines. Once fully operational, which is expected to occur in the first half of fiscal 2017, the facilityPhilippines has a plannedtotal rated annual capacity of 350500 MW. The solar cell manufacturing facility we own and operate in Malaysia has a total rated annual capacity of over 800 MW.MW and is currently being upgraded to 1,900 MW of A-Series (Maxeon 5) capacity.
We use our solar cells to manufacture our X-X-Series (Maxeon 3) and E-seriesE-Series (Maxeon 2) solar panels at our solar panel assembly facilities located in Mexico and France, while we source solar cells from third parties for use in our Performance SeriesP-Series solar
panels at our solar panel assembly facility in Mexico.Mexico and in Hillsboro, Oregon starting in 2019. Our solar panel manufacturing facilities have a combined total rated annual capacity of close to 1.9over 1.4 GW.
We source the materials and components of our solar panels and balance of system componentssystems based on quality, performance, and cost considerations both internally and from third-party suppliers. We typically assemble proprietary components, while we purchase generally available components from third-party suppliers. The balance of system components, along with the EPC cost to construct the project, can comprise as much as two-thirds of the cost of a solar power system. Therefore, we focus on standardizing our products with the goal of driving down installation costs, such as with our Equinox and Helix and SunPower® Oasis®systems.
Customers
We operate in three end-customer segments: (i) Residential Segment, (ii) Commercial Segment and (iii) Power Plant Segment. The Residential and Commercial Segments combined are referred to as Distributed Generation. Our scope and scale allow us to deliver solar solutions across all segments, ranging from consumer homeowners to the largest commercial and governmental entities in the world. Our customers typically include investors, financial institutions, project developers, electric utilities, independent power producers, commercial and governmental entities, production home builders, residential owners and small commercial building owners. We leverage a combination of direct sales as well as a broad partner ecosystem to efficiently reach our global customer base.
We work with development, construction, system integration, and financing companies to deliver our solar power products and solutions to wholesale sellers, retail sellers, and retail users of electricity. In the United States, commercial and electric utility customers typically choose to purchase solar electricity under a PPA with an investor or financing company that buys the system from us. End-user customers typically pay the investors and financing companies over an extended period of time based on energy they consume from the solar power systems, rather than paying for the full capital cost of purchasing the solar power systems. Our utility-scale solar power systems are typically purchased by an investor or financing company, such as 8point3 Energy Partners, and operated as central-station solar power plants. In addition, our third-party global dealer network and our new homes division have deployed thousands of SunPower rooftop solar power systems to residential customers. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Revenue"Operations—Revenue" for our significant customers.
Competition
The market for solar electric power technologies is competitive and continually evolving. In the last year, we faced increased competition, resulting in price reductions in the market and reduced margins, which may continue and could lead to loss of market share. Our solar power products and systems compete with many competitors in the solar power market, including, but not limited to:
Residential and Commercial: •SunPower Energy Services Segment: Canadian Solar Inc., First Solar, Inc., GAF Energy, Hanwha QCELLS Corporation, Hyundai Heavy Industries Co. Ltd., JA Solar Holdings Co., Jinko Solar, Kyocera Corporation, LG Corporation, Mitsubishi Corporation,LONGi Solar, NRG Energy, Inc., Panasonic Corporation, Recurrent Energy,REC Group, Sharp Corporation, SolarWorld AG, Sungevity, Inc., SunRun, Inc., Tesla, Inc., Trina Solar Ltd., Vivint, Inc., and Yingli Green Energy Holding Co. Ltd.
Utility and Power Plant: Abengoa•SunPower Technologies: Canadian Solar S.A.Inc., Acciona Energia S.A., AES Solar Energy Ltd., Chevron Energy Solutions (a subsidiary of Chevron Corporation), EDF Energy plc, First Solar Inc., NextEra Energy, Inc.Hanwha QCELLS Corporation, JA Solar Holdings Co., NRG Energy, Inc.Jinko Solar, LG Solar, LONGi Solar, Tongwei Co. Ltd., Sempra Energy, Silverado Power LLC., SkylinePanasonic, and Trina Solar Inc., Solargen Energy, Inc., Solaria Corporation, and Tenaska, Inc.
Ltd.
We also face competition from resellers that have developed related offerings that compete with our product and service offerings, or have entered into strategic relationships with other existing solar power system providers. We compete for limited government funding for research and development contracts, customer tax rebates and other programs that promote the use of solar, and other renewable forms of energy with other renewable energy providers and customers.
In addition, universities, research institutions, and other companies have brought to market alternative technologies, such as thin films,thin-film solar technology, which compete with our PV technology in certain applications. Furthermore, the solar power market in general competes with other energy providers such as electricity produced from conventional fossil fuels supplied by utilities and other sources of renewable energy such as wind, hydro, biomass, solar thermal, and emerging distributed generation technologies such as micro-turbines, sterling engines and fuel cells.
In the large-scale on-grid solar power systems market, we face direct competition from a number of companies, including those that manufacture, distribute, or install solar power systems as well as construction companies that have expanded into the renewable sector. In addition, we will occasionally compete with distributed generation equipment suppliers.
We believe that the key competitive factors in the market for solar power systems include:
total system price;
LCOE evaluation;
CCOE evaluation;
•total system price;
•LCOE evaluation;
•CCOE evaluation;
•power efficiency, reliability and performance;
•aesthetic appearance of solar panels and systems;
•speed and ease of installation through modular solutions such as Oasis andour Helix systems;system;
•strength of distribution relationships;
•availability of third-party financing and investments;
•established sales channels to customers such as 8point3 Energy Partners;customers;
•timeliness of new product introductions;
•bankability, strength, and reputation of our company; and
•warranty protection, quality, and customer service.
We believe that we can compete favorably with respect to each of these elements, although we may be at a disadvantage in comparison to larger companies with broader product lines, greater technical service and support capabilities, and financial resources. For more information on risks related to our competition, please see the risk factors set forth under the caption "Item 1A. Risk Factors" including "Risks Related to Our Sales Channels—The increase in the global supply of solar cells and panels, and increasing competition, may cause substantial downward pressure on the prices of such products and cause us to lose sales or market share, resulting in lower revenues, earnings, and cash flows.flows."
Intellectual Property
We rely on a combination of patent, copyright, trade secret, trademark, and contractual protections to establish and protect our proprietary rights. "SunPower" and the "SunPower" logo are our registered trademarks in countries throughout the world for use with solar cells, solar panels, energy monitoring systems, inverters, and mounting systems. We also hold registered trademarks for, among others, "Maxeon," "Oasis," "EnergyLink," "Equinox," "Helix," "InvisiMount," "Pantheon," "Serengeti," "Smarter“SunPower Equinox,” “SunPower Giving,” “SunPower Horizons,” “SunPower Energy Services,” “SunPower Technologies,” “Bottle the Sun,” “Demand Better Solar," "Smart” “EDDiE,” “EnergyLink,” “Equinox Energy" "Solar Systems and Design,” “Equinox Solar Systems and Design,” “Equinox,” “Experiential Learning. Expanding Opportunities.,” “Helix,” “InvisiMount,” “Light on Land,” “Maxeon,” “Oasis,” “Oasis Geo,” “Powering a Brighter Tomorrow,” “Smarter Solar,” “Solar Showdown," "SolarBridge," "Solaire," "Solaire Generation," "SunTile," "SunPower Electric," "SuPo Solar," "Tenesol," "TrueAC," "Greenbotics," "PowerLight," "More” “Sol,” “SunTile,” “More Energy. For Life.," "The” “The Planet's Most Powerful Solar," "The” and “The Power of One," "The World's Standard for Solar," and "Use More Sun"One” in certain countries. We are seeking and will continue to seek registration of the "SunPower" trademark and other trademarks in additional countries as we believe is appropriate.As of January 1, 2017,December 29, 2019, we held registrations for 32 trademarks in the United States, and had 179 trademark registration applications pending. We also held 152159 trademark registrations and had over 4537 trademark applications pending in foreign jurisdictions. We typically require our business partners to enter into confidentiality and non-disclosure agreements before we disclose any sensitive aspects of our solar cells, technology, or business plans. We typically enter into proprietary information agreements with employees, consultants, vendors, customers, and joint venture partners.
We own multiple patents and patent applications that cover aspects of the technology in the solar cells, mounting products, and electrical and electronic systems that we currently manufacture and market. We continue to file for and receive new patent rights on a regular basis. The lifetime of a utility patent typically extends for 20 years from the date of filing with the relevant government authority. We assess appropriate opportunities for patent protection of those aspects of our technology, designs, methodologies, and processes that we believe provide significant competitive advantages to us, and for licensing opportunities of new technologies relevant to our business. As of January 1, 2017,December 29, 2019, we held 404502 patents in the United States, which will expire at various times through 2035,2037, and had 385237 U.S. patent applications pending. We also held 348688 patents and had 778563 patent applications pending in foreign jurisdictions. While patents are an important element of our intellectual property strategy, our business as a whole is not dependent on any one patent or any single pending patent application. We additionally rely on trade secret rights to protect our proprietary information and know-how. We employ proprietary processes and
customized equipment in our manufacturing facilities. We therefore require employees and consultants to enter into confidentiality agreements to protect them.
When appropriate, we enforce our intellectual property rights against other parties. For more information about risks related to our intellectual property, please see the risk factors set forth under the caption "Item 1A. Risk Factors" including "Risks Related to Our Intellectual Property—We depend on our intellectual property, and we may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in the loss of significant rights," "Risks Related to Our Intellectual Property—We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer,"
and "Risks Related to Our Intellectual Property—We may not obtain sufficient patent protection on the technology embodied in the solar products we currently manufacture and market, which could harm our competitive position and increase our expenses."
Backlog
We believe that backlog is not a meaningful indicator of our future business prospects. In theour SunPower Energy Services Segment's residential and commercial and international DG markets, we often sell large volumes of solar panel,panels, mounting systems, and other solar equipment to third parties, which are typically ordered by our third-party global dealer network and customers under standard purchase orders with relatively short delivery lead-times. WeAdditionally, we often require project financing for development and construction of our SunPower Technologies Segment's solar power plant projects, which require significant investments before the equity is later sold by us to investors. OurTherefore, our solar power system project backlog would therefore exclude sales contracts signed and completed in the same quarter and contracts still conditioned upon obtaining financing. Based on these reasons, we believe backlog at any particular date is not necessarily a meaningful indicator of our future revenue for any particular period of time.
Regulations
Public Policy Considerations
Different public policy mechanisms have been used by governments to accelerate the adoption and use of solar power. Examples of customer-focused financial mechanisms include capital cost rebates, performance-based incentives, feed-in tariffs, tax credits, and net metering. Some of these government mandates and economic incentives are scheduled to be reduced or to expire, or could be eliminated altogether. Capital cost rebates provide funds to customers based on the cost and size of a customer’s solar power system. Performance-based incentives provide funding to a customer based on the energy produced by their solar power system. Feed-in tariffs pay customers for solar power system generation based on energy produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer’s taxes at the time the taxes are due. Net metering allows customers to deliver to the electric grid any excess electricity produced by their on-site solar power systems, and to be credited for that excess electricity at or near the full retail price of electricity.
In addition to the mechanisms described above, new market development mechanisms to encourage the use of renewable energy sources continue to emerge. For example, many states in the United States have adopted renewable portfolio standards which mandate that a certain portion of electricity delivered to customers come from eligible renewable energy resources. Some states, such as California and Hawaii, have significantly expanded their renewable portfolio standards in recent years. In certain developing countries, governments are establishing initiatives to expand access to electricity, including initiatives to support off-grid rural electrification using solar power. For more information about how we avail ourselves of the benefits of public policies and the risks related to public policies, please see the risk factors set forth under the caption "Item 1A. Risk Factors" including "Risks Related to Our Sales Channels—The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results," and "Risks Related to Our Sales Channels—Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.services," and "Changes in international trade policies, tariffs, or trade disputes could significantly and adversely affect our business, revenues, margins, results of operations, and cash flows."
Environmental Regulations
We use, generate, and discharge toxic, volatile, or otherwise hazardous chemicals and wastes in our research and development, manufacturing, and construction activities. We are subject to a variety of foreign, U.S. federal and state, and local governmental laws and regulations related to the purchase, storage, use, and disposal of hazardous materials. We believe that we have all environmental permits necessary to conduct our business and expect to obtain all necessary environmental permits for future activities. We believe that we have properly handled our hazardous materials and wastes and have appropriately remediated any contamination at any of our premises. For more information about risks related to environmental regulations, please see the risk factors set forth under the caption "Item 1A. Risk Factors" including "Risks Related to Our Operations—Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.fines."
TheInformation concerning certain limited activities in Iran Threat Reduction and Syria Human Rights Act
Information concerning the activities of 2012
our affiliate Total and its affiliated companies (collectively, the “Total Group”) related to Iran that took place in 2019 provided in this section is disclosed according to Section 13(r) of the Securities Exchange Act of 1934, as amended (the “Exchange(“U.S. Exchange Act”), requires us.
In addition, information for 2019 is provided concerning the payments made by Total Group affiliates to, disclose whetheror additional cash flow that operations of Total S.A.Group affiliates generate for, governments of any country identified by the United States as state sponsors of terrorism (currently, Iran, North Korea, Syria and Sudan) or any entity controlled by those governments. The Total Group is not present in North Korea. Other than fees related to the renewal of the registration of an international trademark with the world intellectual property organization (which includes North Korea) paid in 2019, Total is not aware of any of its affiliates (collectively, the “Total Group”) engaged during the 2016 calendar yearactivities in certain Iran-related activities. While the Total Group has not engaged2019 having resulted in any activity that would be requiredpayments to, be disclosed pursuant to
subparagraphs (A), (B) or (C) of Section 13(r)(1), affiliates of Total S.A. may be deemed to have engaged in certain transactions or dealings withadditional cash flow for, the government of this country
Total believes that these activities are not subject to sanctions.
Iran
The Total Group’s operational activities related to Iran that would require disclosure pursuantwere stopped in 2018 following the withdrawal of the United States from the Joint Comprehensive Plan of Action (“JCPOA”) in May 2018 and prior to Section 13(r)(1)(D),the re-imposition of U.S. secondary sanctions on the oil industry as discussed below. Unless otherwise noted, all foreign currency translations to U.S. dollarsof November 5, 2018.
Statements in this section concerning affiliates intending or expecting to continue activities described below are made using exchange rates as of January 1, 2017.
Upstream
Following the suspension of certainsubject to such activities continuing to be permissible under applicable international economic sanctions against Iran on January 16, 2016, the Total Group commenced various business development activities in Iran. regimes.
Exploration & Production
The Total Group entered into a memorandumTehran branch office of understanding (“MOU”) with the National Iranian Oil Company (“NIOC”), pursuant to which NIOC provided technical data on certain oil and gas projects so that the Total Group could assess potential developments in Iran in compliance with the remaining applicable international economic sanctions. The Total Group subsequently proposed to develop and operate the South Pars Phase 11 gas field offshore Iran in the Persian Gulf along the international border with Qatar. This resulted in the negotiation and signing, on November 8, 2016, of a heads of agreement (“HOA”) for the development and operation of the field. The parties to the HOA are NIOC, Total E&P South Pars S.A.S. (a wholly owned affiliatewholly-owned affiliate), which opened in 2017 for the purposes of Total S.A.), CNPC International Ltd. (a wholly owned affiliate of China National Petroleum Company) and Petropars Ltd. (a wholly owned affiliate of NIOC). The HOA contains the key principles and commercial terms that will be adopted in a definitive contract for the development and operationproduction of South Pars Phasephase 11 should such definitive contract be finally agreed. The project is expected to have a production capacity of 370,000 boe/d and the produced gas will be fed into Iran’s gas network. The Total Group is expected to operate the project with a 50.1% interest alongside Petropars (19.9%) and CNPC (30%). The required investment is expected to be approximately $4 billion, of which The Total Group would finance 50.1%, with all equity contributions and payments in non-U.S. currency. In preparation for the South Pars Phase 11 project, The Total Group commenced engineering and reservoir studies, which were presented in part to Pars Oil & Gas Company (a NIOC affiliate) in 2016 during a technical workshop. In the event of new or reinstated international economic sanctions, if such sanctions were to prevent the Total Group from performing under the anticipated contract for South Pars Phase 11, The Total Group expects to be able to terminate the contract and recover its past costs from NIOC (unless prevented by sanctions).
Regarding other potential oil and gas projects covered by the aforementioned MOU, The Total Group held technical meetings in 2016 with representatives of NIOC and its affiliated companies and carried out a technical review of the South Azadegan oil field in Iran as well as the Iran LNG Project (a project contemplating a 10 Mt/y LNG production facility at Tombak Port on Iran’s Persian Gulf coast), the results of which were partially disclosed to NIOC and relevant affiliated companies.
In addition, in connection with anticipated activities under the aforementioned MOU and HOA, The Total Group attended meetings in 2016 with the Iranian oil and gas ministry and several Iranian companies with ties to the government of Iran.
Also in 2016, The Total Group was selected, along with other international oil and gas companies, to form an advisory group to the oil and gas ministries of Iran and Oman concerning a possible future gas pipeline between the two countries. In that regard, The Total Group entered into a confidentiality agreement and attended meetings with these companies and ministries.
In addition, The Total Group registered in 2016 a branch office of a new entity, Total Iran B.V., a wholly-owned affiliate of Total S.A., the purpose of which is to serve as the representation office for the Total Group in Iran. This entity replaces Total E&P Iran, which previously served the same purpose, but only for Exploration & Production.
Neither revenues nor profits were recognized from any of the aforementioned activities in 2016, and the Total Group expects to conduct similar business development activities in 2017.
Some payments are yet to be reimbursed to the Total Group with respect to past expenditures and remuneration under buyback contracts entered into between 1997 and 1999 with NIOC for the development of the South Pars 2&3 and Dorood fields. With respectgas field, ceased all operational activities prior to these contracts, development operations were completedNovember 1, 2018. In addition, since November 2018, Total Iran BV maintains a local representative office in 2010 and the Total Group is no longer involved in the operation of these fields.
Tehran with few employees solely for non-operational functions. Concerning payments to Iranian entities in 2016,2019, Total E&P Iran (100%),BV and Elf Petroleum Iran (99.8%), Total Sirri (100%) and Total South Pars (99.8%) collectively made payments of approximately IRR 31.87 billion (approximately $92,705)€39,500, using the average exchange rate for fiscal 2019, as published by the Central Bank of Iran) to (i) the Iranian administration for taxes and social security contributions concerning the personnelstaff of the aforementioned local office and residual buyback contract-related obligations, and (ii) Iranian public entities forrepresentative office. None of these payments with respect to the maintenancewere executed in U.S. dollars.
of the aforementioned local office (e.g., utilities, telecommunications). The Total Group expects similar types of payments to be made by these affiliates in 2017, albeit in higher amounts due to increased business development activity in Iran. Neither revenues nor profits were recognized from the aforementioned activities in 2016.
Furthermore,Since November 30, 2018, Total E&P UK Limited (“TEP UK”), a wholly-owned affiliate, of The Total Group, holds a 43.25%1% interest in a joint venture atrelating to the Bruce field in the UKUnited Kingdom (the “Bruce Field Joint Venture”) with Serica Energy (UK) Limited (“Serica”) (98%, operator) and BP Exploration Operating Company Limited (37.5%(“BPEOC”) (1%), operator),following the completion of the sale of 42.25% of TEP UK’s interest in the Bruce Field Joint Venture on November 30, 2018 pursuant to a sale and purchase agreement dated August 2, 2018 entered into between TEP UK and Serica. Upon closing of the transaction on November 30, 2018, all other prior joint venture partners also sold their interests in the Bruce Field Joint Venture to Serica (BPEOC sold 36% retaining a 1% interest, BHP Billiton Petroleum Great Britain Ltd (16%Limited (“BHP”) sold its entire interest of 16% and Marubeni Oil & Gas (North Sea)(U.K.) Limited (3.75%(“Marubeni”) sold its entire interest of 3.75%). This joint venture
The Bruce Field Joint Venture is party to an agreement (the “Bruce Rhum Agreement”) governing certain transportation, processing and operation services provided to aanother joint venture at the Rhum field in the UK that is co-owned by BP(the “Bruce Rhum Agreement”). The licensees of the
Rhum field are Serica (50%, operator) and the Iranian Oil Company UK Ltd (“IOC”IOC UK”), a subsidiary of NIOC (50%) (together,, an Iranian government-owned corporation. Under the “Rhum Owners”). TEP UK owned and operated the pipelineterms of the Frigg UK AssociationBruce Rhum Agreement, the Rhum field owners pay a proportion of the operating costs of the Bruce field facilities calculated on a gas throughput basis.
In November 2018, the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) granted a conditional license to BPEOC and the St Fergus Gas Terminal and was party to an agreement governingSerica authorizing provision of transportation and processing services to the Rhum Ownersfield following the re-imposition of U.S. secondary sanctions. The principal condition of the license is that the ownership of shares in IOC UK by Naftiran Intertrade Company Limited (the trading branch of the NIOC) are transferred into and held in a Jersey-based trust, thereby ensuring that the Iranian government does not derive any economic benefit from the Rhum field so long as U.S. sanctions against these entities remain in place. IOC UK’s interest is managed by an independent management company established by the trust and referred to as the “Rhum FUKA Agreement”Management Company” (“RMC”) (the. Where necessary TEP UK liaises with RMC in relation to the Bruce Rhum Agreement and the Rhum FUKA Agreement being referred to collectively as the “Rhum Agreements”). On August 27, 2015, TEP UK signed a saleexpects to continue liaising with RMC on the same basis in 2020.
In October 2019, OFAC renewed and purchase agreementextended the conditional license to divest its entire interest inSerica authorizing the Frigg UK Association pipeline and St Fergus Gas Terminalprovision of services to NSMP Operations Limited (“NSMP”). On March 15, 2016, the divestment was completed and TEP UK’s interest in the Rhum FUKA Agreement was novated to NSMP. As from this date, TEP UK’s only interest in the Rhum FUKA Agreement is in relation to the settlement of historical force majeure claims with the Rhum Owners relating to the period when the Rhum field was shut down. To The Total Group's knowledge, provisionuntil February 2021. In addition, OFAC informed that, to the extent that the license remains valid and Serica represents that the conditions set out in the license are met, activities and transactions of all services undernon-U.S. persons involving the Rhum Agreements was initially suspended in November 2010, whenfiled or the RhumBruce field, stopped production following the adoption of EU sanctions, other than critical safety-related services (i.e., monitoring and marine inspection of the Rhum facilities), which were permitted by EU sanctions regulations. On October 22, 2013, the UK government notified IOC of its decision to apply a temporary management scheme to IOC’s interest in the Rhum field within the meaning of UK Regulations 3 and 5 of the Hydrocarbons (Temporary Management Scheme) Regulations 2013 (the "Hydrocarbons Regulations"). From October 22, 2013 until the termination of the temporary management scheme on March 16, 2016 (as further explained below), all correspondence by TEP UK in respect of IOC’s interest in the Rhum Agreements was with the UK government in its capacity as temporary manager of IOC’s interests. On December 6, 2013, the UK government authorized TEP UK, among others, under Article 43a of EU Regulation 267/2012, as amended by 1263/2012 and under Regulation 9 of the Hydrocarbons Regulations, to carry out activitiesincluding in relation to the operation and production of the Rhum field. In addition, on September 4, 2013, thetrust, IOC UK and RMC will not be exposed to U.S. Treasury Department issued a licensesecondary sanctions with respect to BP authorizing BP and certain others to engage in various activities relating to the operation and productionIran.
IOC UK’s share of the Rhum field. Following receipt of all necessary authorizations, the Rhum field resumed production on October 26, 2014 with IOC’s interest in the Rhum field and the Rhum Agreements subject to the UK government’s temporary management pursuant to the Hydrocarbons Regulations. Services were provided by TEP UK under the Rhum Agreements from October 26, 2014 and TEP UK received tariff income and revenues from BP and the UK government (in its capacity as temporary manager of IOC’s interest in the Rhum field) in accordance with the terms of the Rhum Agreements until the termination of the temporary management scheme in March 2016. As IOC ceased to be a listed person within the meaning of the Hydrocarbons Regulations on January 16, 2016, the UK government gave notice to IOC on January 22, 2016 of the termination of the temporary management scheme with effect from March 16, 2016 in accordance with regulation 26(1)(a) and 27(1)(a) of the Hydrocarbons Regulations. As a result, since March 16, 2016, TEP UK has liaised directly with IOC concerning its interest in the Bruce Rhum Agreement, and services have been provided by TEP UKcosts incurred under the Bruce Rhum Agreement have been paid to IOC as Rhum Owner. In 2016, these activities generated for TEP UK in 2019 by RMC. In 2019, based upon TEP UK’s 1% interest in the Bruce Field Joint Venture and income from the net cash flow sharing arrangement with Serica, gross revenue to TEP UK from IOC UK’s share of the Rhum field resulting from the Bruce Rhum Agreement was approximately £8 million (approximately $9.9 million) and net profit of approximately £0.20 million (approximately $0.2 million). Subject to the foregoing, TEP UK intends to continue such activities so long as they continue to be permissible under UK and EU law and not be in breach of remaining applicable international economic sanctions.
Downstream
The Total Group does not own or operate any refineries or chemicals plants in Iran and did not purchase Iranian hydrocarbons when prohibited by applicable EU and U.S. economic and financial sanctions (refer to point 1.9.1, above).
The Total Group resumed its trading activities with Iran in February 2016 via its wholly-owned affiliates Totsa Total Oil Trading S.A. and Total Trading Asia Pte Ltd. During 2016, approximately 50 Mb of crude oil from Iran were purchased for nearly €1.8 billion (approximately $1.9 billion) pursuant to a mix of spot and term contracts. Most of this crude oilmillion. This amount was used to supplyoffset operating costs on the Total Group's refineriesBruce field and therefore, itas such, generated no net profit to TEP UK. This arrangement is not possibleexpected to estimatecontinue in 2020.
Early 2019, TEP UK continued to act as agent for BHP and Marubeni pursuant to the agency agreement entered into in June 2018 between BHP, Marubeni and TEP UK according to which TEP UK received payments from RMC in relation to BHP and Marubeni’s share of income from the Bruce Rhum Agreement (the “Agency Agreement”). The payments related gross revenueto the period before November 30, 2018, prior to BHP and net profit. However,Marubeni divested their respective interest in the Bruce Field Joint Venture to Serica. In 2019, total payment received on behalf of BHP and Marubeni by TEP UK under this arrangement was approximately 1.4 Mb£1.1 million. TEP UK transferred all income received under the Agency Agreement to BHP and Marubeni and provided the service on a no profit, no loss basis. The Agency Agreement was terminated on June 27, 2019 following receipt of all payments relating to the period up to November 30, 2018.
TEP UK is also party to an agreement with Serica whereby TEP UK uses reasonable endeavors to evacuate Rhum NGL from the St Fergus Terminal (the “Rhum NGL Agreement”). TEP UK provides this crude oil were soldservice subject to entities outsideSerica having title to all of the Total Group. In addition, in 2016 approximately 11 Mb of petroleum products were bought from/soldRhum NGL to entities with ties tobe evacuated and Serica having a valid license from OFAC for the government of Iran. These operations generated gross revenue of nearly €374 million (approximately $393.5 million)activity. The service is provided on a cost basis, and net profitTEP UK charges a monthly handling fee that generates an income of approximately €2.7 million (approximately $2.8 million). The affiliates expect£35,000 per annum relating to continue these activitiesIOC UK’s 50% stake in 2017.
Saft Groupe S.A. (“Saft”), a wholly-owned affiliate of the Total Group, in 2016 sold signaling and backup battery systems for metros and railways as well as products for the utilities and oil and gas sectors to companies in Iran, including some having direct or indirect ties with the Iranian government. In 2016,Rhum field. After costs, TEP UK realizes little profit from this activity generated gross revenue of approximately €5.6 million (approximately $5.9 million) and net profit of approximately €800,000 (approximately $841,636). Saftarrangement. TEP UK expects to continue this activity in 2017.2020.
Saft also attended the Iran Oil Show in 2016, where it discussed business opportunities with Iranian customers, including those with direct or indirect ties with the Iranian government. Saft expects to conduct similar business development activities in 2017.
Total Solar (formerly named Total Energie Developpement), a wholly-owned affiliate of the Total Group, had preliminary discussions in 2016 regarding the potential development of solar projects with companies in Iran, including some having direct or indirect ties with the Iranian government. Neither revenues nor profits were recognized from this activity in 2016, and Total Solar expects to continue this activity in 2017.
Total S.A. signedpaid approximately €2,000 to Iranian authorities related to various patents in 2016 a non-binding memorandum of understanding with the National Petrochemical Company, a company owned by the government of Iran, to consider a project for the construction in Iran of a steamcracker and polyethylene production lines. In relation to the early stages of this project, several visits to Iran were conducted in 2016 and one employee has been seconded to Total Iran B.V. Total S.A. recognized no revenue or profit from this activity in 2016 and similar activities2019. Similar payments are expected to continuebe made in 2017.
Representatives2020. Section 560.509 of the companies Le Joint Français (a subsidiary of Hutchinson SA)U.S. Iranian Transactions and Hutchinson SNC, wholly-owned affiliates of the Total Group, conducted multiple visits to IranSanctions Regulations provides an authorization for certain transactions in 2016 to discuss business opportunitiesconnection with patent, trademark, copyright or other intellectual property protection in the car industry sectorUnited States or Iran, including payments for such services and payments to persons in Iran directly connected to intellectual property rights, and Total believes that the activities related to the industrial property rights are consistent with several companies, including some having direct or indirect ties with the Iranian government. These companies recognized no revenue or profit from this activity in 2016 and expect to continue such discussions in the future.that authorization.
Hutchinson Gmbh, a wholly-owned affiliate of theOther business segments
In 2019, Total Group, sold plastic tubing for automobiles in 2016 to Iran Khodro, a company in which the government of Iran holds a 20% interest and which is supervised by Iran’s Industrial Management Organization. In 2016, these activities generated gross revenueS.A. paid fees of approximately €900,000 (approximately $946,840)€1,500 to Iranian authorities related to the maintenance and net profitprotection of approximately €150,000 (approximately $157,807). This company expectstrademarks and designs in Iran. Similar payments are expected to continue this activitybe made in 2017.2020.
Refining & Chemicals
In 2019, Hanwha Total Petrochemicals (“HTC”), a South Korean joint venture in which each of Total Holdings UK Limited (a wholly-owned affiliate of The Total Group) holds a 50% interestaffiliate) and its partner Hanwha General Chemicals holds a 50% interest, reported some activity in
Iran. In November 2018, South Korea was granted a significant reduction exemption waiver (the “SRE waiver”) allowing it to import Iranian condensate from NIOC for six months. In that context, HTC purchased nearly 25approximately 13.5 Mb of condensates from NIOC for approximately KRW 1,3001,000 billion (approximately $1.1 million).€760 million, using the average exchange rate for fiscal 2019, as published by Bloomberg) from January 2019 to April 2019. HTC stopped purchasing from NIOC thereafter. These condensates are used as raw material for certain of the Total Group's steamcrackers. HTC expects to continue this activity in 2017.HTC’s steam crackers.
In 2019, Total Research & Technology Feluy (“TRTF”), a wholly-owned affiliate of Theaffiliate) and Total Group, commenced in 2016 the process to file a patent in Iran for pipes comprising a multimodal metallocene-catalyzed polyethylene resin. Related to this process, TRTF had contacts with Iranian government officials, but no fees were paid. TRTF expects to continue the patent filing process in 2017.
Until December 2012, at which time it sold its entire interest, the Total Group held a 50% interest in the lubricants retail company Beh Total (now named Beh Tam) along with Behran Oil (50%), a company controlled by entities with ties to the government of Iran. As part of the sale of the Total Group's interest in Beh Tam, Total S.A. agreed to license the trademark “Total” to Beh Tam for an initial 3-year period for the sale by Beh Tam of lubricants to domestic consumers in Iran. In 2014, Total E&P IranRaffinage Chimie (“TEPI”)TRC”, a wholly-owned affiliate of Total S.A., received, on behalf of Total S.A., royalty paymentsaffiliate) paid fees related to three patents to Iranian authorities for an amount of approximately IRR 24 billion (nearly $1 million) from Beh Tam for such license. These payments were based on Beh Tam’s sales of lubricants during the previous calendar year. €1,400.
Marketing & Services
In 2015, royalty payments were suspended due to a procedure brought by the Iranian tax authorities against TEPI. At the end of 2016, this procedure was still pending and no royalty payments had been received since 2015. Representatives of Total Outre Mer, a wholly-owned affiliate of the Total Group, made several visits to Beh Tam and Behran Oil during 2016 regarding the possible purchase of shares of Beh Tam. Subsequent to an internal reorganization, the matter was transferred to Total Oil Asia-Pacific Ltd, another wholly-owned affiliate of the Total Group, which had several exchanges with representatives of Behran Oil. As of the end of 2016, no agreement had been reached, no money was paid or received by either company. Similar discussions may take place in the future.
Total Marketing Middle East FZE (“TMME”), a wholly-owned affiliate of the Total Group, sold lubricants to Beh Tam in 2016. The sale in 2016 of approximately 54 tons of lubricants and special fluids generated gross revenue of approximately AED 420,000 (approximately $30,711) and net profit of approximately AED 360,000 (approximately $26,324). TMME expects to continue this activity in 2017.
2019, Total Marketing France (“TMF”), a company wholly-owned by Total Marketing Services (“TMS”)affiliate), itself a company wholly-owned by Total S.A. and six Total Group employees, provided in 2016 fuel payment cards to the Iranian embassy located in France for useNeuilly-sur-Seine (France) and the Iranian delegation to UNESCO in Paris (France), to be used in the Total Group'sGroup’s service stations. In 2016, these activities2019, this activity generated gross revenue of nearly €22,000 (approximately $23,145)approximately €30,300 and net profit of nearly €900 (approximately $947). TMFapproximately €2,200. The Total Group expects to continue this activity in 2017.2020.
TMF also sold jet fuel in 2016 to Iran AirIn 2019, as part of its airplane refueling activities at Paris Orly airport in France. The sale of approximately 2.8 million liters of jetFrance, Caldeo, a company wholly-owned by TMF, delivered fuel oil to the Iranian embassy in Neuilly-sur-Seine (France). In 2019, this activity generated gross revenue of approximately €982,000 (approximately $1.0 million)€1,500 and net profit of approximately €10,000 (approximately $10,520). TMF€14. The Total Group expects to continue this activity through at least February 2017, when the contract arrives at its term.in 2020.
Air Total International (“ATI”), a wholly-owned affiliate of the Total Group, on two occasions in 2016 sold jet fuel to a broker based at Le Bourget airport near Paris that was destined for the refueling of an Iranian government airplane (official presidential/ministerial visits). These sales generated gross revenue of approximately €8,000 (approximately $8,416) and net profit of approximately €1,600 (approximately $1,683). ATI may conduct similar activities in 2017.
In 2019, Total Belgium (“TB”), a company(a wholly-owned by the Total Group,affiliate) provided in 2016 fuel payment cards to the Iranian embassy in Brussels (Belgium) for use, to be used in the Total Group'sGroup’s service stations. In 2016, these activities2019, this activity generated gross revenue of approximately €1,500 (approximately $1,578)€11,000 and net profit of approximately €300 (approximately $316). TB€4,000. The Total Group expects to continue this activity in 2017.2020.
Proxifuel,Syria
Since early December 2011, Total has ceased its activities that contribute to oil and gas production in Syria and maintains a company wholly-owned bylocal office solely for non-operational functions. In late 2014, the Total Group soldinitiated a downsizing of its Damascus office and reduced its staff to few employees. Following the termination of their employment contracts in 2016 heating oilMay 2019, the Damascus office was closed. In 2019, Total paid approximately €6,500 to the Iranian embassySyrian government as contributions for social security in Brussels. In 2016, these activities generated gross revenue of approximately €200 (approximately $210) and net profit of approximately €80 (approximately $84). Proxifuel expects to continue this activity in 2017.
Caldeo, a company wholly-owned by TMS, sold in 2016 approximately 3 cubic meters of domestic heating oilrelation to the Iranian embassy in France, which generated gross revenueaforementioned staff of nearly €435 (approximately $458) and net profit of nearly €115 (approximately $121). Caldeo expects to continue this activity in 2017.the Damascus office before it was closed.
Total Namibia (PTY) Ltd (“TN”), a wholly-owned affiliate of Total South Africa (PTY) Ltd (of which the Total Group holds 50.1%), sold petroleum products and services during 2016 to Rössing Uranium Limited, a company in which the Iranian Foreign Investment Co. holds an interest of 15.3%. In 2016, these activities generated gross revenue of nearly N$249 million (approximately $18.2 million) and net profit of approximately N$8 million (approximately $0.6 million). TN expects to continue this activity in 2017.
Employees
As of January 1, 2017,December 29, 2019, we had approximately 8,902about 8,400 full-time employees worldwide, of which 1,290about 2,000 each were located in the United States 3,588 were locatedand in the Philippines, 1,633about 1,700 were located in Malaysia, and 2,391about 2,500 were located in other countries. Of these employees, 6,588about 5,300 were engaged in manufacturing, 881about 1,500 in construction projects, 406about 300 in research and development, 492about 400 in sales and marketing, and 535more than 700 in general and administrative services. Although in certain countries, we have works councils and statutory employee representation obligations, our employees are generally not represented by labor unions on an ongoing basis. We have never experienced a work stoppage, and we believe our relations with our employees areto be good.
Geographic Information
Information regarding financial data by segment and geographic area is available in Note 5 and Note 17 under "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements."
Seasonal Trends and Economic Incentives
Our business is subject to industry-specific seasonal fluctuations including changes in weather patterns and economic incentives, among others. Sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two quarters of our fiscal year. The construction of solar power systems or installation of solar power components and related revenue may decline during cold winter months. In the United States, many customers make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. In addition, revenues may fluctuate due to the timing of project sales, construction schedules, and revenue recognition of certain projects, such as those involving real estate, which may significantly impact the quarterly profile of the Company'sour results of operations. We may also retain certain development projects on our balance sheet for longer periods of time than in preceding periods in order to optimize the economic value we receive at the time of sale in light of market conditions, which can fluctuate after we have committed to projects. Delays in disposing of projects, or changes in amounts realized on disposition, may lead to significant fluctuations to the period-over-period profile of our results of operations and our cash available for working capital needs.
Available Information
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") free of charge on our website at www.sunpower.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The contents of our website are not incorporated into, or otherwise to be regarded as part of this Annual Report on Form 10-K. Copies of such material may be obtained, free of charge, upon written request submitted to our corporate headquarters: SunPower Corporation, Attn: Investor Relations, 7751 Rio Robles, San Jose, California, 95134. Copies of materials we file with the SEC may also be accessed at the SEC's Public Reference Room at 100 F Street NE, Washington, D.C., or at the SEC's website at www.sec.gov. The public may obtain additional information on the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
Our business is subject to various risks and uncertainties, including those described below and elsewhere in this Annual Report on Form 10-K, which could adversely affect our business, results of operations, and financial condition. Although we believe that we have identified and discussed below certain key risk factors affecting our business, there may be additional risks and uncertainties that are not currently known to us or that are not currently believed by us to be material that may also harm our business, results of operations, and financial condition.
Risks Related to the Spin-Off
Our plan to separate into two independent publicly-traded companies by means of a sponsored spin-off of our international SunPower Technologies business unit is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.
On November 11, 2019, we announced plans to separate into two independent publicly-traded through the proposed Spin-Off. In the Spin-Off, we will distribute shares of Maxeon Solar to our stockholders
The Spin-Off, which is currently targeted to be completed in the second quarter of 2020, is subject to certain conditions, including final approval by our Board of Directors, as well as other conditions such as completion of all necessary filings under the U.S. securities laws; receipt by our Board of Directors of one or more opinions from an independent valuation firm confirming the solvency and financial viability of each of SunPower and Maxeon Solar immediately after the completion of thedistribution in a form acceptable to us; receipt of an opinion regarding the qualification of the Distribution as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”) to our stockholders; if applicable, the receipt of a waiver from the Singapore Securities Industry Council from the applicability of the Singapore Code on Take-overs and Mergers to the distribution; the absence of any legal impediments prohibiting the Distribution; and the satisfaction or waiver of certain conditions Investment set forth in the Investment Agreement and as detailed below. In addition, we may not be able to complete the contemplated Spin-Off should TZS decide not to provide its contemplated investment. Pursuant to the Investment Agreement, the investment is subject to certain conditions being satisfied or waived by us or Maxeon Solar, on the one hand, and TZS, on the other hand, including, among other things, the completion of the Spin-Off, as well as other conditions including Maxeon Solar entering into definitive agreements for a term loan facility in an amount not less than $325 million; Maxeon Solar obtaining certain additional financing in the form of a revolving credit facility of not less than $100 million or, alternatively, making certain working capital adjustment arrangements; Maxeon Solar having no more than $138 million in other debt and no less than $50 million in Cash (as defined in the Investment Agreement) immediately prior to the Investment; execution of ancillary agreements and a shareholders agreement; receipt of required governmental approvals; completion of all necessary filings under the U.S. securities laws; receipt by our Board of Directors of one or more opinions from an independent valuation firm confirming the solvency and financial viability of each of us and Maxeon Solar immediately after the consummation of the Distribution in a form acceptable to us; if applicable, the receipt of a waiver from the Singapore Securities Industry Council from the applicability of the Singapore Code on Take-overs and Mergers to the distribution and the investment; and the absence of any legal impediments prohibiting the investment. Maxeon Solar has not yet secured commitment letters for the required term loan facility or revolving credit facility noted above, and there is no guarantee that Maxeon Solar will be able to secure such commitments. The failure to satisfy all of the required conditions could delay the completion of the Spin-Off or the investment for a significant period of time or prevent them from occurring at all.
Unanticipated developments, including changes in the competitive conditions of our markets, possible delays in obtaining various tax opinions or rulings, regulatory approvals or clearances, negotiating challenges, the uncertainty of the financial markets, changes in the law, and challenges in executing the separation, could delay or prevent the completion of the
Spin-Off, or cause the Spin-Off to occur on terms or conditions that are different or less favorable than expected. Any changes to the Spin-Off or delay in completing the Spin-Off could cause us not to realize some or all of the expected benefits, or realize them on a different timeline than expected. Further, our Board of Directors could decide, either because of a failure of conditions or because of market or other factors, to abandon the Spin-Off. If it does so, not only will we not realize any benefits of the Spin-Off, we may have to pay, in some cases, a breakup fee to TZS of either $20 million or $80 million, depending on the circumstances. No assurance can be given as to whether and when the Spin-Off will occur.
We have incurred significant expenses in connection with the Spin-Off and investment, and expect that the process of completing the Spin-Off will be time-consuming and involve significant additional costs and expenses, which may be significantly higher than what we currently anticipate and may not yield a discernible benefit if the separation is not completed. Executing the Spin-Off will require significant time and attention from our senior management and employees, which could adversely affect our business, financial results, and results of operations. We may also experience increased difficulties in attracting, retaining, and motivating employees during the pendency of the Spin-Off and following its completion, which could harm our businesses. In addition, if the Spin-Off is not completed, we will still be required to pay certain costs and expenses incurred in connection therewith, such as legal, accounting, and other professional fees. And, as noted, in some cases we may have to pay a breakup fee to TZS.
Any of the above factors could cause the Spin-Off (or the failure to execute the Spin-Off) to have a material adverse effect on our business, financial condition and results of operations and the price of our common stock.
The Spin-Off may not achieve some or all of the anticipated benefits.
We may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the Spin-Off. We cannot predict with certainty when the benefits expected from the Spin-Off will occur or the extent to which they will be achieved. If the Spin-Off is completed, our operational and financial profile will change and we will face new risks. As independent, publicly-traded companies, SunPower and Maxeon Solar will be smaller, less-diversified companies with narrower business focuses and may be more vulnerable to changing market conditions, which could materially and adversely affect their respective businesses, financial condition, and results of operations. There is no assurance that following the Spin-Off each separate company will be successful.
In addition, some investors holding our common stock prior to the separation may hold our common stock because of a decision to invest in a company that operates all of our business units, including our SunPower Technologies business unit. If the Spin-Off is completed, shares in each independent company held by those investors will represent an investment in a company with a different profile than that of SunPower, and, as a result, some investors may sell our common stock prior to the Separation or sell the shares of one or both independent companies resulting from the separation. Excess selling could cause the relative market price of our common stock to decrease and be subject to greater volatility following the completion of the Spin-Off. We expect the trading price of our common stock immediately following the ex-dividend date for the Spin-Off to be significantly lower than immediately preceding the ex-dividend date, as the trading price of our common stock will no longer reflect the value of our SunPower Technologies business unit. Further, there can be no assurance that the combined value of the shares of the two publicly-traded companies will be equal to or greater than what the value of our common stock would have been had the proposed Spin-Off not occurred.
The proposed Spin-Off may result in disruptions to, and may negatively impact our relationships with, our customers and other business partners.
Uncertainty related to the Spin-Off may lead customers and other parties with which we currently do business, or may do business in the future, to terminate or attempt to negotiate changes in existing business relationships, or consider entering into business relationships with parties other than us. These disruptions could have a material and adverse effect on our businesses, financial condition and results of operations. The effect of such disruptions could be exacerbated by any delays or unanticipated developments in the completion of the Spin-Off.
Following the Spin-Off, each of SunPower and Maxeon Solar will operate as an independent publicly-traded company with its own business goals, objectives and commercial relationships.
Following the Spin-Off, we and Maxeon Solar will operate as independent publicly-traded companies. Accordingly, our business goals, objectives and commercial relationships will be different from those of Maxeon Solar. In that respect, we may not have exclusive access to next-generation solar cells and panels that may be produced by Maxeon Solar, including Maxeon5 solar cells and A-Series (Maxeon 5) modules, following the applicable exclusivity periods in the supply agreement we will
enter into with Maxeon, which could have an adverse effect on our business, financial condition and results of operations and our ability to execute our business strategy.
We may have divergent interests with respect to the transition services agreement and other ancillary agreements that we will enter into with Maxeon Solar, which could negatively impact the scope, duration or effectiveness of such agreements in a manner that negatively impacts our and Maxeon Solar’s businesses and operations.
We and Maxeon Solar will enter into a transition services agreement and other ancillary agreements in connection with the Spin-Off pursuant to which SunPower and Maxeon Solar will provide each other, on an interim, transitional basis, various services related to finance, accounting, business technology, human resources information systems, human resources, facilities, document management and record retention, relationship and strategy management and module operations, technical and quality support. Nevertheless, our interests and those of Maxeon Solar could differ with respect to these agreements, which could negatively impact the scope, duration or effectiveness of such agreements. In addition, if we or Maxeon Solar do not satisfactorily perform our obligations under these agreements, the non-performing party may be held liable for any resulting losses suffered by the other party. Also, during the periods of these agreements, our and Maxeon Solar’s management and employees may be required to divert their attention away from our and their respective business in order to provide services pursuant to the agreements, which could adversely affect our and their business. Any of these factors could negatively impact our and Maxeon Solar’s businesses and operations.
If the Spin-Off fails to qualify for tax-free distribution treatment to the stockholders for U.S. federal income tax purposes, then the distribution could result in tax liability to the stockholders.
We expect that for U.S. federal income tax purposes, the distribution should qualify, for our stockholders, as a tax-free distribution under Section 355 of the Code. This expectation is based, among other things, on various factual assumptions we have made. If any of these assumptions are, or become, inaccurate or incomplete, our expectations may change. For instance, this expectation relies on certain significant ownership interests in the resulting companies continuing after the Spin-Off. Whether such ownership continues may be out of SunPower’s control following the completion of the Spin-Off, because none of its stockholders have committed to SunPower to retain their shares of SunPower or Maxeon Solar after the Spin-Off. Additionally, there can be no assurance that the IRS will not challenge any positions we take with respect to the Spin-Off or that a court would not sustain such a challenge.
Although the stockholders are expected to obtain tax-free treatment in the distribution portion of the Spin-Off, the separation is expected to result in a fully taxable event to SunPower, for which SunPower expects to recognize gain which it expects to offset with prior year losses, thus resulting in a significant reduction in our net operating loss carryforwards. We may incur certain non-U.S. tax costs in connection with the separation, including tax expense resulting from separations in multiple non-U.S. jurisdictions that do not legally provide for tax-free separations, which may be material. If the distribution fails to qualify as tax-free under Section 355 of the Code, each SunPower stockholder will generally be required to include in its taxable income as a dividend the fair market value of the Maxeon Solar ordinary shares received by it to the extent of earnings and profits of SunPower and will generally take a fair market value basis in the Maxeon Solar ordinary shares received by it in the distribution.
We may determine to forgo certain transactions in order to avoid the risk of incurring material tax-related liabilities.
As a result of requirements of Section 355 of the Code and/or other applicable tax laws, we may determine to forgo certain transactions that would otherwise be advantageous. In particular, we may determine to continue to operate certain of our business operations for the foreseeable future even if a sale or discontinuance of such business would otherwise be advantageous.
If the Spin-Off is completed, any financing we obtain in the future could involve higher costs.
Following completion of the Spin-Off, any financing that we obtain will be with the support of a reduced pool of diversified assets and a significant amount of outstanding debt, and therefore we may not be able to secure adequate debt or equity financing on desirable terms. The cost to us of financing without our SunPower Technologies business unit as part of our consolidated company may be materially higher than the cost of financing prior to the Spin-Off. If we have credit ratings lower than we currently have, it could be more expensive for us to obtain debt financing than it has been to date.
Certain members of our Board of Directors and management may have actual or potential conflicts of interest because of their ownership of shares of Maxeon Solar and SunPower or their relationships with Maxeon Solar following the Spin-Off.
Certain members of our Board of Directors and management are expected to own shares of Maxeon Solar and/or options to purchase shares of Maxeon Solar, which could create, or appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different implications for SunPower and Maxeon Solar. This may create, or appear to create, potential conflicts of interest if these directors are faced with decisions that could have different implications for Maxeon Solar than the decisions have for SunPower.
Our historical financial statements do not reflect the effects of the Spin-Off.
Our historical financial information for periods prior to the completion of the Spin-Off are not necessarily indicative of what our results of operations, financial position and cash flows will be in the future if the Spin-Off is completed and, for periods prior to the Spin-Off, do not reflect many significant changes in our capital structure, funding and operations that will result from the Spin-Off.
Risks Related to Our Sales Channels
Our operating results are subject to significant fluctuations and are inherently unpredictable.
We do not know whether our revenue will continue to grow, or if it will continue to grow sufficiently to outpace our expenses, which we also expect to grow. As a result, we may not be profitable on a quarterly or annual basis. Our quarterly revenue and operating results are difficult to predict and have in the past fluctuated significantly from quarter to quarter. The principal reason for these significant fluctuations in our results is that we derive a substantial portion of our total revenues from our large commercial and utility-scale and power plant customers, and, consequently:
•the amount, timing and mix of sales to our large commercial utilities and power plant customers often for a single medium or large-scale project, may cause large fluctuations in our revenue and other financial results because, at any given time, a single large-scale project can account for a material portion of our total revenue in a given quarter;
•our inability to monetize our projects as planned, or any delay in obtaining the required government support or initial payments to begin recognizing revenue under the relevant recognition criteria, and the corresponding revenue impact, may similarly cause large fluctuations in our revenue and other financial results;
•our ability to monetize projects as planned is also subject to market conditions, including fluctuations in demand based on the availability of regulatory incentives and other factors, changes in the internal rate of return expected by customers in light of market conditions, the increasing number of power plants being constructed or available for sale and competition for financing, which can make both financing and disposition more challenging and may significantly affect project sales prices;
•market conditions may deteriorate after we have committed to projects, resulting in delays in disposing of projects, or changes in amounts realized on disposition, which may lead to significant fluctuations in the period-over-period profile of our results of operations and our cash available for working capital needs;
•in the event a project is subsequently canceled, abandoned, or is deemed unlikely to occur, we will charge all prior capital costs as an operating expense in the quarter in which such determination is made, which could materially adversely affect operating results;
•a delayed disposition of a project could require us to recognize a gain on the sale of assets instead of recognizing revenue;
•our agreements with these customers may be canceled if we fail to meet certain product specifications or materially breach the agreement;these agreements;
•in the event of a customer bankruptcy, our customers may seek to terminate or renegotiate the terms of current agreements or renewals; and
•the failure by any significant customer to pay for orders, whether due to liquidity issues or otherwise, could materially and adversely affect our results of operations.
Any decrease in revenue from our large commercial and utility-scale power plant customers whether due to a loss or delay of projects or an inability to collect, could have a significant negative impact on our business. See also "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk." See also under this section "Risks Related to Our Sales Channels - Channels—Revenues from a limited number of customers and large projects are expected to continue to comprise a significant portion of our total
revenues and any decrease in revenues from those customers or projects, payment of liquidated damages, or an increase in related expenses, could have a material adverse effect on our business, results of operations and financial condition.”"
Sales to our residential and light commercial customers are similarly susceptible to fluctuations in volumes and revenue, as well as fluctuations in demand based on the availability of regulatory incentives and other factors. In addition, demand from our commercial and residential customers may fluctuate based on the perceived cost-effectiveness of the electricity generated by our solar power systems as compared to conventional energy sources, such as natural gas and coal (which fuel sources are subject to significant price swings from time to time), and other non-solar renewable energy sources, such as wind. Declining average selling prices immediately affect our residential and light commercial sales volumes, and therefore lead to large fluctuations in revenue.
Further, our revenue mix of materials sales versus project sales can fluctuate dramatically from quarter to quarter, which may adversely affect our margins and financial results in any given period.
Any of the foregoing may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our common stock and our liquidity.
We base our planned operating expenses in part on our expectations of future revenue and a significant portion of our expenses is fixed in the short term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would materially adversely affect our operating results for that quarter. See also “-Risksunder this section, “Risks Related to Our Sales Channels-OurChannels—Our business could be adversely affected by seasonal trends and construction cycles,” “-Risks“Risks Related to Our Sales Channels-TheChannels—The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results”results,” and “-Risks“Risks Related to Our Sales Channels-ExistingChannels—Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.”
We may not achieve someChanges in international trade policies, tariffs, or all of the expected benefits of our restructuring planstrade disputes could significantly and our restructuring may adversely affect our business.
We announced restructuring plans in August 2016 and December 2016 to realign our downstream investments, optimize our supply chain, and reduce operating expenses, in response to market dislocation, including expected near-term challenges primarily relating to our power plant and commercial segments, and to reduce costs and focus on improving cash flow while positioning us to succeed in the next phase of industry growth. As part of such plans, our Board of Directors approved the closure of our Philippine-based Fab 2 manufacturing facility. Implementation of our restructuring plans may be costly and disruptive to our business, and we may not be able to obtain the cost savings and benefits that were initially anticipated in connection with our restructuring. Additionally, as a result of our restructuring, we may experience a loss of continuity, loss of accumulated knowledge, or inefficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees’ time and focus, which may divert attention from operating and growing our business. If we fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our competitive position, business, financial condition,revenues, margins, results of operations, and cash flows. For more information about
On February 7, 2018, safeguard tariffs on imported solar cells and modules went into effect pursuant to Proclamation 9693, which approved recommendations to provide relief to U.S. manufacturers and impose safeguard tariffs on imported solar cells and modules, based on the investigations, findings, and recommendations of the U.S. International Trade Commission (the “International Trade Commission”). Modules are subject to a four-year tariff at a rate of 30% in the first year, declining 5% in each of the three subsequent years, to a final tariff rate of 15% in 2021. Cells are subjected to a tariff-rate quota, under which the first 2.5 GW of cell imports each year will be exempt from tariffs; and cells imported after the 2.5 GW quota has been reached will be subject to the same 30% tariff as modules in the first year, with the same 5% decline in each of the three subsequent years. The tariff-free cell quota applies globally, without any allocation by country or region.
The tariffs could materially and adversely affect our restructuring plans, seebusiness and results of operations. While solar cells and modules based on interdigitated back contact ("IBC") technology, like our Current ReportsX-Series (Maxeon 3), E-Series (Maxeon 2), A-Series (Maxeon 5) and related products, were granted exclusion from these safeguard tariffs on Form 8-K filedSeptember 19, 2018, our solar products based on other technologies continue to be subject to the safeguard tariffs. Although we are actively engaged in efforts to mitigate the effect of these tariffs, there is no guarantee that these efforts will be successful.
Additionally, the Office of the United States Trade Representative (“USTR”) initiated an investigation under Section 301 of the Trade Act of 1974 into the government of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation. In notices published June 20, 2018, August 9, 201616, 2018, and December 7, 2016September 21, 2018, the USTR imposed additional import duties of up to 25% on certain Chinese products covered by the Section 301 remedy. These tariffs include certain solar power system components and “Item 8. Financial Statementsfinished products, including those purchased from our suppliers for use in our products and Supplementary Data–Notesused in our business. The United States and China continue to Consolidated Financial Statements–Note 8. Restructuring.”signal the possibility of taking additional retaliatory measures in response to actions taken by the other country, which may result in changes to existing trade agreements and terms including additional tariffs on imports from China or other countries.
Uncertainty surrounding the implications of existing tariffs affecting the U.S. solar market, trade tensions between China and the United States is likely to cause market volatility, price fluctuations, supply shortages, and project delays, any of which could harm our business, and our pursuit of mitigating actions may divert substantial resources from other projects. In addition,
the imposition of tariffs is likely to result in a wide range of impacts to the U.S. solar industry and the global manufacturing market, as well as our business in particular. Such tariffs could materially increase the price of our solar products and result in significant additional costs to us, our resellers, and our resellers’ customers, which could cause a significant reduction in demand for our solar power products and greatly reduce our competitive advantage. With the uncertainties associated with the tariffs and Section 301 trade case, events and changes in circumstances indicated that the carrying values of our long-lived assets associated with our manufacturing operations might not be recoverable.
The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our solar power plants,projects, including our residential lease program, and our customers, and is affected by general economic conditions and other factors.
Our growth strategy depends on third-party financing arrangements. We often require project financing for development and construction of certain of our solar power plant projects, which require significant investments before the equity is later sold to investors. Many purchasers of our systems projects have entered into third-party arrangements to finance their systems over an extended period of time, while many end-customers have chosen to purchase solar electricity under a power purchase agreement ("PPA") with an investor or financing company that purchases the system from us or our authorized dealers. We often execute PPAs directly with the end-user, with the expectation that we will later assign the PPA to a financier. Under such arrangements, the financier separately contracts with us to acquire and build the solar power system, and then sells the electricity to the end-user under the assigned PPA. When executing PPAs with end-users, we seek to mitigate the risk that financing will not be available for the project by allowing termination of the PPA in such event without penalty. However, we may not always be successful in negotiating for penalty-free termination rights for failure to obtain financing, and certain end-
usersend-users have required substantial financial penalties in exchange for such rights. These structured finance arrangements are complex and may not be feasible in many situations.
Global economic conditions, including conditions that may make it more difficult or expensive for us to access credit and liquidity, could materially and adversely affect our business and results of operations. Credit markets are unpredictable, and if they become more challenging, we may be unable to obtain project financing for our projects, customers may be unable or unwilling to finance the cost of our products, we may have difficulties in reaching agreements with financiers to finance the construction of our solar power systems, or the parties that have historically provided this financing may cease to do so, or only do so on terms that are substantially less favorable for us or our customers, any of which could materially and adversely affect our revenue and growth in allboth segments of our business. Our plans to continue to grow our residential lease program may be delayed if credit conditions prevent us from obtaining or maintaining arrangements to finance the program. We are actively arranging additional third-party financing for our residential lease program; however, if we encounter challenging credit markets, 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 event we enter into a material number of additional leases without obtaining corresponding third-party financing, our cash, working capital and financial results could be negatively affected. In addition, a rise in interest rates would likely increase our customers’ cost of financing or leasing our products and could reduce their profits and expected returns on investment in our products. The general reduction in available credit to would-be borrowers or lessees, worldwide economic uncertainty, and the condition of worldwide housing markets could delay or reduce our sales of products to new homebuilders and authorized resellers. For more information, see "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 6. Solar Services."
The availability of financing depends on many factors, including market conditions, the demand for and supply of solar projects, and resulting risks of refinancing or disposing of such projects. It also depends in part on government incentives, such as tax incentives. In the United States, with the expiration of the Treasury Grant under Section 1603 of the American Recovery and Reinvestment Act program, we have needed to identify interested financiers with sufficient taxable income to monetize the tax incentives created by our solar systems. In the long term, as we look toward markets not supported (or supported less) by government incentives, we will continue to need to identify financiers willing to finance residential solar systems without such incentives. Our failure to effectively do so could materially and adversely affect our business and results of operations. In addition, with the new administration and Congress have expressed interest inrecent passage of comprehensive reform of the U.S. tax code, which could result inCode, the reduction or eliminationimpact of revisions to various industry-specific tax incentives, in return forsuch as accelerated depreciation, and an overall reduction in corporate tax rates.rates may lead to changes in the market and availability of tax equity investors.
The lack of project financing, due to tighter credit markets or other reasons, could delay the development and construction of our solar power plant projects, thus reducing our revenues from the sale of such projects. We may in some cases seek to pursue partnership arrangements with financing entities to assist residential and other customers to obtain financing for the purchase or lease of our systems, which would expose us to credit or other risks. We face competition for financing partners and if we are unable to continue to offer a competitive investment profile, we may lose access to financing partners or they may
offer financing on less favorable terms than our competitors, which could materially and adversely affect our business and results of operations.
If we fail to successfully execute our cost reduction roadmap, or fail to develop and introduce new and enhanced products and services, we may be unable to compete effectively, and our ability to generate revenues and profits would suffer.
Our solar panels are currently competitive in the market as compared with lower cost conventional solar cells, such as thin-film, due to our products’ higher efficiency, among other things. Given the general downward pressure on prices for solar panels driven by increasing supply and technological change, a principal component of our business strategy is reducing our costs to manufacture our products to remain competitive. We also focus on standardizing our products with the goal of driving down installation costs. If our competitors are able to drive down their manufacturing and installation costs or increase the efficiency of their products faster than we can, or if competitor products are exempted from tariffs and quotas and ours are not, our products may become less competitive even when adjusted for efficiency. Further, if raw materials costs and other third-party component costs were to increase, we may not meet our cost reduction targets. If we cannot effectively execute our cost reduction roadmap, our competitive position will suffer, and we could lose market share and our margins would be adversely affected as we face downward pricing pressure.
The solar power market is characterized by continually changing technology and improving features, such as increased efficiency, higher power output and enhanced aesthetics. Technologies developed by our direct competitors, including thin-film solar panels, concentrating solar cells, solar thermal electric and other solar technologies, may provide energy at lower costs than our products. We also face competition in some markets from other energy generation sources, including conventional fossil fuels, wind, biomass, and hydro. In addition, other companies could potentially develop a highly reliable renewable energy system that mitigates the intermittent energy production drawback of many renewable energy systems. Companies could also offer other value-added improvements from the perspective of utilities and other system owners, in which case such
companies could compete with us even if the cost of electricity associated with any such new system is higher than that of our systems. We also compete with traditional utilities that supply energy to our potential customers. Such utilities have greater financial, technical, operational and other resources than we do. If electricity rates decrease and our products become less competitive by comparison, our operating results and financial condition will be adversely affected.
Our failure to further refine our technology, reduce costcosts in our manufacturing process, and develop and introduce new solar power products could cause our products or our manufacturing facilities to become less competitive or obsolete, which could reduce our market share, cause our sales to decline, and cause the impairment of our assets. This risk requires us to continuously develop new solar power products and enhancements for existing solar power products to keep pace with evolving industry standards, competitive pricing and changing customer preferences, expectations, and requirements. It is difficult to successfully predict the products and services our customers will demand. If we cannot continually improve the efficiency and prove the reliability of our solar panels as compared with those of our competitors, our pricing will become less competitive, we could lose market share and our margins would be adversely affected. We have new products, such as our Performance Series, which have not yet been mass-deployed in the market. We need to prove their reliability in the field as well as drive down their cost in order to gain market acceptance.
As we introduce new or enhanced products or integrate new technology and components into our products, we will face risks relating to such transitions including, among other things, the incurrence of high fixed costs, technical challenges, acceptance of products by our customers, disruption in customers’ ordering patterns, insufficient supplies of new products to meet customers’ demand, possible product and technology defects arising from the integration of new technology and a potentially different sales and support environment relating to any new technology. Our failure to manage the transition to newer products or the integration of newer technology and components into our products could adversely affect our business’s operating results and financial condition.
We may fail See also under this section, “Risks Related to realize the expected benefits of our YieldCo strategy, whichOur Sales Channels-Changes in international trade policies, tariffs, or trade disputes could materiallysignificantly and adversely affect our business, financial condition, and results of operations.
In June 2015, 8point3 Energy Partners, a joint YieldCo vehicle formed by us and First Solar, Inc. to own, operate and acquire solar energy generation assets, launched an initial public offering of Class A shares representing its limited partner interests. The IPO was consummated on June 24, 2015, whereupon the Class A shares were listed on The NASDAQ Global Select Market under the trading symbol “CAFD.”
Immediately after the IPO, we contributed a portfolio of solar generation assets to 8point3 Energy Partners in exchange for cash proceeds as well as equity interests in several 8point3 Energy Partners affiliated entities (collectively, the “8point3 Group”). Additionally, we entered into a Right of First Offer Agreement with 8point3 Energy Partners in connection with the IPO under which we granted 8point3 Energy Partners a right of first offer to purchase certain of our solar energy projects that are in various stages of development in our project pipeline. We have sold four of these projects to 8point3 Energy Partners to date, including two projects which are currently in the process of being sold in phases.
We may be unable to fully realize our expected strategic and financial benefits from the 8point3 Group on a timely basis or at all. The operations of the 8point3 Group are not consolidated with ours. Instead, we account for our investments in the 8point3 Group using the equity method, whereby the book value of our investments is recorded as a non-current asset and our portion of their earnings is recorded in the Consolidated Statements of Operations under the caption “Equity in earnings (loss) of unconsolidated investees.”
There is no assurance that we will realize a return on our equity investments in the 8point3 Group. The ability of the 8point3 Group to make cash distributions will depend primarily upon its cash flow, which is not solely a function of 8point3 Energy Partners’ profitability. There is no assurance that we will receive any further cash distributions. Accordingly, we may never recover the value of the assets we contribute to the YieldCo vehicle, and we may realize less of a return on such contribution than if we had retained or operated these assets. In addition, 8point3 Energy Partners may be unable to obtain funding through the sale of equity securities or otherwise. If adequate funds and other resources are not available on acceptable terms, 8point3 Group may be unable to purchase assets that we wish to sell, or otherwise function as anticipated and planned. In such event, our YieldCo strategy may not succeed, and our business, financial condition andrevenues, margins, results of operations, would be materially adversely affected.and cash flows.”
We believe that the viability of our YieldCo strategy will depend, among other things, upon our ability to continue to develop revenue-generating solar assets, to build and manage relationships with sponsors, and to productively manage our relationship with First Solar and the 8point3 Group, which are subject to the project-level, joint venture relationship, business, and industry risks described herein. If we are unable to realize the strategic and financial benefits that we expect to derive from
our YieldCo strategy and 8point3 Energy Partners in particular, our business, financial condition and results of operations could be materially adversely affected.
The increase in the global supply of solar cells and panels, and increasing competition, may cause substantial downward pressure on the prices of such products and cause us to lose sales or market share, resulting in lower revenues, earnings, and cash flows.
Global solar cell and panel production capacity has been materially increasing overall, and solar cell and solar panel manufacturers currently have excess capacity, particularly in China. Excess capacity and industry competition have resulted in the past, and may continue to result, in substantial downward pressure on the price of solar cells and panels, including SunPower products. Intensifying competition could also cause us to lose sales or market share. Such price reductions or loss of sales or market share could have a negative impact on our revenue and earnings, and could materially adversely affect our business, financial condition and cash flows. In addition, our internal pricing forecasts may not be accurate in such a market environment, which could cause our financial results to be different than forecasted. Uncertainty with respect to Chinese
government policies, including subsidies or other incentives for solar projects, may cause increased, decreased, or volatile supply and/or demand for solar products, which could negatively impact our revenue and earnings. Finally, the imposition by the U.S. of tariffs and quotas could materially adversely affect our ability to compete with other suppliers and developers in the U.S. market. See also under this section, “Risks Related to Our Sales Channels - Channels-If we fail to successfully execute our cost reduction roadmap, or fail to develop and introduce new and enhanced products and services, we may be unable to compete effectively, and our ability to generate revenues and profits would suffer.suffer,” and “Risks Related to Our Sales Channels-Changes in international trade policies, tariffs, or trade disputes could significantly and adversely affect our business, revenues, margins, results of operations, and cash flows.”
The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results.
The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased from the utility network or sold to a utility under tariff, depends in large part on the availability and size of government mandates and economic incentives because, at present, the cost of solar power generally exceeds retail electric rates in many locations and wholesale peak power rates in some locations. Incentives and mandates vary by geographic market. Various government bodies in most of the countries where we do business have provided incentives in the form of feed-in tariffs, rebates, and tax credits and other incentives and mandates, such as renewable portfolio standards and net metering, to end-users, distributors, system integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These various forms of support for solar power are subject to change (as, for example, occurred in 2011 in Germany and other European countries, and in 2015 with Nevada’s decision to change net energy metering)metering; and in 2017 with California's adoption of new time-of-use rates that reduced the price paid to solar system owners for mid-day electricity production; and in 2020 with California's adoption of building standards requiring the installation of solar systems on new homes), and are expected in the longer term to decline. Even changes that may be viewed as positive (such as the extension at the end of 2015 of U.S. tax credits related to solar power) can have negative effects if they result, for example, in delaying purchases that otherwise might have been made before expiration or scheduled reductions in such credits. Governmental decisions regarding the provision of economic incentives often depend on political and economic factors that we cannot predict and that are beyond our control. The reduction, modification or elimination of grid access, government mandates or economic incentives in one or more of our customer markets would materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause our revenue to decline and materially adversely affect our financial results.
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.
The market for electric generation products is heavily influenced by federal, state and local government laws, regulations and policies concerning the electric utility industry in the United States and abroad, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation, and changes that make solar power less competitive with other power sources could deter investment in the research and development of alternative energy sources as well as customer purchases of solar power technology, which could in turn result in a significant reduction in the demand for our solar power products. The market for electric generation equipment is also influenced by trade and local content laws, regulations and policies that can discourage growth and competition in the solar industry and create economic barriers to the purchase of solar power products, thus reducing demand for our solar products. In addition, on-grid applications depend on access to the grid, which is also regulated by government entities. We anticipate that our solar power products and their installation will continue to be subject to oversight and regulation in accordance with federal, state, local and foreign regulations relating to construction, safety, environmental protection, utility interconnection and metering, trade, and related matters. It is difficult to track the requirements of individual states or local jurisdictions and design equipment to comply with the varying standards. In addition, the U.S., European Union and Chinese governments, among others, have imposed tariffs or are in the process of evaluating the imposition of tariffs on solar panels, solar cells, polysilicon, and potentially other components. These and any other tariffs or similar taxes or duties may increase the price of our solar products and adversely affect our cost reduction roadmap, which could harm our results of operations and financial condition. Any new regulations or policies pertaining to our solar power
products may result in significant additional expenses to us, our resellers and our resellers’ customers, which could cause a significant reduction in demand for our solar power products.
As owners See also under this section, “Risks Related to Our Sales Channels-Changes in international trade policies, tariffs, or trade disputes could significantly and operators of solar power systems that deliver electricity to the grid, certain of our affiliated entities may be considered public utilities for purposes of the Federal Power Act, as amended (the “FPA”), and are subject to regulation by the Federal Energy Regulatory Commission (“FERC”), as well as various local and state regulatory bodies.
Although we are not directly subject to FERC regulation under the FPA, we are considered to be a “holding company” for purposes of Section 203 of the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the business, through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or acquire ownership interests in their securities may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.
Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. FERC may grant our affiliated entities the authority to sell electricity at market-based rates and may also grant them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or revise market-based sales authority if FERC subsequently determines that our affiliated entities can exercise market power in the sale of generation products, the provision of transmission services, or if it finds that any of the entities can create barriers to entry by competitors. In addition, if the entities fail to comply with certain reporting obligations, FERC may revoke their power sales tariffs. Finally, if the entities were deemed to have engaged in manipulative or deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or suspension or revocation of their market-based rate authority. If our affiliated entities were to lose their market-based rate authority, such companies would be required to obtain FERC’s acceptance of a cost-of-service rate schedule and could become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and have an adverse effect on ourrevenues, margins, results of operations. In addition to the risks described above, we may be subject to additional regulatory regimes at state or foreign levels to the extent we ownoperations, and operate solar power systems in such jurisdictions.cash flows.”
As our sales to residential customers have continued to grow, we have increasingly become subject to substantial financing and consumer protection laws and regulations.
As we continue to seek to expand our retail customer base, our activities with customers – and in particular, our financing activities with our residential customers – are subject to consumer protection laws that may not be applicable to our commercial and power plant segments, such as federal truth-in-lending, consumer leasing, and equal credit opportunity laws and regulations, as well as state and local finance laws and regulations. Claims arising out of actual or alleged violations of law may be asserted against us by individuals or governmental entities and may expose us to significant damages or other penalties, including fines.
We may incur unexpected warranty and product liability claims that could materially and adversely affect our financial condition and results of operations.
Our current standard product warranty for our solar panels and their components includes a 25-year warranty period for defects in materials and workmanship and for greater than promised declines in power performance. We believe our warranty offering is in line with industry practice. This long warranty period creates a risk of extensive warranty claims long after we have shipped product and recognized revenue. We perform accelerated lifecyclelife cycle testing that exposes our products to extreme stress and climate conditions in both environmental simulation chambers and in actual field deployments in order to highlight potential failures that could occur over the 25-year warranty period. We also employ measurement tools and algorithms intended to help us assess actual and expected performance; these attempt to compare actual performance against an expected performance baseline that is intended to account for many factors (like weather) that can affect performance. Although we conduct accelerated testing of our solar panels and components, they have not and cannot be tested in an environment that exactly simulates the 25-year warranty period and it is difficult to test for all conditions that may occur in the field. Further, there can be no assurance that our efforts to accurately measure and predict panel and component performance will be successful. Although we have not faced any material warranty claims to date, weWe have sold products under our warranties since the early 2000s and have therefore not experienced the full warranty cycle.
In our project installations, our current standard warranty for our solar power systems differs by geography and end-customer application and usually includes a limited warranty of 10 years for defects in workmanship, after which the customer may typically extend the period covered by its warranty for an additional fee. We also typically provide a system output
performance warranty, separate from our standard solar panel product warranty, to customers that have subscribed to our post-installation O&M services. The long warranty period and nature of the warranties create a risk of extensive warranty claims long after we have completed a project and recognized revenues. Warranty and product liability claims may also result from defects or quality issues in certain technology and components (whether manufactured by us or third parties) that we incorporate into our solar power systems, such as solar cells, panels, inverters, and microinverters, over which we may have little or no control. See also “-Risksunder this section “Risks Related to Our Supply Chain-WeChain-We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframestime frames and could in turn result in sales and installation delays, cancellations, penalty payments and loss of market share.share.” While we generally pass through to our customers the manufacturer warranties we receive from our suppliers, in some circumstances, we may be responsible for repairing or replacing defective parts during our warranty period, often including those covered by manufacturers’ warranties, or incur other non-warranty costs. If a manufacturer disputes or otherwise fails to honor its warranty obligations, we may be required to incur substantial costs before we are compensated, if at all, by the manufacturer. Furthermore, our warranties may exceed the period of any warranties from our suppliers covering components, such as third-party solar cells, third-party panels and third-party inverters, included in our systems. In addition, manufacturer warranties may not fully compensate us for losses associated with third-party claims caused by defects or quality issues in their products. For example, most manufacturer warranties exclude certain losses that may result from a system component’s failure or defect, such as the cost of de-installation, re-installation, shipping, lost electricity, lost renewable energy credits or other solar incentives, personal injury, property damage, and other losses. In certain cases, the direct warranty coverage we provide to our customers, and therefore our financial exposure, may exceed our recourse available against cell, panel or other manufacturers for defects in their products. In addition, in the event we seek recourse through warranties, we will also be dependent on the creditworthiness and continued existence of the suppliers to our business. In the past, certain of our suppliers have entered bankruptcy and our likelihood of a successful warranty claim against such suppliers is minimal.
Increases in the defect rate of SunPower or third-party products, including components, could cause us to increase the amount of warranty reserves and have a corresponding material, negative impact on our results of operations. Further, potential future product or component failures could cause us to incur substantial expense to repair or replace defective products or components, and we have agreed in some circumstances to indemnify our customers and our distributors against liability from some defects in our solar products. A successful indemnification claim against us could require us to make significant damage payments. Repair and replacement costs, as well as successful indemnification claims, could materially and negatively impact our financial condition and results of operations.
Like other retailers, distributors and manufacturers of products that are used by customers, we face an inherent risk of exposure to product liability claims in the event that the use of the solar power products into which solar cells, solar panels, and microinverters are incorporated results in injury, property damage or other damages. We may be subject to warranty and product liability claims in the event that our solar power systems fail to perform as expected or if a failure of our solar power systems or any component thereof results, or is alleged to result, in bodily injury, property damage or other damages. Since our solar power products are electricity-producing devices, it is possible that our systems could result in injury, whether by product malfunctions, defects, improper installation or other causes. In addition, since we only began selling our solar cells and solar
panels in the early 2000s and the products we are developing incorporate new technologies and use new installation methods, we cannot predict the extent to which product liability claims may be brought against us in the future or the effect of any resulting negative publicity on our business. Moreover, we may not have adequate resources to satisfy a successful claim against us. We rely on our general liability insurance to cover product liability claims. A successful warranty or product liability claim against us that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages. In addition, quality issues can have various other ramifications, including delays in the recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs associated with repairing or replacing products, and a negative impact on our goodwill and reputation, any of which could adversely affect our business, operating results and financial condition.
Revenues from a limited number ofAs our sales to residential customers have grown, we have increasingly become subject to substantial financing and large projects are expected toconsumer protection laws and regulations.
As we continue to compriseseek to expand our retail customer base, our activities with customers - and in particular, our financing activities with our residential customers - are subject to consumer protection laws that may not be applicable to our other businesses, such as federal truth-in-lending, consumer leasing, telephone and digital marketing, and equal credit opportunity laws and regulations, as well as state and local finance laws and regulations. Claims arising out of actual or alleged violations of law may be asserted against us by individuals or governmental entities and may expose us to significant damages or other penalties, including fines. In addition, our affiliations with third-party dealers may subject us to alleged liability in connection with actual or alleged violations of law by such dealers, whether or not actually attributable to us, which may expose us to significant damages and penalties, and we may incur substantial expenses in defending against legal actions related to third-party dealers, whether or not we are ultimately found liable.
We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring may adversely affect our business.
We announced restructuring plans in February 2018 and December 2019 to realign and optimize workforce requirements in light of recent changes to our business, including the contemplated plan to separate into two public companies through the Spin-Off, to reduce operating expenses and cost of revenue overhead in light of the known shorter-term impact of U.S. tariffs imposed on PV solar cells and modules pursuant to Section 201 of the Trade Act of 1974 and our broader initiatives to control costs and improve cash flow. While we expect to complete the February 2018 and December 2019 plans in 2020 and 2023, respectively, additional actions may be costly and disruptive to our business, and we may not be able to obtain the cost savings and benefits that were initially anticipated in connection with our restructuring. Additionally, we may experience a loss of continuity, loss of accumulated knowledge, or inefficiency during transitional periods associated with our restructurings. Reorganization and restructuring can require a significant portionamount of management and other employees’ time and focus, which may divert attention from operating and growing our total revenues and any decrease in revenues from those customersbusiness. If we fail to achieve some or projects, paymentall of liquidated damages, or an increase in related expenses,the expected benefits of the restructurings, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and financial condition.cash flows. For more information about our restructuring plan, see "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 8. Restructuring."
Even though overAs owners and operators of solar power systems that deliver electricity to the long term we expect our customer base and number of large projects to expand and our revenue streams to diversify, a substantial portiongrid, certain of our revenues will continueaffiliated entities may be considered public utilities for purposes of the Federal Power Act, as amended (the “FPA”), and are subject to depend on sales to a limited number of customersregulation by the Federal Energy Regulatory Commission (“FERC”), as well as constructionvarious local and state regulatory bodies.
Although we are not directly subject to FERC regulation under the FPA, we are considered to be a “holding company” for purposes of a limited numberSection 203 of large projects,the FPA, which regulates certain transactions involving public utilities, and such regulation could adversely affect our ability to grow the lossbusiness through acquisitions. Likewise, investors seeking to acquire our public utility subsidiaries or delayacquire ownership interests in their securities may require prior FERC approval to do so. Such approval could result in transaction delays or uncertainties.
Public utilities under the FPA are required to obtain FERC acceptance of their rate schedules for wholesale sales of electricity and to comply with various regulations. FERC may grant our affiliated entities the authority to sell electricity at market-based rates and may also grant them certain regulatory waivers, such as waivers from compliance with FERC’s accounting regulations. These FERC orders reserve the right to revoke or constructionrevise market-based sales authority if FERC subsequently determines that our affiliated entities can exercise market power in the sale of generation products, the provision of transmission services, or inabilityif it finds that any of the entities can create barriers to collect from those customersentry by competitors. In addition, if the entities fail to comply with certain reporting obligations, FERC may revoke their power sales tariffs. Finally, if the entities were deemed to have engaged in manipulative or for those projects, deceptive practices concerning their power sales transactions, they would be subject to potential fines, disgorgement of profits, and/or an increase in expenses (such as financing costs) relatedsuspension or revocation of their market-based rate authority. If our affiliated entities were to anylose their market-based rate authority, such large projects,companies would havebe required to obtain FERC’s acceptance of a significant negative impact on our business. In fiscal 2016, our top customer accounted for 15% of our
total revenue. These larger projects create concentrated operatingcost-of-service rate schedule and financial risks. Thecould become subject to the accounting, record-keeping, and reporting requirements that are imposed on utilities with cost-based rate schedules, which would impose cost and compliance burdens on us and have an adverse effect on our results of recognizing revenue or other financial measures on the sale of a larger project, or the failure to recognize revenue or other financial measures as anticipated in a given reporting period because a project is not yet completed under applicable accounting rules by period end, may materially affect our financial results.operations. In addition if construction, warranty or operational challenges arise on a larger project, or ifto the timing of such a project unexpectedly changes for other reasons, our financial results could be materially, adversely affected. Our agreements for such projectsrisks described above, we may be cancelledsubject to additional regulatory regimes at state or foreign levels to the extent we may incur large liquidated damages if we fail to execute the projects as planned, obtain certain approvals or consents by a specified time, meet certain productown and project specifications, or if we materially breach the governing agreements, oroperate solar power systems in the event of a customer’s or project entity’s bankruptcy, our customers may seek to cancel or renegotiate the terms of current agreements or renewals. In addition, the failure by any significant customer to make payments when due, whether due to liquidity issues, failure of anticipated government support or otherwise, could materially adversely affect our business, results of operations and financial condition.such jurisdictions.
We do not typically maintain long-term agreements with our customers and accordingly we could lose customers without warning, which could adversely affect our operating results.
Our product sales to residential dealers and components customers typically are not made under long-term agreements. We often contract to construct or sell large projects with no assurance of repeat business from the same customers in the future. Although we believe that cancellations onof our purchase orders to date have been infrequent, our customers may cancel or reschedule purchase orders with us on relatively short notice. Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory. These circumstances, in addition to the completion and non-repetition of large projects, declining average selling prices, changes in the relative mix of sales of solar equipment versus solar project installations, and the fact that our supply agreements are generally long-term in nature and many of our other operating costs are fixed, could cause our operating results to fluctuate and may result in a material adverse effect in our business, results of operations, and financial condition. In addition, since we rely partly on our network of international dealers for marketing and other promotional programs, if our dealers fail to perform up to our standards, our operating results could be adversely affected.
Our business could be adversely affected by seasonal trends and construction cycles.
Our business is subject to significant industry-specific seasonal fluctuations. Our sales have historically reflected these seasonal trends, with the largest percentage of our total revenues realized during the second half of each 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 annual reduction of the applicable minimum feed-in tariff and the fact that the coldest winter months in the Northern Hemisphere are January through March. In the United States, many customers make purchasing decisions towards the end of the year in order to take advantage of tax credits. 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.
The competitive environment in which we operate often requires us to undertake customer obligations, which may turn out to be costlier than anticipated and, in turn, materially and adversely affect our business, results of operations and financial condition.
We are often required, as a condition of financing or at the request of our end customer, to undertake certain obligations such as:
•system output performance warranties;
•system maintenance;
•penalty payments or customer termination rights if the system we are constructing is not commissioned within specified timeframestime frames or other construction milestones are not achieved;
•guarantees of certain minimum residual value of the system at specified future dates;
•system put-rights whereby we could be required to buy back a customer’s system at fair value on a future date if certain minimum performance thresholds are not met; and
•indemnification against losses customers may suffer as a result of reductions in benefits received under the solar commercial investment tax credit (“ITC”) under Section 48(c)and of the Internal Revenue Code of 1986, as amended (the "Code"), and Treasury grant programs under Section 1603 of the American Recovery and Reinvestment Act (the “Cash Grant”).
Such financing arrangements and customer obligations involve complex accounting analyses and judgments regarding the timing of revenue and expense recognition, and in certain situations these factors may require us to defer revenue or profit recognition until projects are completed or until contingencies are resolved, which could adversely affect our revenues and profits in a particular period.
Risks Related to Our Liquidity
We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments, as planned due to the general economic environment and the continued market pressure driving down the average selling prices of our solar power products, among other factors.
To develop new products, including our A-Series (Maxeon 5), support future growth, achieve operating efficiencies, and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. We also anticipate increased costs as we make advance payments for raw materials or pay to procure such materials (especially polysilicon), increase our sales and marketing efforts, invest in joint ventures and acquisitions, invest in our residential lease business, and continue our research and development. Our manufacturing and assembly activities have required and will continue to require significant investment of capital and substantial engineering expenditures. In addition, we expect to invest a significant amount of capital to develop solar power systems and plants for sale to customers. Developing and constructing solar power plantsprojects requires significant time and substantial initial investments.investment. The delayed disposition of such projects, or the inability to realize the full anticipated value of such projects on disposition, could have a negative impact on our liquidity. See also under this section, “Risks Related to Our Operations - Operations-Project development or construction activities may not be successful and we may make significant investments without first obtaining project financing, which could increase our costs and impair our ability to recover our investments.” See also under this section, “Risksinvestments" and "Risks Related to Our Sales Channels - AChannels-Revenues from a limited number of customers and large projects are expected to continue to comprise a significant portion of our total revenues and any decrease in revenues from those customers or projects, payment of liquidated damages, or an increase in related expenses, could have a material adverse effect on our business, results of operations and financial condition.”
Our capital expenditurescondition," and use of working capital may be greater than we anticipate if we decide to make additional investments"Changes in the developmentinternational trade policies, tariffs, or trade disputes could significantly and construction of solar power plants, or if sales of power plants and associated receipt of cash proceeds is delayed, or if we decide to accelerate increases in our manufacturing capacity internally or through capital contributions to joint ventures. In addition, we could in the future make additional investments in certain of our joint ventures or could 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 venture partners. In addition, if our financial results or operating plans deviate from our current assumptions, we may not have sufficient resources to support our business plan. See under this section, “Risks Related to Our Liquidity - We have a significant amount of debt outstanding. Our substantial indebtedness and other contractual commitments could adversely affect our business, financial condition andrevenues, margins, results of operations, as well as our ability to meet our payment obligations under our debentures and our other debt.”cash flows."
Certain of our customers also require performance bonds issued by a bonding agency, or bank guarantees 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 the security, which could have an adverse impact on our liquidity.
On October 29, 2019, we entered into a new Green Revolving Credit Agreement (the “2019 Revolver”) with Crédit Agricole, as lender, with a revolving credit commitment of $55.0 million. The 2019 Revolver contains affirmative covenants, events of default and repayment provisions customarily applicable to similar facilities and has a per annum commitment fee of 0.05% on the daily unutilized amount, payable quarterly. Loans under the 2019 Revolver bear either an adjusted LIBOR interest rate for the period elected for such loan or a floating interest rate of the higher of prime rate, federal funds effective rate, or LIBOR for an interest period of one month, plus an applicable margin, ranging from 0.25% to 0.60%, depending on the base interest rate applied, and each matures on the earlier of April 29, 2021, or the termination of commitments thereunder. Our uncollateralized letter of credit facility with Deutsche Bank, as of January 1, 2017, had an outstanding amount of $45.8 million. Our bilateral letter of credit agreements with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), Credit Agricole, and HSBC Bank USA, National Association, which as of January 1, 2017 had an outstanding amount of $244.8 million,payment obligations under the 2019 Revolver are guaranteed by Total S.A. pursuantup to the Credit Support Agreement between usmaximum aggregate principal amount of $55.0 million. In consideration of the commitments of Total S.A., we are required to pay them a guaranty fee of 0.25% per annum on any amounts borrowed under the 2019 Revolver and to reimburse Total S.A. dated June 29, 2016 (the “Credit Support Agreement”). Any draws under these uncollateralized facilities would require us to immediately reimburse the bank for the drawn amount. A defaultany amounts paid by them under the Credit Support Agreement orparent guaranty. We have pledged the guaranteed letterequity of credit facility, ora wholly-owned subsidiary of the accelerationCompany that holds our shares of Enphase Energy, Inc. common stock to secure our other indebtedness greater than $25 million, could cause Total S.A.reimbursement obligation under the 2019 Revolver. We have also agreed to declare all amounts due and payable to Total S.A. and direct the bank to cease issuing additional letters of credit on our behalf, which could have a material adverse effect on our operations.
In addition, the Credit Support Agreement will terminate as of December 2018 by its terms, and we may be unable to find adequate credit support in replacement, on acceptable terms or at all. In such case,limit our ability to obtain adequate amountsdraw funds under the 2019 Revolver, to no more than 67% of debt financing, throughthe fair market value of the common stock held by our lettersubsidiary at the time of credit facility or otherwise, may be harmed.the draw. As of December 29, 2019, we had no outstanding borrowings under the 2019 Revolver.
We manage our working capital requirements and fund our committed capital expenditures, including the development and construction of our planned solar power plants,projects, through our current cash and cash equivalents, cash generated from
operations, and funds available under our revolving credit facilities with (i) Credit Agricole Corporate2019 Revolver and Investment Bank (“Credit Agricole”) and (ii) Mizuho Bank Ltd. and Goldman Sachs Bank USA (the “Construction Revolver”). On February 17, 2016, we entered into an amendment tofrom our other construction financing providers.Upon the credit agreement with Credit Agricole, expanding our available borrowings under the revolving credit facility to $300 million and adding a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. As of January 1, 2017, $295.3 million remained undrawn under our revolving credit facility with Credit Agricole, with the utilized portiontermination of the facility pertaining to outstanding letters of credit that are fully cash collateralized; however, we are currently not in compliance with the covenant for the Credit Agricole credit facility that requires the ratio that our debt at the end of each quarter to our EBITDA for the last twelve months, as defined, to not exceed 4.5 to 1. We are not in default with Credit Agricole; however,2019 Revolver, we may not drawbe unable to find adequate credit support in replacement, on the facility without collateralizing additional future borrowings with cash. We expectacceptable terms or at all.In such case, our ability to notobtain adequate amounts of debt financing may be in compliance with the aforementioned financial ratio covenant for the Credit Agricole credit facility for at least the remainder of fiscal 2017, which will affect the availability of borrowings under the line, if not remedied. As of January 1, 2017, we had $189.5 million available under the Construction Revolver.
harmed. The lenders under our credit facilities and holders of our debentures may also require us to repay our indebtedness to them in the event that our obligations under other indebtedness or contracts in excess of the applicable threshold amount, are accelerated and we fail to discharge such obligations. If our capital resources are insufficient to satisfy our liquidity requirements, for example, due to cross acceleration of indebtedness, we may seek to sell additional equity securitiesinvestments or debt securities or obtain other debt financings. Market conditions, 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. The sale of additional equity securitiesinvestments or convertible debt securities may result in additional dilution to our stockholders. Additional debt would result in increased expenses and could impose new restrictive covenants that may be different from those restrictions contained in the covenants under certain of our current debt agreements and debentures. Financing arrangements, including project financing for our solar power plantsprojects and letters of credit facilities, may not be available to us, or may not be available in amounts or on terms acceptable to us. If
additional financing is not available, we may be forced to seek to sell assets or reduce or delay capital investments, any of which could adversely affect our business, results of operations and financial condition.
If we cannot generate sufficient cash flows, find other sources of capital to fund our operations and solar power plant projects, make adequate capital investments to remain technologically and price competitive, or provide bonding or letters of credit required by our projects, we may need to sell additional equity securitiesinvestments or debt securities, or obtain other debt financings. If adequate funds from these or and other sources are not available on acceptable terms, our ability to fund our operations, develop and construct solar power plants,projects, develop and expand our manufacturing operations and distribution network, maintain our research and development efforts, provide collateral for our projects, meet our debt service obligations, or otherwise respond to competitive pressures would be significantly impaired. Our inability to do any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
We 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 our payment obligations under the debentures and our other debt.
We currently have a significant amount of debt and debt service requirements. As of January 1, 2017,December 29, 2019, we had approximately $1.6$1.0 billion of outstanding debt for borrowed money.debt.
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 the 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 or a significant portion of our debt becoming immediately due and payable;
•reducing the availability of our cash flows 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 with our competitors that have less debt or have lower leverage ratios.
In the event, expected or unexpected, that any of our joint ventures is consolidated with our financial statements, such consolidation could significantly increase our indebtedness. See also under this section, “Risks Related to Our Operations - We may in the future be required to consolidate the assets, liabilities and financial results of certain of our existing or future joint ventures, which could have an adverse impact on our financial position, gross margin and operating results.”
Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flows, 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 flows 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 unable to generate sufficient cash flows 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. There can be no assurance that we will be successful in any sale of assets, refinancing, or restructuring effort. See also under this section, "Risks Related to Our Operations-We may in the future be required to consolidate the assets, liabilities, and financial results of certain of our existing or future joint ventures, which could have an adverse impact on our financial position, gross margin and operating results", "Risks Related to Our Sales Channels-Changes in international trade policies, tariffs, or trade disputes could significantly and adversely affect our business, revenues, margins, results of operations, and cash flows," and "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 1. Organizationand Summary of Significant Accounting Policies-Liquidity.”
Although we are currently in compliance with the financial and other covenants contained in our debt agreements, (except for the financial covenant for the Credit Agricole credit facility discussed above), we cannot assure you that we will be able to remain in compliance with such covenants in the future. We may not be able to cure future violations or obtain waivers from our creditors in order to avoid a default. An event of default under any of our debt agreements could have a material adverse effect on our liquidity, financial condition, and results of operations.
Our current tax holidays in the Philippines Malaysia, and Switzerland have expired orMalaysia will expire within the next several years, and other related international tax developments could adversely affect our results.
We benefit from income tax holiday incentives in the Philippines in accordance with our subsidiary’s registration with the Philippine Economic Zone Authority (“PEZA”), which provideprovides that we pay no income tax in the Philippines for those operations subject to the ruling.ruling. Tax savings associated with the Philippines tax holidays were approximately $10.0$4.0 million, $21.2$3.4 million, and $8.3$5.6 million in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively, which provided a diluted net income (loss) per share benefit of $0.03, $0.02, and $0.04 in fiscal 2019, 2018, and 2017, respectively.
Our income tax holidays were granted as manufacturing lines were placed in service and have expired within this fiscal year.service. We have appliedplan to apply for extensions and renewals upon expiration; however, while we expect all approvals to be granted, we can offer no assurance that they will be. We believe that if our Philippine tax holidays are not extended or renewed, (a) gross income attributable to activities covered by our PEZA registrations will be taxed at a 5% preferential rate, and (b) our Philippine net income attributable to all other activities will be taxed at the statutory Philippine corporate income tax rate, currently 30%. An increase in our tax liability could materially and adversely affect our business, financial condition and results of operations.
We have ancontinue to qualify for the auxiliary company rulingstatus in Switzerland where we sell our solar power products. The auxiliary company ruling confirmed our entitlementstatus entitles us to a reduced effective Swiss tax rate of 11.5% in Switzerland, reduced from approximately 11.5%24.2%. Tax savings associated with this statusruling were approximately $1.9$2.3 million, $1.6$1.8 million, and $3.5$2.4 million in fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively, which provided a diluted net income (loss) per share benefit of $0.02, $0.01, and $0.02 in fiscal 2019, 2018, and 2017, respectively. The current ruling expires in 2019. If the ruling is not renewed in 2019, Swiss income would be taxable at the full Swiss tax rate of approximately 24.2%.
We also benefit from a tax holiday granted by the Malaysian government, to our former joint venture AUOSP (now our wholly-owned subsidiary, SunPower Malaysia Manufacturing Sdn. Bhd.) subject to certain hiring, capital spending, and manufacturing requirements. We postponed the construction of an additional manufacturing facility (“Fab 3B”), which resulted in failure to meet certain hiring conditions required to continue to benefitreceived approval from the tax ruling. We have successfully negotiated with the Malaysian government to modify the requirements of the tax holiday; we are currently in compliance with the modified requirements of the tax holiday and we expect to remain in compliance with the updated requirements. In addition, we are currently awaiting a ruling for the extension of our tax holiday for a second five-year term (through June 30, 2021). The Company is in the process of negotiating with the Malaysia government to modify the requirements of the second five-year term because of the planned manufacturing expansion in Malaysia. The current negotiation is not expected to affect the tax holiday status. Tax savings associated with the Malaysia tax holiday were approximately $3.9 million, $7.6 million, and $6.8 million in fiscal 2019, 2018, and 2017 respectively, which provided a diluted net income (loss) per share benefit of $0.03, $0.05, and $0.05 in fiscal 2019, 2018, and 2017 respectively. Although we currently expect anwere granted the extension, to be granted, should we fail to meet certain requirements in the future and are unable to renegotiate the tax ruling further, we could be retroactively and prospectively subject to statutory tax rates and repayment of certain incentives which could negatively impact our business.
More generally, with the finalization of specific actions contained within the Organization for Economic Development and Cooperation’s (“OECD”) Base Erosion and Profit Shifting (“BEPS”) study (“Actions”), many OECD countries have acknowledged their intent to implement the Actions and update their local tax regulations. Among the considerations required by the Actions is the need for appropriate local business operational substance to justify any locally granted tax incentives, such as those described above, and that the incentives are not determined to constitute “state aid” which would invalidate the incentive. If we fail to maintain sufficient operational substance or if the countries determine the incentive regimes do not conform with the BEPS regulations being considered for implementation, adverse material economic impacts may result.
A change in our effective tax rate cancould have a significant adverse impact on our business, and an adverse outcome resulting from examination of our income or other tax returns could adversely affect our results.
A number of factors may adversely affect our future effective tax rates, such as the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments to our interpretation of transfer pricing standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; the availability of loss or credit carryforwards to offset taxable income; changes in tax laws or the interpretation of such tax laws (for example proposals for fundamental U.S. and international tax reform); changes in U.S. generally accepted accounting principles ("U.S. GAAP")(U.S. GAAP); expiration or the inability to renew tax rulings or tax holiday incentives; and the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.incentives. A change in our effective tax rate due to any of these factors may adversely affect our future results from operations.
On December 22, 2017, the U.S. enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for fiscal year 2018 (previously known as "The Tax Cuts and Jobs Act" and, as enacted, the "Tax Act"). The Tax Act reduced the federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The U.S. Department of Treasury has broad authority to issue regulations and interpretive guidance that may significantly impact how we will apply
the law and impact our results of operations in the period issued. We analyzed the impacts of the “Tax Act” and concluded that our cash payments for income tax will not be materially impacted in the foreseeable future.
Significant judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely affect our provision for income taxes. In addition, we are subject to examination of our income tax returns by various tax authorities. We regularly assess the likelihood of adverse outcomes resulting from any examination to determine the adequacy of our provision for income taxes. An adverse determination of an examination could have an adverse effect on our operating results and financial condition. See also “Item 8. Financial Statements and Supplementary Data–NotesData-Notes to Consolidated Financial Statements–Note 12. Derivative Financial Instruments.Statements-Note 13. Income Taxes.”
Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are evolving (for example, those relating to the Actions currently being undertaken by the OECD and similar actions by the G8 and G20) and the change in Administration in the U.S. tax reform may lead to further changes in (or departure from) these norms. As these and other tax laws and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
Our credit and other agreements contain covenant restrictions that may limit our ability to operate our business.
We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing, because our debt agreements, our Credit Support Agreement with Total S.A., our Affiliation Agreement with Total, foreign exchange hedging agreements and equity derivative agreements contain, and any of our other future similar agreements may contain, covenant restrictions that limit our ability to, among other things:
•incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;
•create liens;
•make certain investments or acquisitions;
•enter into transactions with our affiliates;
•sell certain assets;
•redeem capital stock or make other restricted payments;
•declare or pay dividends or make other distributions to stockholders; and
•merge or consolidate with any person.
Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under our other debt instruments, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operations.
Risks Related to Our Supply Chain
We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframes and could in turn result in sales and installation delays, cancellations, penalty payments, and loss of market share.
We rely on a limited number of third-party suppliers, including our joint ventures, for certain raw materials and components for our solar cells, panels and power systems, such as polysilicon, inverters and module material. If we fail to maintain our relationships with our suppliers or to build relationships with new suppliers, or if suppliers are unable to meet demand through industry consolidation, we may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay.
To the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers. In addition, the financial markets could limit our suppliers’ ability to raise capital if required to expand their production or satisfy their operating capital requirements. As a result, they could be unable to supply necessary raw materials, inventory and capital equipment which we would require to support our planned sales operations to us, which would in turn negatively impact our sales volume, profitability, and cash flows. The failure of a supplier to supply raw materials or components in a timely manner, or to supply raw materials or components that meet our quality, quantity and cost requirements, could impair our ability to manufacture our products or could increase our cost of production. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our products to our customers within required timeframes.
Any such delays could result in sales and installation delays, cancellations, penalty payments or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.
Our long-term, firm commitment supply agreements could result in excess or insufficient inventory, place us at a competitive disadvantage on pricing, or lead to disputes, each of which could impair our ability to meet our cost reduction roadmap, and in some circumstances may force us to take a significant accounting charge.
If our supply agreements provide insufficient inventory to meet customer demand, or if our suppliers are unable or unwilling to provide us with the contracted quantities, we may be forced to purchase additional supply at market prices, which could be greater than expected and could materially and adversely affect our results of operations. Due to the industry-wide
shortage of polysilicon experienced before 2011, we purchased polysilicon that we resold to third-party ingot and wafer manufacturers who deliver wafers to us that we then use in the manufacturing of our solar cells. Without sufficient polysilicon, some of those ingot and wafer manufacturers would not have been able to produce the wafers on which we rely. We have historically entered into multiple long-term fixed supply agreements for periods of up to 10 years to match our estimated customer demand forecasts and growth strategy for the next several years. The long-term nature of these agreements, which often provide for fixed or inflation-adjusted pricing, may prevent us from benefiting from decreasing polysilicon costs, has, and may continue to, cause us to pay more at unfavorable payment terms than the current market prices and payment terms available to our competitors, and has in the past, and could again in the future, cause us to record an impairment. In the event that we have inventory in excess of short-term requirements of polysilicon, in order to reduce inventory or improve working capital, we may, and sometimes do, elect to sell such inventory in the marketplace at prices below our purchase price, thereby incurring a loss.
Additionally, because certain of these agreements are “take or pay,” if our demand for polysilicon from these suppliers were to decrease in the future,decreases, we could be required to purchase polysilicon that we do not need, resulting in either storage costs or payment for polysilicon we nevertheless choose not to accept from such suppliers. Further, we face significant, specific counterparty risk under long-term supply agreements when dealing with suppliers without a long, stable production and financial history. In the event any such supplier experiences financial difficulties or goes into bankruptcy, it could be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. Any of the foregoing could materially harm our financial condition and results of operations.
We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframes and could in turn result in sales and installation delays, cancellations, penalty payments, and loss of market share.
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TableWe rely on a limited number of Contentsthird-party suppliers for certain raw materials and components for our solar cells, panels and power systems, such as polysilicon, inverters and module material. If we fail to maintain our relationships with our suppliers or to build relationships with new suppliers, or if suppliers are unable to meet demand through industry consolidation, we may be unable to manufacture our products or our products may be available only at a higher cost or after a long delay.
To the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers. In addition, the financial markets could limit our suppliers’ ability to raise capital if required to expand their production or satisfy their operating capital requirements. As a result, they could be unable to supply necessary raw materials, inventory and capital equipment which we would require to support our planned sales operations to us, which would in turn negatively impact our sales volume, profitability, and cash flows. The failure of a supplier to supply raw materials or components in a timely manner, or to supply raw materials or components that meet our quality, quantity and cost requirements, could impair our ability to manufacture our products or could increase our cost of production. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our products to our customers within required time frames.
Any such delays could result in sales and installation delays, cancellations, penalty payments or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.
We utilize construction loans, term loans, sale-leaseback, partnership flip, preferred equity, and other financing structures to fund acquisition, development, construction, and expansion of photovoltaic power plantcertain solar projects, in the future, and such funds may or may not continue to be available as required to further our plans. Furthermore, such project financing increases our consolidated debt and may be structurally senior to other debt such as our Credit Agricole revolving credit facility2019 Revolver and outstanding convertible debentures.
Certain of our subsidiaries and other affiliates are separate and distinct legal entities and, except in limited circumstances, have no obligation to pay any amounts due with respect to our indebtedness or indebtedness of other subsidiaries or affiliates, and do not guarantee the payment of interest on or principal of such indebtedness. Such subsidiaries may borrow funds to finance particular projects. In the event of a default under a project financing which we do not cure, the lenders or lessors generally have rights to the power plant project and related assets. In the event of foreclosure after a default, we may not be able to retain any interest in the power plant project or other collateral supporting such financing. In addition, any such default or foreclosure may trigger cross default provisions in our other financing agreements, including our corporate debt obligations, which could materially and adversely affect our results of operations. In the event of our bankruptcy, liquidation or reorganization (or the bankruptcy, liquidation or reorganization of a subsidiary or affiliate), such subsidiaries’ or other affiliates’ creditors, including trade creditors and holders of debt issued by such subsidiaries or affiliates, will generally be entitled to payment of their claims from the assets of those subsidiaries or affiliates before any assets are made available for distribution to us or the holders of our indebtedness. As a result, holders of our corporate indebtedness will be effectively
subordinated to all present and future debts and other liabilities (including trade payables) of certain of our subsidiaries. As of January 1, 2017,December 29, 2019, our subsidiaries had approximately $427.9$9.1 million in subsidiary project financing, which is effectively senior to our corporate debt, such as our Credit Agricole revolving credit facility,2019 Revolver, our 4.00% debentures due 2023 and our 0.875% debentures due 2021, and our 0.75% debentures due 2018.2021.
Risks Related to Our Operations
We have significant international activities and customers, and plan to continue these efforts, which subject us to additional business risks, including logistical complexity and political instability.
A substantial portion of our sales are made to customers outside of the United States, and a substantial portion of our supply agreements are with supply and equipment vendors located outside of the United States. We have solar cell and module production lines located at our manufacturing facilities in the Philippines, Mexico, France, and Malaysia.
Risks we face in conducting business internationally include:
•multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, environmental protection, regulatory requirements, international trade agreements, and other government approvals, permits and licenses;
•difficulties and costs in staffing and managing foreign operations as well as cultural differences;
•potentially adverse tax consequences associated with ourcurrent, future or deemed permanent establishment of operations in multiple countries;
•relatively uncertain legal systems, including potentially limited protection for intellectual property rights, and laws, changes in the governmental incentives we rely on, regulations and policies which impose additional restrictions on the ability of foreign companies to conduct business in certain countries or otherwise place them at a competitive disadvantage in relation to domestic companies;
taxation by the U.S. of the repatriation of non-U.S. earnings taxed at rates lower than the U.S. statutory effective tax rate;
•inadequate local infrastructure and developing telecommunications infrastructures;
•financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable;
•currency fluctuations, government-fixed foreign exchange rates, the effects of currency hedging activity, and the potential inability to hedge currency fluctuations;
•political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions;
•trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries; and
•liabilities associated with compliance with laws (for example, the Foreign Corrupt Practices Act in the United StatesU.S. and similar laws outside of the United States)U.S.).
We have a complex organizational structure involving many entities globally. This increases the potential impact of adverse changes in laws, rules and regulations affecting the free flow of goods and personnel, and therefore heightens some of the risks noted above. Further, this structure requires us to effectively manage our international inventory and warehouses. If we fail to do so, our shipping movements may not mapcorrespond with product demand and flow. Unsettled intercompany balances between entities could result, if changes in law, regulations or related interpretations occur, in adverse tax or other consequences affecting our capital structure, intercompany interest rates and legal structure. If we are unable to successfully manage any such risks, any one or more could materially and negatively affect our business, financial condition and results of operations.
If we experience interruptions in the operation of our solar cell production lines, or we are not successful in integrating and continuing to operate our newly acquired manufacturing subsidiary (the former joint venture, AUOSP, in which we acquired our partner's interest in fiscal 2016), our revenue and results of operations may be materially and adversely affected.
If our solar cell or module production lines suffer problems that cause downtime, we might be unable to meet our production targets, which would adversely affect our business. Our manufacturing activities require significant management attention, a significant capital investment and substantial engineering expenditures.
In September 2016 we completed the acquisition of 100% of the voting equity interest in our former joint venture AUOSP (now our wholly owned subsidiary). The former AUOSP constructed a manufacturing facility in Malaysia, which we call Fab 3. The success of our manufacturing operations in Malaysia and elsewhere is subject to significant risks including:
•cost overruns, delays, supply shortages, equipment problems and other operating difficulties;
•custom-built equipment may take longer or cost more to engineer than planned and may never operate as designed;
•incorporating first-time equipment designs and technology improvements, which we expect to lower unit capital and operating costs, but which may not be successful;
•our ability to obtain or maintain third partythird-party financing to fund capital requirements;
•difficulties in maintaining or improving our historical yields and manufacturing efficiencies;
•difficulties in protecting our intellectual property and obtaining rights to intellectual property developed by the former AUOSP or otherour manufacturing partners;
•difficulties in hiring and retaining key technical, management, and other personnel;
difficulties in successfully or timely integrating the former AUOSP's operations with our own, or implementing IT infrastructure or an effective control environment;•impacts that may arise from natural disasters and epidemics; and
•potential inability to obtain, or obtain in a timely manner, financing, or approvals from governmental authorities for operations.operations; and
•tariffs imposed on imported solar cells and modules which may cause market volatility, price fluctuations, supply shortages, and project delays.
Any of these or similar difficulties may unexpectedly delay or increase costs of our supply of solar cells.cells, which could adversely impact our business and operating results. For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in extended holidays and travel restrictions. At this point, the extent to which the coronavirus may impact our supply, operations, or sale of our products is uncertain.
If we do not achieve satisfactory yields or quality in manufacturing our solar products, our sales could decrease and our relationships with our customers and our reputation may be harmed.
The manufacture of solar cells is a highly complex process. Minor deviations in the manufacturing process can cause substantial decreases in yield and in some cases, cause production to be suspended or yield no output. We have from time to time experienced lower than anticipated manufacturing yields. As we expand our manufacturing capacity and qualify additional suppliers, we may initially experience lower yields. If we do not achieve planned yields, our product costs could increase, and product availability would decrease resulting in lower revenues than expected. In addition, in the process of transforming polysilicon into ingots, a significant portion of the polysilicon is removed in the process. In circumstances where we provide the polysilicon, if our suppliers do not have very strong controls in place to ensure maximum recovery and utilization, our economic yield can be less than anticipated, which would increase the cost of raw materials to us.
Additionally, products as complex as ours may contain undetected errors or defects, especially when first introduced. For example, our solar cells or solar panels may contain defects that are not detected until after they are shipped or are installed because we cannot test for all possible scenarios. These defects could cause us to incur significant warranty, non-warranty, and re-engineering costs, divert the attention of our engineering personnel from product development efforts, and significantly affect our customer relations and business reputation. If we deliver solar products with errors or defects, including cells or panels of third-party manufacturers, or if there is a perception that such solar products contain errors or defects, our credibility and the market acceptance and sales of our products could be harmed. In addition, some of our arrangements with customers include termination or put rights for non-performance. In certain limited cases, we could incur liquidated damages or even be
required to buy back a customer’s system at fair value on specified future dates if certain minimum performance thresholds are not met.
A change in our 1603 Treasury cash grant proceeds orthe solar investment tax creditscredit could adversely affect our business, revenues, margins, results of operations and cash flows.
We have incorporated into our financial planning and agreements with our customers certain assumptions regarding the future level of U.S. tax incentives, including the ITC, and Cash Grant, which is administered by the U.S. Treasury DepartmentInternal Revenue Service (“Treasury”IRS”) and provides cash grant payments in lieu of the ITC.. The ITC and Cash Grant allowallows qualified applicants to claim an amount equal to 30%26% of the eligible cost basis for qualifying solar energy property. We hold projects and have sold projects to certain customers based on certain underlying assumptions regarding the ITC and Cash Grant, including for CVSR and Solar Star. ITC.We have also accounted for certain projects and programs in our business using the same assumptions.
Owners of our qualifying projects and our residential lease program have applied or will apply for the ITC and have applied for the Cash Grant. We have structured theassumptions regarding expected tax incentive applications,benefits, both in timing and amount, to beare made in accordance with the guidance provided by Treasury and Internal Revenue Service (“IRS”).the IRS. Any changes to the Treasury or IRS guidance which we relied upon in structuring our projects, failure to comply with the requirements, including the safe harbor protocols,guidance, lower levels of incentives granted, or changes in assumptions including the estimated residual values and the estimated fair market value of financed and installed systems for the purposes of Cash Grant andthe ITC, applications, could materially and adversely affect our business and results of operations. While all grants related to our projects have been fully paid by Treasury, ifIf the IRS or Treasury disagrees, as a result of any future review or audit, with the fair market value of, or other assumptions concerning, our solar projects or systems that we have constructed or that we construct in the future, including the systems for which tax incentives have already been paid, it could have a material adverse effect on our business and financial condition. We also have obligations to indemnify certain of our customers and investors for the loss of tax incentives to such customers.incentives. We may have to recognize impairments or lower margins than initially anticipated for certain of our projects or our residential lease program. Additionally, if the amount or timing of the Cash Grant or ITC paymentsITCs received varies from what we have projected, our revenues, margins and cash flows could be adversely affected and we may have to recognize losses, which would have a material adverse effect on our business, results of operations and financial condition.
There are continuing developments in the interpretation and application of how companies should calculate their eligibility and level of Cash Grant and ITC incentives. There have been recent cases in the U.S. district courts that challenge the criteria for a true lease, which could impact whether the structure of our residential lease program qualifies under the Cash Grant and ITC. Additionally, the Office of the Inspector General of the Treasury has issued subpoenas to a number of significant participants in the rooftop solar energy installation industry. The Inspector General is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the Cash Grant program, including potential misrepresentations concerning the fair market value of certain solar power systems submitted for Cash Grant. While we have not received a subpoena, we could be asked to participate in the information gathering process. The results of the current investigation could affect the underlying assumption used by the solar industry, including us, in our Cash
Grant and ITC applications, which could reduce eligibility and level of incentives and could adversely affect our results of operations and cash flows.
We were notified by an investor in Section 1603 residential inverted lease structures of an IRS examination of such investor’s income tax filings. Under this structure, we transferred the cash grants to the investor pursuant to the 1603 program regulations. If the IRS redetermines the amount of the cash grant awards, the investorITC, investors may be required to make corresponding adjustments to itstheir taxable income or other changes. Such adjustments may provide us with an indication of IRS practice regarding the valuation of residential leased solar assets, and we would consider such adjustments in our accounting for our indemnification obligations to investors who receive ITCs.
Acquisitions of other companies, project development pipelines and other assets, or investments in joint ventures with other companies could materially and adversely affect our financial condition and results of operations, and dilute our stockholders’ equity.
To expand our business and maintain our competitive position, we have acquired a number of other companies and entered into several joint ventures over the past several years, including our acquisitions of Cogenra Solar, Inc. and Solaire Generation, Inc. in fiscal 2015, our acquisition of 100% of the equity voting interest in our former joint venture AUO SunPower Sdn. Bhd. in fiscal 2016, our entry into a manufacturing joint venture in China in 2017, and our SunStrong and Solar Sail joint ventures with Hannon Armstrong and acquisition of SolarWorld Americas in fiscal 2018 and 2019. In the future, we may acquire additional companies, project pipelines, products, or technologies or enter into additional joint ventures or other strategic initiatives.
Acquisitions and joint ventures involve a number of risks that could harm our business and result in the acquired business or joint venture not performing as expected, including:
•insufficient experience with technologies and markets in which the acquired business or joint venture is involved, which may be necessary to successfully operate and/or integrate the business or the joint venture;
•problems integrating the acquired operations, personnel, IT infrastructure, technologies or products with the existing business and products;
•diversion of management time and attention from the core business to the acquired business or joint venture;
•potential failure to retain or hire key technical, management, sales and other personnel of the acquired business or joint venture;
•difficulties in retaining or building relationships with suppliers and customers of the acquired business or joint venture, particularly where such customers or suppliers compete with us;
•potential failure of the due diligence processes to identify significant issues with product quality and development or legal and financial liabilities, among other things;
•potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities or work councils, which could delay or prevent acquisitions, delay our ability to achieve synergies, or adversely impact our successful operation of acquired companies or joint ventures;
•potential necessity to re-apply for permits of acquired projects;
•problems managing joint ventures with our partners, meeting capital requirements for expansion, potential litigation with joint venture partners and reliance upon joint ventures which we do not control;
•differences in philosophy, strategy, or goals with our joint venture partners;
•subsequent impairment of the acquired assets, including intangible assets; and
•assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, environmental matters, and liabilities associated with compliance with laws (for example, the FCPA).
Additionally, we may decide that it is in our best interests to enter into acquisitions or joint ventures that are dilutive to earnings per share or that negatively impact margins as a whole. In an effort to reduce our cost of revenue, we have and may continue to enter into acquisitions or joint ventures involving suppliers or manufacturing partners, which would expose us to additional supply chain risks. Acquisitions or joint ventures could also require investment of significant financial resources and require us to obtain additional equity financing, which may dilute our stockholders’ equity, or require us to incur additional indebtedness. Such equity or debt 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 grantsflows, increase our indebtedness and investment tax credits.expose us to the credit risk of our joint ventures.
To the extent that we invest in upstream suppliers or downstream channel capabilities, we may experience competition or channel conflict with certain of our existing and potential suppliers and customers. Specifically, existing and potential suppliers and customers may perceive that we are competing directly with them by virtue of such investments and may decide to reduce or eliminate their supply volume to us or order volume from us. In particular, any supply reductions from our polysilicon, ingot or wafer suppliers could materially reduce manufacturing volume.
Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results.
We obtain certain of our capital equipment used in our manufacturing process from sole suppliers and if this equipment is damaged or otherwise unavailable, our ability to deliver products on time will suffer, which in turn could result in order cancellations and loss of revenue.
Some of the capital equipment used in the manufacture of our solar power products has been developed and made specifically for us, is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown of our manufacturing equipment, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner, with adequate quality and on terms acceptable to us, could delay our future
capacity expansion or manufacturing process improvements and otherwise disrupt our production schedule or increase our costs of production.
Project development or construction activities may not be successful, and we may make significant investments without first obtaining project financing, which could increase our costs and impair our ability to recover our investments.
The development and construction of solar power electric generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive or capable of being built. In addition, we will often choose to bear the costs of such efforts prior to obtaining project financing, prior to getting final regulatory approval, and prior to our final sale to a customer, if any.
Successful completion of a particular project may be adversely affected by numerous factors, including:
failures or delays in obtaining desired or necessary land rights, including ownership, leases and/or easements;
failures or delays in obtaining necessary permits, licenses or other governmental support or approvals, or in overcoming objections from members of the public or adjoining land owners;
uncertainties relating to land costs for projects;
unforeseen engineering problems;
access to available transmission for electricity generated by our solar power plants;
construction delays and contractor performance shortfalls;
work stoppages or labor disruptions and compliance with labor regulations;
cost over-runs;
availability of products and components from suppliers;
adverse weather conditions;
environmental, archaeological and geological conditions; and
availability of construction and permanent financing.
If we are unable to complete the development of a solar power plant, or fail to meet one or more agreed target construction milestone dates, we may be subject to liquidated damages and/or penalties under the EPC agreement or other agreements relating to the power plant, and we typically will not be able to recover our investment in the project. We expect to invest a significant amount of capital to develop projects initially owned by us or ultimately owned by third parties. If we are unable to complete the development of a solar power project, we may write-down or write-off some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized.
If we cannot offer residential lease customers an attractive value proposition due to an inability to continue to monetize tax benefits in connection with our residential lease arrangements, an inability to obtain financing for our residential lease program, challenges implementing our third-party ownership model in new jurisdictions, declining costs of retail electricity, or otherwise,other reasons, we may be unable to continue to increase the size of our residential lease program, which could have a material, adverse effect on our business, results of operations, and financial condition.
Our residential lease program has been eligible for the ITC and Cash Grant.ITC. We have relied on, and expect to continue to rely on, financing structures that monetize a substantial portion of those benefits. If we were unable to continue to monetize the tax benefits in our financing structures or such tax benefits were reduced or eliminated, we might be unable to provide financing or pricing that is attractive to our customers. Under current law, the ITC will bewas reduced from approximately 30% of the cost of the solar system to approximately 26% for solar systems placed into service after December 31, 2019, and thenwill be further reduced to approximately 22% for solar systems placed into service after December 31, 2020, before being reduced permanently to 10% for commercial projects and 0% for residential projects. In addition, Cash Grants are no longer available for new solar systems.
Changes in existing law and interpretations by the IRS Treasury and the courts could reduce the willingness of financing partners to invest in funds associated with our residential lease program. Additionally, benefits under the Cash Grant and ITC programs are tied, in part, to the fair market value of our systems, as ultimately determined by the federal agency administering the benefit program. This means that, in connection with implementing financing structures that monetize such benefits, we need to, among other things, assess the fair market value of our systems in order to arrive at an estimate of the amount of tax benefit expected to be derived from the benefit programs. We incorporate third-party valuation reports that we believe to be reliable into our methodology for assessing the fair market value of our systems, but these reports or other elements of our methodology may cause our fair market value estimates to differ from those ultimately determined by the federal agency administering the applicable benefit program. If the amount or timing of Cash Grant payments orthe ITC received in connection with our residential lease program varies from what we have projected, due to discrepancies in our fair value assessments or otherwise, our revenues, cash flows, and margins could be adversely affected.
Additionally, if any of our financing partners that currently provide financing for our solar systems decide not to continue to provide financing due to general market conditions, changes in tax benefits associated with our solar systems, concerns about our business or prospects, or any other reason, or if they materially change the terms under which they are willing to provide future financing, we will need to identify new financing partners and negotiate new financing terms.
See also under this section, “Risks Related to Our Supply Chain - Chain—A change in our anticipated 1603 Treasury cash grant proceeds orthe solar investment tax credit could adversely affect our business, revenues, margins, results of operations and cash flows.”
We have to quicklycontinuously build and improve infrastructure to support our residential lease program, and any failure or delay in implementing the necessary processes and infrastructure could adversely affect our financial results. We establish credit approval limits based on the credit quality of our customers. We may be unable to collect rent payments from our residential lease customers in the event they enter into bankruptcy or otherwise fail to make payments when due. If we experience higher customer default rates than we currently experience or if we lower credit rating requirements for new customers, it could be more difficult or costly to attract future financing. See also under this section, “Risks Related to Our Sales Channels - Channels—The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our solar power plants, our residential lease program, and our customers, and is affected by general economic conditions.”
We make certain assumptions in accounting for our residential lease program, including, among others, assumptions in accounting for our residual value of the leased systems. As our residential lease program grows, if the residual value of leased systems does not materialize as assumed, it will adversely affect our results of operations. At the end of the term of the lease, our customers have the option to extend the lease and certain of those customers may either purchase the leased systems at fair market value or return them to us. Should there be a large number of returns, we may incur de-installation costs in excess of amounts reserved.
We believe that, as with our other customers, retail electricity prices factor significantly into the value proposition of our products for our residential lease customers. If prices for retail electricity or electricity from other renewable sources decrease, our ability to offer competitive pricing in our residential lease program could be jeopardized because such decreases would make the purchase of our solar systems or the purchase of energy under our lease agreements and PPAs less economically attractive.
Our leases are third-party ownership arrangements. Sales of electricity by third parties face regulatory challenges in some states and jurisdictions. Other challenges pertain to whether third-party owned systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems. Reductions in, or eliminations of, this treatment of these third-party arrangements could reduce demand for our residential lease program. As we look to extend the third partythird-party ownership model outside of the United States, we will be faced with the same risks and uncertainties we have in the United States. Our growth outside of the United States could depend on our ability to expand the third partythird-party ownership model, and our failure to successfully implement a third-party ownership model globally could adversely affect our financial results.
Our success depends on the continuing contributions of our key personnel.
We rely heavily on the services of our key executive officers and the loss of services of any principal member of our management team could adversely affect our operations. We have experienced significant turnover in our management team in the recent past, and we are investing significant resources in developing new members of management as we complete our restructuring and strategic transformation. In connection with our separation into two public companies through the Spin-Off, members of SunPower’s management team may accept roles with Maxeon Solar. We also anticipate that over time we will need to hire a number of highly skilled technical, manufacturing, sales, marketing, administrative, and accounting personnel. In recent years, we have conducted several restructurings, which may negatively affect our ability to execute our strategy and business model, and may impair our ability to retain key talent required to provide transition services during such restructurings. The competition for qualified personnel is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of qualified personnel to support our anticipated growth. We cannot guarantee that any employee will remain employed with us for any definite period of time since all of our employees, including our key executive officers, serve at-will and may terminate their employment at any time for any reason.
Project development or construction activities may not be successful, and we may make significant investments without first obtaining project financing, which could increase our costs and impair our ability to recover our investments.
The development and construction of solar power electric generation facilities and other energy infrastructure projects involve numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive or capable of being built. In addition, we will often choose to bear the costs of such efforts prior to obtaining project financing, prior to getting final regulatory approval, and prior to our final sale to a customer, if any.
Successful completion of a particular project may be adversely affected by numerous factors, including:
•failures or delays in obtaining desired or necessary land rights, including ownership, leases and/or easements;
•failures or delays in obtaining necessary permits, licenses or other governmental support or approvals, or in overcoming objections from members of the public or adjoining land owners;
•unforeseen engineering problems;
•uncertainties relating to access to available transmission for electricity generated by our solar power systems and delays in interconnection of such systems;
•construction delays and contractor performance shortfalls;
•work stoppages or labor disruptions and compliance with labor regulations;
•cost over-runs;
•availability of products and components from suppliers;
•adverse weather conditions;
•environmental, archaeological and geological conditions; and
•availability of construction and permanent financing.
If we are unable to complete the development of a solar power project, or fail to meet one or more agreed target construction milestone dates, we may be subject to liquidated damages and/or penalties under the EPC agreement or other agreements relating to the power plant, and we typically will not be able to recover our investment in the project. We expect to invest a significant amount of capital to develop projects initially owned by us or ultimately owned by third parties. If we are unable to complete the development of a solar power project, we may write-down or write-off some or all of these capitalized investments, which would have an adverse impact on our net income in the period in which the loss is recognized.
We act as the general contractor for many of our customers in connection with the installations of our solar power systems and are subject to risks associated with construction, cost overruns, delays and other contingencies tied to performance bonds and letters of credit, or other required credit and liquidity support guarantees, any of which could have a material adverse effect on our business and results of operations.
We act as the general contractor for many of our customers in connection with the installation of our solar power systems. Some customers require performance bonds issued by a bonding agency or letters of credit issued by financial institutions, or may require other forms of liquidity support. Due to the general performance risk inherent in construction activities, it has become increasingly difficult recently to attain suitable bonding agencies willing to provide performance bonding. Obtaining letters of credit may require collateral. In the event we are unable to obtain bonding, or sufficient letters of credit, or other liquidity support, we will be unable to bid on, or enter into, sales contracts requiring such bonding.
Almost all of our EPC contracts are fixed price contracts. We attempt to estimate all essential costs at the time of entering into the EPC contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the subcontractors, suppliers, and any other parties that may become necessary to complete the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Thus, if the cost of materials or skilled labor were to rise dramatically, or if financing costs were to increase, our operating results could be adversely affected.
In addition, the contracts with some of our larger customers require that we would be obligatedobligate us to pay substantial penalty payments for each day or other period beyond an agreed target date that a solar installation for any such customer is not completed, up to and including the return of the entire project sale price. This is particularly true in Europe, where long-term, fixed feed-in tariffs available to investors are typically set during a prescribed period of project completion, but the fixed amount declines over time for projects completed in subsequent periods. We face material financial penalties in the event we fail to meet the completion deadlines, including but not limited to a full refund of the contract price paid by the customers. In certain cases we do not control all of the events which could give rise to these penalties, such as reliance on the local utility to timely complete electrical substation construction.
Furthermore, investors often require that the solar power system generate specified levels of electricity in order to maintain their investment returns, allocating substantial risk and financial penalties to us if those levels are not achieved, up to and including the return of the entire project sale price. Also, our customers often require protections in the form of conditional payments, payment retentions or holdbacks, and similar arrangements that condition its future payments on performance. Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. Additionally, we sometimes purchase land in connection with project development and assume the risk of project completion. All such risks could have a material adverse effect on our business and results of operations.
Acquisitions
We could be adversely affected by any violations of other companies, project development pipelinesthe FCPA and other assets, or investments in joint ventures with other companies could materially and adversely affect our financial condition and results of operations, and dilute our stockholders’ equity.foreign anti-bribery laws.
To expand our business and maintain our competitive position, we have acquired a number of otherThe FCPA generally prohibits companies and enteredtheir intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Our policies mandate compliance with these anti-bribery laws. We continue to acquire businesses outside of the United States and operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into several joint ventures overnew jurisdictions through internal growth or acquisitions requires substantial government contact where norms can differ from U.S. standards. While we implement policies and procedures and conduct training designed to facilitate compliance with these anti-bribery laws, thereby mitigating the past several years, includingrisk of violations of such laws, our 8point3 joint venture with First Solar,employees, subcontractors and agents may take actions in violation of our
policies and anti-bribery laws. Any such violation, even if
acquisitions of Cogenra Solar, Inc. and Solaire Generation, Inc. in fiscal 2015, andprohibited by our acquisition of 100% of the equity voting interest in AUOSP in fiscal 2016. In the future, we may acquire additional companies, project pipelines, products,policies, could subject us to criminal or technologies or enter into joint venturescivil penalties or other strategic initiatives.
Acquisitions and joint ventures involve a number of risks that could harm our business and result in the acquired business or joint venture not performing as expected, including:
insufficient experience with technologies and markets insanctions, which the acquired business or joint venture is involved, which may be necessary to successfully operate and/or integrate the business or the joint venture;
problems integrating the acquired operations, personnel, IT infrastructure, technologies or products with the existing business and products;
diversion of management time and attention from the core business to the acquired business or joint venture;
potential failure to retain or hire key technical, management, sales and other personnel of the acquired business or joint venture;
difficulties in retaining or building relationships with suppliers and customers of the acquired business or joint venture, particularly where such customers or suppliers compete with us;
potential failure of the due diligence processes to identify significant issues with product quality and development or legal and financial liabilities, among other things;
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities or work councils, which could delay or prevent acquisitions, delay our ability to achieve synergies, or our successful operation of acquired companies or joint ventures;
potential necessity to re-apply for permits of acquired projects;
problems managing joint ventures with our partners, meeting capital requirements for expansion, potential litigation with joint venture partners and reliance upon joint ventures which we do not control; for example, our ability to effectively manage 8point3 Energy Partners with First Solar;
differences in philosophy, strategy or goals with our joint venture partners;
subsequent impairment of the acquired assets, including intangible assets; and
assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, environmental matters and liabilities associated with compliance with laws (for example, the FCPA).
The success of our joint venture 8point3 Energy Partners is subject to additional risks described under the risk factor “Risks Related to Our Sales Channels - We may fail to realize the expected benefits of our YieldCo strategy.”
Additionally, we may decide that it is in our best interests to enter into acquisitions or joint ventures that are dilutive to earnings per share or that negatively impact margins as a whole. In an effort to reduce our cost of goods sold, we have and may continue to enter into acquisitions or joint ventures involving suppliers or manufacturing partners, which would expose us to additional supply chain risks. Acquisitions or joint ventures could also require investment of significant financial resources and require us to obtain additional equity financing, which may dilute our stockholders’ equity, or require us to incur additional indebtedness. Such equity or debt 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.
To the extent that we invest in upstream suppliers or downstream channel capabilities, we may experience competition or channel conflict with certain of our existing and potential suppliers and customers. Specifically, existing and potential suppliers and customers may perceive that we are competing directly with them by virtue of such investments and may decide to reduce or eliminate their supply volume to us or order volume from us. In particular, any supply reductions from our polysilicon, ingot or wafer suppliers could materially reduce manufacturing volume.
Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results.
We may in the future be required to consolidate the assets, liabilities and financial results of certain of our existing or future joint ventures, which could have an adverse impact on our financial position, gross margin, and operating results.
The Financial Accounting Standards Board has issued accounting guidance regarding variable interest entities (“VIEs”) that affects our accounting treatment of our existing and future joint ventures. We have variable interests in 8point3 Energy Partners, our joint venture with First Solar. To ascertain whether we are required to consolidate this entity, we determine whether it is a VIE and if we are the primary beneficiary in accordance with the accounting guidance. Factors we consider in determining whether we are the VIE’s primary beneficiary include the decision making authority of each partner, which partner manages the day-to-day operations of the joint venture and each partner’s obligation to absorb losses or right to receive benefits from the joint venture in relation to that of the other partner. Changes in the financial accounting guidance, or changes in circumstances at each of these joint ventures, could lead us to determine that we have to consolidate the assets, liabilities and financial results of such joint ventures. The consolidation of 8point3 Energy Partners would significantly increase our indebtedness. Consolidation of our VIEs could have a material adverse impacteffect on our business, financial position, gross margincondition, cash flows, and operating results. In addition, we may enter into future joint ventures or make other equity investments, which could have an adverse impact on us because of the financial accounting guidance regarding VIEs.reputation.
Fluctuations in the demand for our products may cause impairment of our project assets and other long-lived assets or cause us to write off equipment or inventory, and each of these events would adversely affect our financial results.
We have tangible project assets on our Consolidated Balance Sheets related to capitalized costs incurred in connection with the development of solar power systems. Project assets consist primarily of capitalized costs relating to solar power system projects in various stages of development that we incur prior to the sale of the solar power system to a third party. These costs include costs for land and costs for developing and constructing a solar power system. These project assets could become impaired if there are changes in the fair value of these capitalized costs. If these project assets become impaired, we may write-off some or all of the capitalized project assets, which would have an adverse impact on our financial results in the period in which the loss is recognized.
In addition, if the demand for our solar products decreases, our manufacturing capacity could be underutilized, and we may be required to record an impairment of our long-lived assets, including facilities and equipment, which would increase our expenses. In improving our manufacturing processes consistent with our cost reduction roadmap, we could write off equipment that is removed from the manufacturing process. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record excess capacity charges, which would have a negative impact on our gross margin. Factory-planning decisions may shorten the useful lives of long-lived assets, including facilities and equipment, and cause us to accelerate depreciation. Each of the above events would adversely affect our future financial results.
We may not be able to sustain our recent growth rate, and we may not be able to manage our future growth effectively.
We may not be able to continueexpand our business or manage our future growth effectively.
We may not be able to expand our business or manage future growth. We plan to continue to improve our manufacturing processes and build additional manufacturing production over the next five years, which will require successful execution of:
•expanding our existing manufacturing facilities and developing new manufacturing facilities, which would increase our fixed costs and, if such facilities are underutilized, would negatively impact our results of operations;
•ensuring delivery of adequate polysilicon, ingots, and third-party cells;
•enhancing our customer resource management and manufacturing management systems;
•implementing and improving additional and existing administrative, financial and operations systems, procedures and controls, including the need to centralize, update and integrate our global financial internal control;
•hiring additional employees;
•expanding and upgrading our technological capabilities;
•managing multiple relationships with our customers, suppliers and other third parties;
•maintaining adequate liquidity and financial resources; and
•continuing to increase our revenues from operations.
Improving our manufacturing processes, expanding our manufacturing facilities or developing new facilities may be delayed by difficulties such as unavailability of equipment or supplies or equipment malfunction. Ensuring delivery of adequate polysilicon, ingots, and third-party cells is subject to many market risks including scarcity, significant price fluctuations and competition. Maintaining adequate liquidity is dependent upon a variety of factors including continued revenues from operations, working capital improvements, and compliance with our indentures and credit agreements. If we are unsuccessful in any of these areas, we may not be able to achieve our growth strategy and increase production capacity as planned during the foreseeable future. In addition, we need to manage our organizational growth, including rationalizing reporting structures, support teams, and enabling efficient decision making. For example, the administration of the residential lease program requires processes and systems to support this business model. If we are not successful or if we delay our continuing implementation of such systems and processes, we may adversely affect the anticipated volumes in our residential lease business. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new solar cells and other products, satisfy customer requirements, execute our business plan, or respond to competitive pressures.
Fluctuations in foreign currency exchange rates and interest rates could adversely affect our business and results of operations.
We have significant sales globally, and we are exposed to movements in foreign exchange rates, primarily related to sales to European customers that are denominated in Euros. A depreciation of the Euro would adversely affect our margins on sales to European customers. When foreign currencies appreciate against the U.S. dollar, inventories and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our solar power products more expensive for international customers, thus potentially leading to a reduction in demand, our sales and profitability. As a result, substantial unfavorable changes in foreign currency exchange rates could have a substantial adverse effect on our financial condition and results of operations. Although we seek to reduce our currency exposure by engaging in hedging transactions where we deem it appropriate, we do not know whether our efforts will be successful. Because we hedge some of our expected future foreign exchange exposure, if associated revenues do not materialize, we could experience losses. In the past, we have experienced an adverse impact on our revenue, gross margin, cash position and profitability as a result of foreign currency fluctuations. In addition, any break-up of the Eurozone would disrupt our sales and supply chain, expose us to financial counterparty risk, and materially and adversely affect our results of operations and financial condition.
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 affect our operating results. An increase in interest rates could lower a customer’s return on investment in a system or make alternative investments more attractive relative to solar power systems, which, in each case, could cause our customers to seek alternative investments that promise higher returns or demand higher returns from our solar power systems, which could reduce our revenue and gross margin and adversely affect our operating results. Our interest expense would increase to the extent interest rates rise in connection with our variable interest rate borrowings. Conversely, lower interest rates have an adverse impact on our interest income. See also "Item 7A. Quantitative and Qualitative Disclosures About Market Risk"Risk" and under this section “Risks Related to Our Sales Channels-TheChannels-The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our solar power plants, our residential lease program and our customers, and is affected by general economic conditions.conditions.”
Uncertainty about the continuing availability of LIBOR may adversely affect our business, financial condition, results of operations, and cash flows.
Borrowings under certain of our credit facilities bear interest at a floating rate based on the London Inter-bank Offered Rate ("LIBOR"). We also have entered into fixed-for-floating interest rate forward swap agreements to manage our exposure to fluctuations in the LIBOR benchmark interest rate. As described in Note 14 (Foreign Currency and Interest Rate Derivatives) to the Condensed Consolidated Financial Statements in Part I of this Annual Report, we pay the counterparties to these swap agreements a fixed rate in return for a LIBOR-based floating rate, which we may use to fund payments under our credit facilities. The aggregate notional amount of these swap agreements is $6.1 million. Please see Item 8. Financial Statements Note 12. Derivative Financial Instruments for more details.
In July 2017, the United Kingdom’s Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that after December 31, 2021, it would no longer compel banks to submit the rates required to calculate LIBOR. We cannot predict the effect of the FCA’s decision not to sustain LIBOR or, if changes ultimately are made to LIBOR, the effect those changes may have on the interest we pay on our 2019 Revolver and the payments we receive under our interest rate forward swap agreements.
In anticipation of LIBOR’s discontinuation, our credit facilities generally provide a transition mechanism to a LIBOR-replacement rate to be mutually agreed upon by us and our lenders. There can be no assurance, however, that we will be able to reach an agreement with our lenders on any such replacement benchmark before experiencing adverse effects due to changes in interest rates, if at all. In addition, any such changes under the credit facilities may result in interest rates and/or payments that are higher or lower than payments we presently are obligated to make. We also may seek to amend our swap agreements to replace the benchmark rate. There can be no assurance, however, that the counterparties to those agreements will agree to a replacement rate, and any such changes to the swap agreements may result in us receiving payments that are higher or lower than the payments we are entitled to receive under our existing swap agreements. There also can be no assurance that (a) the amounts we are entitled to receive under the swap agreements will continue to be correlated with the amounts we are required to pay under our credit facilities or (b) transitions to new benchmarks will be concurrent across our various agreements, the
failure of either or both of which could diminish the swaps’ effectiveness as hedging instruments. Any of these risks could adversely affect our business, financial condition, results of operations, and cash flows.
We depend on third-party contract manufacturers to assemble a portion of our solar cells into solar panels and any failure to obtain sufficient assembly and test capacity could significantly delay our ability to ship our solar panels and damage our customer relationships.
We outsource a portion of module manufacturing to contract manufacturers in China. As a result of outsourcing this final step in our production, we face several significant risks, including limited control over assembly and testing capacity, delivery schedules, quality assurance, manufacturing yields, production costs and production costs.tariffs. If the operations of our third-party contract manufacturers were disrupted or their financial stability impaired, or if they were unable or unwilling to devote capacity to our solar panels in a timely manner, our business could suffer as we might be unable to produce finished solar panels on a timely basis. We also risk customer delays resulting from an inability to move module production to an alternate provider or to
complete production internationally, and it may not be possible to obtain sufficient capacity or comparable production costs at another facility in a timely manner. In addition, migrating our design methodology to third-party contract manufacturers or to a captive panel assembly facility could involve increased costs, resources and development time, and utilizing additional third-party contract manufacturers could expose us to further risk of losing control over our intellectual property and the quality of our solar panels. Any reduction in the supply of solar panels could impair our revenue by significantly delaying our ability to ship products and potentially damage our relationships with new and existing customers, any of which could have a material and adverse effect on our financial condition and results of operation.
While we believe we currently have effective internal control over financial reporting, we may identify a material weakness in our internal control over financial reporting that could cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our common stock.
Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Management concluded that as of the end of each of fiscal 2016, 2015,2019, 2018, and 2014,2017, our internal control over financial reporting and our disclosure controls and procedures were effective.
We need to continuously maintain our internal control processes and systems and adapt them as our business grows and changes. This process is expensive, time-consuming, and requires significant management attention. We cannot be certain that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404 of the Sarbanes-Oxley Act. Furthermore, as we grow our business or acquire other businesses, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm identify material weaknesses in our internal controls, the disclosure of that fact, even if quickly remedied, may cause investors to lose confidence in our financial statements and the trading price of our common stock may decline.
Remediation of a material weakness could require us to incur significant expense and if we fail to remedy any material weakness, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, our access to the capital markets may be restricted, the trading price of our common stock may decline, and we may be subject to sanctions or investigation by regulatory authorities, including the Securities and Exchange Commission ("SEC")SEC or The NASDAQ Global Select Market. We may also be required to restate our financial statements from prior periods.
Our agreements
We may in the future be required to consolidate the assets, liabilities and financial results of certain of our existing or future joint ventures, which could have an adverse impact on our financial position, gross margin, and operating results.
The Financial Accounting Standards Board has issued accounting guidance regarding variable interest entities (“VIEs”) that affects our accounting treatment of our existing and future joint ventures. To ascertain whether we are required to consolidate an entity, we determine whether it is a VIE and if we are the primary beneficiary in accordance with Cypress Semiconductor Corporation (“Cypress”) requirethe accounting guidance. Factors we consider in determining whether we are the VIE’s primary beneficiary include the decision making authority of each partner, which partner manages the day-to-day operations of the joint venture and each partner’s obligation to absorb losses or right to receive benefits from the joint venture in relation to that of the other partner. Changes in the financial accounting guidance, or changes in circumstances at each of these joint ventures, could lead us to indemnify Cypress for certain tax liabilities. These indemnification obligations and related contractual restrictions may limit our ability to pursue certain business initiatives.
On October 6, 2005, while a subsidiary of Cypress, our former parent company, we entered into a tax sharing agreement with Cypress providing for each party’s obligations concerning various tax liabilities. The tax sharing agreement is structured such that Cypress would pay all federal, state, local and foreign taxes that are calculated on a consolidated or combined basis while we were a member of Cypress’s consolidated or combined group for federal, state, local and foreign tax purposes. Our portion of tax liabilities or benefits was determined based upon our separate return tax liability as defined under the tax sharing agreement. These tax liabilities or benefits were based on a pro forma calculation as if we were filing a separate income tax return in each jurisdiction, rather than on a combined or consolidated basis, subject to adjustments as set forth in the tax sharing agreement.
On June 6, 2006, we ceased to be a member of Cypress’s consolidated group for federal income tax purposes and certain state income tax purposes. On September 29, 2008, we ceased to be a member of Cypress’s combined group for all state income tax purposes. To the extentdetermine that we become entitledhave to utilize our separate portion of any tax credit or loss carryforwards existing asconsolidate the assets, liabilities and financial results of such date, we will distribute to Cypress the tax effect, estimated to be 40% for federaljoint ventures. The consolidation of our VIEs would significantly increase our indebtedness and state income tax purposes, of the amount of such tax loss carryforwards so utilized,could have a material adverse impact on our financial position, gross margin and the amount of any credit carryforwards so utilized. We will distribute these amounts to Cypress in cash or in our shares, at Cypress’s option. During fiscal 2015 and fiscal 2016, we recorded an estimated liability to Cypress of $3.5 million and $0.2 million, respectively. As of January 1, 2017, we believe there is no additional future liability.
We are jointly and severally liable for any tax liability during all periods in which we were deemed to be a member of the Cypress consolidated or combined group. Accordingly, although the tax sharing agreement allocates tax liabilities between
operating
Cypress and all its consolidated subsidiaries, for any period inresults. In addition, we may enter into future joint ventures or make other equity investments, which we were included in Cypress’s consolidated or combined group, we could be liable in the event that any federal or state tax liability was incurred, but not discharged, by any other memberhave an adverse impact on us because of the group.financial accounting guidance regarding VIEs.
We will continue to be jointly and severally liable to Cypress until the statute of limitations runs or all appeal options are exercised for all years in which we joined in the filing of tax returns with Cypress. If Cypress experiences adjustments to their tax liability pursuant to tax examinations, we may incur an incremental liability.
We would also be liable to Cypress for taxes that might arise from the distribution by Cypress of our former class B common stock to Cypress’s stockholders on September 29, 2008, or “spin-off.” In connection with Cypress’s spin-off of our former class B common stock, we and Cypress, on August 12, 2008, entered into an amendment to our tax sharing agreement (“Amended Tax Sharing Agreement”) to address certain transactions that may affect the tax treatment of the spin-off and certain other matters.
Subject to certain caveats, Cypress obtained a ruling from the IRS to the effect that the distribution by Cypress of our former class B common stock to Cypress’s stockholders qualified as a tax-free distribution under Section 355 of the Code. Despite such ruling, the distribution may nonetheless be taxable to Cypress under Section 355(e) of the Code if 50% or more of the voting power or value of our stock was or is later acquired as part of a plan or series of related transactions that included the distribution of our stock. The Amended Tax Sharing Agreement requires us to indemnify Cypress for any liability incurred as a result of issuances or dispositions of our stock after the distribution, other than liability attributable to certain dispositions of our stock by Cypress, that cause Cypress’s distribution of shares of our stock to its stockholders to be taxable to Cypress under Section 355(e) of the Code.
Under the Amended Tax Sharing Agreement, we also agreed that, until October 29, 2010, we would not effect a conversion of any or all of our former class B common stock to former class A common stock or any similar recapitalization transaction or series of related transactions. On November 16, 2011, we reclassified our former class A common stock and class B common stock into a single class of common stock. In the event this reclassification does result in the spin-off being treated as taxable, we could face substantial liabilities as a result of our obligations under the Amended Tax Sharing Agreement.
Our affiliation with Total S.A. may require us to join in certain tax filings with Total S.A. in the future. The allocation of tax liabilities between us and Total S.A., and any future agreements with Total S.A. regarding tax indemnification and certain tax liabilities may adversely affect our financial position.
We have not joined in tax filings on a consolidated, combined or unitary basis with Total S.A., and no tax sharing agreement is currently in place. We may in the future become required to join in certain tax filings with Total S.A. on a consolidated, combined, or unitary basis in certain jurisdictions, at which point we may seek to enter into a tax sharing agreement with Total S.A., which would allocate the tax liabilities among the parties. The entry into any future agreement with Total S.A. may result in less favorable allocation of certain liabilities than we experienced before becoming subject to consolidated, combined, or unitary filing requirements, and may adversely affect our financial position.
Our ability to use our net operating loss and credit carryforwards to offset future taxable income may be subject to certain limitations.
As of January 1, 2017, we estimate that we have available to offset future taxable income approximately $480 million of federal and $438.5 million of California state operating loss carry-forwards, which expire at various dates from 2028 to 2036, federal credit carryforwards of approximately $54.3 million, which expire at various dates from 2018 to 2036, and $7.5 million of California state credit carryforwards that do not expire. Our ability to utilize our net operating loss and credit carryforwards is dependent upon our ability to generate taxable income in future periods and may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership, such as the transaction with Cypress.
Section 382 of the Code imposes restrictions on the use of a corporation’s net operating losses, as well as certain recognized built-in losses and other carryforwards, after an “ownership change” occurs. A Section 382 “ownership change” occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within the prior three-year period (calculated on a rolling basis). The issuance of common stock upon a conversion of our outstanding convertible notes debentures, and/or other issuances or sales of our stock (including certain transactions involving our stock that are outside of our control) could result in (or could have resulted in) an ownership change under Section 382. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-change net operating losses and other losses we can use to reduce our taxable
income generally equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the applicable federal long-term tax-exempt interest rate for the month of the “ownership change” (subject to certain adjustments). The applicable rate for ownership changes occurring in the month of February 2016 is 2.65%.
Because U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation may effectively provide a cap on the cumulative amount of pre-ownership change losses, including certain recognized built-in losses that may be utilized. Such pre-ownership change losses in excess of the cap may be lost. In addition, if an ownership change were to occur, it is possible that the limitations imposed on our ability to use pre-ownership change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and require U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect. Further, if for financial reporting purposes the amount or value of these deferred tax assets is reduced, such reduction would have a negative impact on the book value of our common stock.
Our headquarters and manufacturing facilities, as well as the facilities of certain subcontractors and suppliers, are located in regions that are subject to epidemics, earthquakes, floods, fires, and other natural disasters, and climate change and climate change regulation could have an adverse effect on our operations.
Our headquarters and research and development operations are located in California, and our manufacturing facilities are located in the Philippines, Malaysia, France, Mexico and Mexico.Oregon, U.S. Any significant epidemic, earthquake, flood, fire or other natural disaster in these countries or countries where our suppliers are located could materially disrupt our management operations and/or our production capabilities, andcould result in damage or destruction of all portion of our facilities or could result in our experiencing a significant delay in delivery, or substantial shortage, of our products and services.For example, ash and debris from volcanic activity at the Taal Volcano in the Philippines forced closures and evacuations of nearby areas in January 2020 and impacted our employees.
In addition, legislators, regulators, and non-governmental organizations, as well as companies in many business sectors, are considering ways to reduce green-house gas emissions. Further regulation could be forthcoming at the federal or state level with respect to green-house gas emissions. Such regulation or similar regulations in other countries could result in regulatory or product standard requirements for our global business, including our manufacturing operations. Furthermore, the potential physical impacts of climate change on our operations may include changes in weather patterns (including floods, fires, tsunamis, drought and rainfall levels), water availability, storm patterns and intensities, and temperature levels. These potential physical effects may adversely affect the cost, production, sales and financial performance of our operations.
We could be adversely affected by any violations of the FCPA and foreign anti-bribery laws.
The FCPA generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Our policies mandate compliance with these anti-bribery laws. We continue to acquire businesses outside of the United States and operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into new jurisdictions through internal growth or acquisitions requires substantial government contact where norms can differ from U.S. standards. While we implement policies and procedures and conduct training designed to facilitate compliance with these anti-bribery laws, thereby mitigating the risk of violations of such laws, our employees, subcontractors and agents may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
We sell our solar products to agencies of the U.S. government, and as a result, we are subject to a number of procurement rules and regulations, and our business could be adversely affected by an audit by the U.S. government if it were to identify errors or a failure to comply with regulations.
We have sold and continue to sell our solar power systems to various U.S. government agencies. In connection with these contracts, we must comply with and are affected by laws and regulations relating to the award, administration, and performance of U.S. government contracts, which may impose added costs on our business. We are expected to perform in compliance with a vast array of federal laws and regulations, including, without limitation, the Federal Acquisition Regulation, the Truth in Negotiations Act, the Federal False Claims Act, the Anti-Kickback Act of 1986, the Trade Agreements Act, the Buy American Act, the Procurement Integrity Act, and the Davis Bacon Act. A violation of specific laws and regulations, even if prohibited by our policies, could result in the imposition of fines and penalties, reductions of the value of our contracts, contract modifications or termination, or suspension or debarment from government contracting for a period of time.
In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. government may terminate any of our government contracts either at its convenience or for default based on performance. A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts.
U.S. government agencies may audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. government. In addition, we could suffer reputational harm if allegations of impropriety were made against us.
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
We are required to comply with all foreign, U.S. federal, state and local laws and regulations regarding pollution control and protection of the environment. In addition, under some statutes and regulations, a government agency, or other parties, may seek recovery and response costs from owners or operators of property where releases of hazardous substances have occurred or are ongoing, even if the owner or operator was not responsible for such release or otherwise at fault. We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and manufacturing activities. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to, among other matters, potentially significant monetary damages and fines or liabilities or suspensions in our business operations. In addition, if more stringent laws and regulations are adopted in the future, the costs of compliance with these new laws and regulations could be substantial. If we fail to comply with present or future environmental laws and regulations, we may be required to pay substantial fines, suspend production or cease operations, or be subjected to other sanctions.
In addition, U.S. legislation includes disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such “conflict” minerals. We have incurred and will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. The implementation of these requirements could affect the sourcing and availability of minerals used in the manufacture of solar products. As a result, there may only be a limited pool of suppliers who provide conflict free minerals, and we cannot be certain that we will be able to obtain products in sufficient quantities or at competitive prices. Since our supply chain is complex, we have not been able to sufficiently verify, and in the future we may not be able to sufficiently verify, the origins for these conflict minerals used in our products. As a result, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for all minerals used in our products.
Our success depends on the continuing contributions of our key personnel.
We rely heavily on the services of our key executive officers and the loss of services of any principal member of our management team could adversely affect our operations. In addition, we anticipate that we will need to hire a number of highly skilled technical, manufacturing, sales, marketing, administrative and accounting personnel. In recent years, we have conducted several restructurings, which may negatively affect our ability to execute our strategy and business model. The competition for qualified personnel is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of qualified personnel to support our anticipated growth. We cannot guarantee that any employee will remain employed with us for any definite period of time since all of our employees, including our key executive officers, serve at-will and may terminate their employment at any time for any reason.
Our insurance for certain indemnity obligations we have to our officers and directors may be inadequate, and potential claims could materially and negatively impact our financial condition and results of operations.
Pursuant to our certificate of incorporation, by-laws, and certain indemnification agreements, we indemnify our officers and directors for certain liabilities that may arise in the course of their service to us. Although we currently maintain directors and officers liability insurance for certain potential third-party claims for which we are legally or financially unable to indemnify them, such insurance may be inadequate to cover certain claims.claims, or may prove prohibitively costly to maintain in the future. In addition, in previous years, we have primarily self-insured with respect to potential third-party claims. If we were required to pay a significant amount on account of these liabilities for which we self-insured, our business, financial condition, and results of operations could be materially harmed.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and we may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in the loss of significant rights.
From time to time, we, our respective customers, or our third parties with whom we work may receive letters, including letters from other third parties, and may become subject to lawsuits with such third parties alleging infringement of their patents. Additionally, we are required by contract to indemnify some of our customers and our third-party intellectual property providers for certain costs and damages of patent infringement in circumstances where our products are a factor creating the customer’s or these third-party providers’ infringement liability. This practice may subject us to significant indemnification claims by our customers and our third-party providers. We cannot assure investors that indemnification claims will not be made or that these claims will not harm our business, operating results or financial condition. Intellectual property litigation is very expensive and time-consuming and could divert management’s attention from our business and could have a material adverse effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, our customers or our third-party intellectual property providers, we may be required to pay substantial damages to the party claiming infringement, stop selling products or using technology that contains the allegedly infringing intellectual property, or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Parties making infringement claims may also be able to bring an action before the International Trade Commission that could result in an order stopping the importation into the United States of our solar products. Any of these judgments could materially damage our business. We may have to develop non-infringing technology, and our failure in doing so or in obtaining licenses to the proprietary rights on a timely basis could have a material adverse effect on our business.
We have filed, and may continue to file, claims against other parties for infringing our intellectual property that may be very costly and may not be resolved in our favor.
To protect our intellectual property rights and to maintain our competitive advantage, we have filed, and may continue to file, suits against parties who we believe infringe or misappropriate our intellectual property. Intellectual property litigation is expensive and time consuming, could divert management’s attention from our business, and could have a material adverse effect on our business, operating results, or financial condition, and our enforcement efforts may not be successful. In addition, the validity of our patents may be challenged in such litigation. Our participation in intellectual property enforcement actions may negatively impact our financial results.
Our business is subject to a variety of U.S. and international laws, rules, policies, and other obligations regarding privacy, data protection, and other matters.
We are subject to federal, state, and international laws relating to the collection, use, retention, security, and transfer of customer, employee, and business partner personally identifiable information (“PII”), including the European Union’s General Data Protection Regulation (“GDPR”), which came into effect in May 2018 and the California Consumer Privacy Act (“CCPA”), which came into effect on January 1, 2020. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between one company and its subsidiaries, and among the subsidiaries and other parties with which we have commercial relations. The introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. Foreign data protection, privacy, and other laws and regulations, including GDPR, can be more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations, including GDPR which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations, including GDPR, are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines, which may be significant, or demands that we modify or cease existing business practices.
A failure by us, our suppliers, or other parties with whom we do business to comply with posted privacy policies or with other federal, state, or international privacy-related or data protection laws and regulations, including GDPR and CCPA, could result in proceedings against us by governmental entities or others, which could have a material adverse effect on our business, results of operations, and financial condition.
We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer.
We seek to protect our proprietary manufacturing processes, documentation, and other written materials primarily under trade secret and copyright laws. We also typically require employees, consultants, and third parties, such as our vendors and customers, with access to our proprietary information to execute confidentiality agreements. The steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our systems may be subject to intrusions, security breaches, or targeted theft of our trade secrets. In addition, our proprietary rights may not be adequately protected because:
•others may not be deterred from misappropriating our technologies despite the existence of laws or contracts prohibiting such misappropriation;misappropriation and information security measures designed to deter or prevent misappropriation of our technologies;
•policing unauthorized use of our intellectual property may be difficult, expensive, and time-consuming, the remedy obtained may be inadequate to restore protection of our intellectual property, and moreover, we may be unable to determine the extent of any unauthorized use;
•the laws of other countries in which we market our solar products, such as some countries in the Asia/Pacific region, may offer little or no protection for our proprietary technologies; and
•reports we file in connection with government-sponsored research contracts are generally available to the public and third parties may obtain some aspects of our sensitive confidential information.
Reverse engineering, unauthorized copying, or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without compensating us for doing so. Our joint ventures or our partners may not be deterred from misappropriating our proprietary technologies despite contractual and other legal restrictions. Legal protection in countries where our joint ventures are located may not be robust and enforcement by us of our intellectual property rights
may be difficult. As a result, our joint ventures or our partners could directly compete with our business. Any such activities or any other inabilities to adequately protect our proprietary rights could harm our ability to compete, to generate revenue, and to grow our business.
We may be subject to breaches of our information technology systems, which could lead to disclosure of our internal information, damage our reputation or relationships with dealers and customers, and disrupt access to our online services. Such breaches could subject us to significant reputational, financial, legal, and operational consequences.
Our business requires us to use and store confidential and proprietary information, intellectual property, commercial banking information, personal information concerning customers, employees, and business partners, and corporate information concerning internal processes and business functions. Malicious attacks to gain access to such information affects many companies across various industries, including ours.
Where appropriate, we use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity or malicious effort, and result in persons obtaining unauthorized access to our data.
We devote resources to network security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute security. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, target end users through phishing and other malicious techniques, and/or may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventative measures. As a result, we have experienced such breaches of our systems in the past, and may experience a breach of our systems in the future that reduces our ability to protect sensitive data. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our team members, contractors and temporary staff. If we experience, or are perceived to have experienced, a significant data security breach, fail to detect and appropriately respond to a significant data security breach, or fail to implement disclosure controls and procedures that provide for timely disclosure of data security breaches deemed material to our business, including corrections or updates to previous disclosures, we could be exposed to a risk of loss, increased insurance costs, remediation and prospective prevention costs, damage to our reputation and brand, litigation and possible liability, or government enforcement actions, any of which could detrimentally affect our business, results of operations, and financial condition.
We may also share information with contractors and third-party providers to conduct our business. While we generally review and typically request or require such contractors and third-party providers to implement security measures, such as encryption and authentication technologies to secure the transmission and storage of data, those third-party providers may experience a significant data security breach, which may also detrimentally affect our business, results of operations, and financial condition as discussed above. See also under this section, “Risks Related to Our Intellectual Property-We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer.”
We may not obtain sufficient patent protection on the technology embodied in the solar products we currently manufacture and market, which could harm our competitive position and increase our expenses.
Although we substantially rely on trade secret laws and contractual restrictions to protect the technology in the solar products we currently manufacture and market, our success and ability to compete in the future may also depend to a significant degree upon obtaining patent protection for our proprietary technology. We currently own multiple patents and patent applications which cover aspects of the technology in the solar cells and mounting systems that we currently manufacture and market. Material patents that relate to our systems products and services primarily relate to our rooftop mounting products and ground-mounted tracking products. We intend to continue to seek patent protection for those aspects of our technology, designs, and methodologies and processes that we believe provide significant competitive advantages.
Our patent applications may not result in issued patents, and even if they result in issued patents, the patents may not have claims of the scope we seek or we may have to refile patent applications due to newly discovered prior art. In addition, any
issued patents may be challenged, invalidated, or declared unenforceable, or even if we obtain an award of damages for infringement by a third party, such award could prove insufficient to compensate for all damages incurred as a result of such infringement.
The term of any issued patent is generally 20 years from its earliest filing date and if our applications are pending for a long time period, we may have a correspondingly shorter term for any patent that may issue. Our present and future patents may provide only limited protection for our technology and may be insufficient to provide competitive advantages to us. For example, competitors could develop similar or more advantageous technologies on their own or design around our patents. Also, patent protection in certain foreign countries may not be available or may be limited in scope and any patents obtained may not be readily enforceable because of insufficient judicial effectiveness, making it difficult for us to aggressively protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to obtain and enforce our intellectual property rights in some countries may harm our business. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.
We may not be able to prevent others from using the term SunPower or similar terms, or other trademarks which we hold, in connection with their solar power products which could adversely affect the market recognition of our name and our revenue.
“SunPower”"SunPower" and the SunPower logo are our registered trademarks in certain countries, including the United States, for uses that include solar cells and solar panels. We are seeking registration of these trademarks in other countries, but we may not be successful in some of these jurisdictions. We hold registered trademarks for SunPower,®, Maxeon,®, Oasis,®, EnergyLink™, EnergyLink, InvisiMount,®, Tenesol®, Greenbotics,®, Customer Cost of Energy™ ("CCOE™"), SunPower Spectrum™, Helix™, Equinox™, Signature™, SolarBridge,®, The Power of One™,One, and many more marks, in certain countries, including the United States. We have not registered, and may not be able to register, these trademarks in other key countries. In the foreign jurisdictions where we are unable to obtain or have not tried to obtain registrations, others may be able to sell their products using trademarks compromising or incorporating “SunPower,” or a variation thereof, or our other chosen brands, which could lead to customer confusion. In addition, if there are jurisdictions where another proprietor has already established trademark rights in marks containing “SunPower,” or our other chosen brands, we may face trademark disputes and may have to market our products with other trademarks or without our trademarks, which may undermine our marketing efforts. We may encounter trademark disputes with companies using marks which are confusingly similar to the SunPower mark, or our other marks, which if not resolved favorably, could cause our branding efforts to suffer. In addition, we may have difficulty in establishing strong brand recognition with consumers if others use similar marks for similar products.
Our past and possible future reliance on government programs to partially fund our research and development programs could impair our ability to commercialize our solar power products and services.
Government funding of some of our research and development efforts imposed certain restrictions on our ability to commercialize results and could grant commercialization rights to the government. In some funding awards, the government is entitled to intellectual property rights arising from the related research. Such rights include a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced each subject invention developed under an award throughout the world by or on behalf of the government. Other rights include the right to require us to grant a license to the developed technology or products to a third party or, in some cases, if we refuse, the government may grant the license itself, if the
government determines that action is necessary because we fail to achieve practical application of the technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give the United States industry preference. Accepting government funding can also require that manufacturing of products developed with federal funding be conducted in the United States.
We may be subject to information technology system failures or network disruptions that could damage our business operations, financial conditions, or reputation.
We may be subject to information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or similar events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could result in delayed or canceled orders. System failures and disruptions could also impede the manufacturing and shipping of products, delivery of online services, transactions processing, and financial reporting.
We may be subject to breaches of our information technology systems, which could lead to disclosure of our internal information, damage our reputation or relationships with dealers and customers, and disrupt access to our online services. Such breaches could subject us to significant reputational, financial, legal, and operational consequences.
Our business requires us to use and store customer, employee, and business partner personally identifiable information (“PII”). This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. Malicious attacks to gain access to PII affect many companies across various industries, including ours.
We use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to our data. Third parties may attempt to fraudulently induce employees or customers into disclosing passwords or other sensitive information, which may in turn be used to access our information technology systems.
We devote resources to network security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute security. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventative measures and as a result, we may experience a breach of our systems and may be unable to protect sensitive data. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our team members, contractors and temporary staff. If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to a risk of loss, litigation and possible liability, or government enforcement actions, any of which could detrimentally affect our business, results of operations, and financial condition.
PII may also be shared with contractors and third-party providers to conduct our business. Although such contractors and third-party providers typically implement encryption and authentication technologies to secure the transmission and storage of data, those third-party providers may experience a significant data security breach of the shared PII.
See also “Risks Related to Our Intellectual Property - We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, our ability to compete and generate revenue could suffer.”
Our business is subject to a variety of U.S. and international laws, rules, policies, and other obligations regarding privacy, data protection, and other matters.
We are subject to federal, state and international laws relating to the collection, use, retention, security, and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between one company and its subsidiaries, and among the subsidiaries and other parties with which we have commercial relations. The introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. In addition, foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or
government entities, are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.
A failure by us, our suppliers or other parties with whom we do business to comply with a posted privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, which could have a detrimental effect on our business, results of operations, and financial condition.
Risks Related to Our Debt and Equity Securities
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 convertible debentures are our general, unsecured obligations and rank equally in right of payment with all of our existing and any future unsubordinated, unsecured indebtedness. As of January 1, 2017,December 29, 2019, we and our subsidiaries had $1.1 billion$825.0 million in principal amount of senior unsecured indebtedness outstanding, which ranks pari passu with ourconvertible debentures. Our debentures are effectively subordinated to our existing and any future secured indebtedness we may have, including for example, our $300.0 million revolving credit facilityLoan and Security Agreement with Credit Agricole,Bank of America, N.A., 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. In addition to our unsecured indebtedness described above, as of January 1, 2017,December 29, 2019, we and our subsidiaries had $495.1$221.0 million in principal amount of senior securedother indebtedness outstanding, which includes $139.7$9.1 million in non-recourse project debt and $293.1 million in non-recourse long-term debt related to our residential lease business.debt. These liabilities may also include other 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 or future regulatory actions may adversely affect For a discussion the trading price and liquidityimpact of our debentures.
We believe that many investors inliquidity on our ability to meet our payment obligations under our debentures, employ, or will seeksee also “Risks Related to employ,Our Liquidity-We have a convertible arbitrage strategy with respect to our debentures. Investors that employ a convertible arbitrage strategy with respect to convertiblesignificant amount of debt instruments typically implement that strategy by selling short the common stock underlying the convertible debt instrumentsoutstanding. Our substantial indebtedness 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, 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 stockcontractual commitments could adversely affect theour business, financial condition and results of operations, as well as our ability of investors into meet our payment obligations under our debentures to conduct the convertible arbitrage strategy that we believe they employ, or will seek to employ, with respect toand our debentures. This could, in turn, adversely affect the trading price and liquidity of our debentures.other debt.”
The SEC and other regulatory and self-regulatory authorities have implemented various rules in recent years 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 restricts certain 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, during 2012, the SEC 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 pilot basis, on April 8, 2013 and has been extended several times, most recently through April 21, 2017.
The second initiative revised existing national securities 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 listed stocks and options for certain periods following specified market declines. The 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 became effective, on a pilot basis, on April 8, 2013 and have been extended so that the system will continue in effect so long as the Limit Up-Limit Down plan is effective, currently until April 21, 2017. 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, (the "Dodd-Frank Act") on July 21, 2010 also introduced regulatory changes that may impact trading activities relevant to our debentures. As a result of this legislation and implementing rules, certain interest rate swaps and credit default swaps are currently required to be cleared through regulated clearinghouses. Certain other swaps (regulated by the U.S. Commodity Futures Trading Commission (the "CFTC") and security-based swaps (regulated by the SEC) 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, the indirect cost of which will likely be borne by market participants. Market participants will also be subject to certain direct margin 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, CFTC, 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 holders of 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.
Total’s majority ownership of our common stock may adversely affect the liquidity and value of our common stock.
As of January 1, 2017,December 29, 2019, Total owned approximately 57%47% of our outstanding common stock. PursuantHowever, pursuant to the Affiliation Agreement, between usTotal had a grace period of nine months ending on September 30, 2020, during which it had the ability to, and did, acquire stock sufficient retain at least 50% ownership of the Company. During this period, Total continued to be entitled to, among other items, designate directors as if it actually held more than 50% of the voting stock of the Company, exercise the stockholder approval rights, and our stockholders may still act by written consent. As of February 7, 2020, Total owned approximately 51% of our outstanding common stock, inclusive of common stock issuable upon conversion of our 0.875% debentures and 4.00% debentures.
The Board of Directors of SunPower includes five designees from Total, giving Total majority control of our Board. As a result, subject to the restrictions in the Affiliation Agreement, Total possesses significant influence and control over our affairs. Our non-Total stockholders have reduced ownership and voting interest in our company and, as a result, have less influence over the management and policies of our company than they exercised prior to Total’s tender offer. As long as Total controls us, the ability of our other stockholders to influence matters requiring stockholder approval is limited. Total’s stock ownership and relationships with members of our Board of Directors could have the effect of preventing minority stockholders from exercising significant control over our affairs, delaying or preventing a future change in control, impeding a merger, consolidation, takeover, or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, limiting our financing options. These factors in turn could adversely affect the market price of our common stock or prevent our stockholders from realizing a premium over the market price of our common
stock. The Affiliation Agreement limits Total and any member of the Total affiliated companies (“Total Group”) from effecting, seeking, or entering into discussions with any third party regarding any transaction that would result in the Total Group beneficially owning our shares in excess of certain thresholds during a standstill period. The Affiliation Agreement also imposes certain limitations on the Total Group’s ability to seek to affecteffect a tender offer or merger to acquire 100% of our outstanding voting power. Such provisions may not be successful in preventing the Total Group from engaging in transactions which further increase their ownership and negatively impact the price of our common stock. See also “Risks Related to Our Liquidity - WeLiquidity-We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments as planned due to the general economic environment and the continued market pressure driving down the average selling prices of our solar power products, among other factors.” Finally, the market for our common stock has become less liquid and more thinly traded as a result of the Total tender offer. The lower number of shares available to be traded could result in greater volatility in the price of our common stock and affect our ability to raise capital on favorable terms in the capital markets.
If we cease to be considered a “controlled company” within the meaning of the NASDAQ corporate governance rules, during a one-year transition period, we may continue to rely on exemptions from certain corporate governance requirements.
If we cease to be considered a “controlled company” under the NASDAQ corporate governance rules, we will be subject to additional corporate governance requirements, including the requirements that:
•a majority of our Board of Directors consist of independent directors;
•our Nominating and Corporate Governance Committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
•our Compensation Committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
•there be an annual performance evaluation of the Nominating and Corporate Governance Committee and the Compensation Committee.
The NASDAQ listing rules provide for phase-in periods for these requirements (including that each such committee consist of a majority of independent directors within 90 days of ceasing to be a “controlled company”), but we must be fully compliant with the requirements within one year of the date on which we cease to be a “controlled company.” Currently, we do not have a majority of independent directors on our Board of Directors and only two of the four members of each of our Nominating and Governance Committee and our Compensation Committee are independent. During this transition period, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance rules and the ability of our independent directors to influence our business policies and affairs may be reduced. In addition, we may not be able to attract and retain the number of independent directors needed to comply with NASDAQ corporate governance rules during the transition period.
In addition, as a result of potentially no longer being a “controlled company,” we may need to obtain certain consents, waivers and amendments in connection with our existing debt agreements. Any failure to obtain such consents, waivers and amendments might cause cross defaults under other agreements and may have a material adverse effect on our results of operations and financial conditions.
Conversion of our outstanding 0.75%0.875% debentures 0.875% debentures,and 4.00% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease.
The conversion of some or all of our outstanding 0.75%, 0.875%, or 4.00% debentures into shares of our common stock will dilute the ownership interests of existing stockholders, including holders who had previously converted their debentures. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. Sales of our common stock in the public market or sales of any of our other securities could dilute ownership and earnings per share, and even the perception that such sales could occur could cause the market prices of our common stock to decline. In addition, the existence of our outstanding debentures may encourage short selling of our common stock by market participants who expect that the conversion of the debentures could depress the prices of our common stock.
Future sales of our common stock in the public market could lower the market price for our common stock and adversely impact the trading price of our debentures.
In the future, we may sell additional shares of our common stock to raise capital. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. In addition, a substantial number of shares of our common stock is reserved for issuance upon the exercise of stock options, restricted stock awards, restricted stock units, warrants, and upon conversion of the debentures and our outstanding 0.75%, 0.875%, and 4.00% debentures. The issuance and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of our debentures and the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities.
The price of our common stock, and therefore of our outstanding 0.75%, 0.875%, and 4.00% debentures, may fluctuate significantly.
Our common stock has experienced extreme price and volume fluctuations. The trading price of our common stock could be subject to further wide fluctuations due to many factors, including the factors discussed in this risk factors section. In addition, the stock market in general, and The NASDAQ Global Select Market and the securities of technology companies and solar companies in particular, have experienced severe price and volume fluctuations. These trading prices and valuations,
including our own market valuation and those of companies in our industry generally, may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. Because the 0.75%, 0.875%, and 4.00% debentures are convertible into our common stock (and/or cash equivalent to the value of our common stock), volatility or depressed prices of our common stock could have a similar effect on the trading price of the debentures.
If securities or industry analysts change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business or our market. If one or more of the analysts who cover us change their recommendation regarding our stock adversely, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume, and the value of our debentures, to decline.
We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never declared or paid cash dividends. For the foreseeable future, we intend to retain any earnings, after considering any dividends on any preferred stock, to finance the development of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects, and other factors that our Board of Directors considers relevant. Accordingly, holders of our common stock must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their shares of common stock.
Delaware law and our certificate of incorporation and by-laws contain anti-takeover provisions and our outstanding 0.75%, 0.875%, and 4.00% debentures provide for a right to convert upon certain events, and our Board of Directors entered into a rights agreement and declared a rights dividend, any of which could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
•the right of the Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors;
•the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
•the requirement for advance notice for nominations for election to the Board of Directors or for proposing matters that can be acted upon at a stockholders’ meeting;
the ability of the Board of Directors to issue, without stockholder approval, up to 10 million shares of preferred stock with terms set by the Board of Directors, which rights could be senior to those of common stock;
•our Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as possible;
•stockholders may not call special meetings of the stockholders, except by Total under limited circumstances; and
•our Board of Directors is able to alter our by-laws without obtaining stockholder approval.
Certain provisions of our outstanding debentures could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, including an entity (such as Total) becoming the beneficial owner of 75% of our voting stock, holders of our outstanding debentures will have the right, at their option, to require us to repurchase, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest on the debentures, all or a portion of their debentures. We may also be required to issue additional shares of our common stock upon conversion of such debentures in the event of certain fundamental changes. In addition, we entered into a Rights Agreement with Computershare Trust Company, N.A., commonly referred
The issuance of shares of common stock, conversion of our outstanding 0.875% and 4.00% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to as a “poison pill,” which could delay or discourage takeover attempts that stockholders may consider favorable.decrease.
In the equity offering in 2019, we sold an aggregate of 25,300,000 shares. Sales of our common stock in the public market or sales of any of our other securities will or could, as applicable, dilute ownership and earnings per share, and even the perception that such sales could occur could cause the market prices of our common stock to decline.
To the extent we issue common stock upon conversion of our outstanding 0.875% and 4.00% debentures, the conversion of some or all of such debentures will dilute the ownership interests of existing stockholders, including holders who had previously converted their debentures. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of our outstanding debentures may encourage short selling of our common stock by market participants who expect that the conversion of the debentures could depress the prices of our common stock.
Our ability to use our net operating loss and credit carryforwards to offset future taxable income may be subject to certain limitations.
As of December 29, 2019, we had federal net operating loss carryforwards of $839.8 million for tax purposes of which $133.4 million was generated in fiscal years 2018 and thereafter and can be carried forward indefinitely under the Tax Cuts and Job Acts of 2017 (“The Tax Act”). The remaining federal net operating loss carry forward of $706.4 million, which were generated prior to 2018, will expire at various dates from 2031 to 2037. As of December 29, 2019, we had California state net operating loss carryforwards of approximately $876.1 million for tax purposes, of which $5.2 million relate to debt issuance and will benefit equity when realized. These California net operating loss carryforwards will expire at various dates from 2029 to 2039. We also had credit carryforwards of approximately $68.2 million for federal tax purposes, of which $16.6 million relate to debt issuance and will benefit equity when realized. We had California credit carryforwards of $9.0 million for state tax purposes, of which $4.7 million relate to debt issuance and will benefit equity when realized. These federal credit carryforwards will expire at various dates from 2019 to 2039, and the California credit carryforwards do not expire. Our ability to utilize a portion of the net operating loss and credit carryforwards is dependent upon our being able to generate taxable income in future periods or being able to carryback net operating losses to prior year tax returns. Our ability to utilize net operating losses may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership, such as transaction with Cypress Semiconductor Corporation ("Cypress") while we were deemed to be a member and subsidiary of the Cypress consolidated group.
Section 382 of the Code imposes restrictions on the use of a corporation’s net operating losses, as well as certain recognized built-in losses and other carryforwards, after an “ownership change” occurs. A Section 382 “ownership change” occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within the prior three-year period (calculated on a rolling basis). A conversion of our outstanding convertible notes debentures, and/or other issuances or sales of our stock (including certain transactions involving our stock that are outside of our control) could result in an ownership change under Section 382. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-change net operating losses and other losses we can use to reduce our taxable income generally equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the applicable federal long-term tax-exempt interest rate for the month of the “ownership change” (subject to certain adjustments).
The majority of our U.S. federal net operating losses were generated prior to 2018, and these losses may be carried forward for up to 20 years. The annual limitation may effectively provide a cap on the cumulative amount of pre-ownership change losses, including certain recognized built-in losses that may be utilized. Such pre-ownership change losses in excess of the cap may be lost. In addition, if an ownership change were to occur, it is possible that the limitations imposed on our ability to use pre-ownership change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and require U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect. Further, if for financial reporting purposes the amount or value of these deferred tax assets is reduced, such reduction would have a negative impact on the book value of our common stock.
As discussed in “Risk Factors—Risks Related to the Spin-Off,” the Spin-Off is expected to result in a fully taxable event to SunPower, for which we expect to recognize gain which it expects to offset with prior year losses, thus resulting in a significant reduction in our net operating loss carryforwards.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
The table below presents details for each of our principal properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Facility | | Location | | Approximate
Square
Footage | | Held | | Year When Lease Term Ends | | Segment |
Solar cell manufacturing facility1, 2 | | Philippines | | 390,000 | | | Owned | | n/a | | SPT6 |
Solar cell manufacturing facility3 | | Malaysia | | 885,000 | | | Owned | | n/a | | SPT |
Former solar cell manufacturing facility1, 4 | | Philippines | | 641,000 | | | Owned | | n/a | | SPT |
| Solar cell manufacturing support and storage facility | | Philippines | | 280,000 | | | Leased | | 2024 | | SPT |
Former solar module assembly facility1, 4 | | Philippines | | 132,000 | | | Owned | | n/a | | SPT |
Solar cell and module manufacturing facility5 | | Oregon, U.S. | | 212,000 | | | Leased | | 2022 | | SPT |
| Solar module assembly facility | | Mexico | | 320,000 | | | Leased | | 2021 | | SPT |
| Solar module assembly facility | | Mexico | | 191,000 | | | Leased | | 2026 | | SPT |
| Solar module assembly facility | | France | | 36,000 | | | Owned | | n/a | | SPT |
| Corporate headquarters | | California, U.S. | | 61,000 | | | Leased | | 2027 | | SPT |
| Corporate headquarters | | California, U.S. | | 5,000 | | | Leased | | 2020 | | SPES7 & SPT |
| Global support offices | | California, U.S. | | 163,000 | | | Leased | | 2023 | | SPES & SPT |
| Global support offices | | Texas, U.S. | | 46,000 | | | Leased | | 2024 | | SPES |
| Global support offices | | Texas, U.S. | | 23,000 | | | Leased | | 2021 | | SPES |
| Global support offices | | France | | 27,000 | | | Leased | | 2023 | | SPT |
| Global support offices | | Philippines | | 65,000 | | | Owned | | n/a | | SPES |
|
| | | | | | | | |
| Facility | | Location | | Approximate Square Footage | | Held | | Lease Term |
Solar cell manufacturing facility1, 2 | | Philippines | | 392,000 | | Owned | | n/a |
Solar cell manufacturing facility3 | | Malaysia | | 885,000 | | Owned | | n/a |
Former solar cell manufacturing facility1, 4 | | Philippines | | 641,000 | | Owned | | n/a |
| Solar cell manufacturing support and storage facility | | Philippines | | 167,000 | | Leased | | 2024 |
Former solar module assembly facility1, 4 | | Philippines | | 183,000 | | Owned | | n/a |
| Solar module assembly facility | | Mexico | | 320,000 | | Leased | | 2021 |
| Solar module assembly facility | | Mexico | | 186,000 | | Leased | | 2026 |
| Solar module assembly facility | | France | | 11,000 | | Owned | | n/a |
| Solar module assembly facility | | France | | 13,000 | | Leased | | 2018 |
| Corporate headquarters | | California, U.S. | | 129,000 | | Leased | | 2021 |
| Global support offices | | California, U.S. | | 163,000 | | Leased | | 2023 |
| Global support offices | | Texas, U.S. | | 69,000 | | Leased | | 2019 |
| Global support offices | | France | | 27,000 | | Leased | | 2023 |
| Global support offices | | Philippines | | 65,000 | | Owned | | n/a |
| |
2 The solar cell manufacturing facility we operate in the Philippines has a total annual capacity of 500 MW. 1
| The lease for the underlying land expires in May 2048 and is renewable for an additional 25 years. |
| |
2
| The solar cell manufacturing facility we operate in the Philippines has a total annual capacity of 350 MW. |
3The solar cell manufacturing facility we operate in Malaysia has a total rated annual capacity of over 800 MW.
4We still ownowned this facility as of January 1, 2017 butDecember 29, 2019; however, relevant operations ceased during fiscal 2016.
5 The solar cell manufacturing facility we operate in Oregon, U.S. has a total annual capacity of over 120 MW.
6 SPT refers to SunPower Technology segment
7 SPES refers to SunPower Energy Services segment
As of January 1, 2017,December 29, 2019, our principal properties includeincluded operating solar cell manufacturing facilities with a combined total annual capacity of over 1.11.4 GW and solar module assembly facilities with a combined total annual capacity of approximately 1.91.4 GW. For more information about our manufacturing capacity, see "Item 1. Business."
We do not identify orand allocate assetsproperty, plant and equipment by country and by business segment. For more information on property, plant and equipment by country, see "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 5. Balance Sheet Components.Components and Note 17. Segments, respectively."
ITEM 3. LEGAL PROCEEDINGS
Tax Benefit Indemnification Litigation
On March 19, 2014, a lawsuit was filed by NRG Solar LLC, now known as NRG Renew LLC (“NRG”), against SunPower Corporation, Systems, our wholly-owned subsidiary (“SunPower Systems”),The disclosure under "Item 1. Financial Statements—Note 9. Commitments and Contingencies—Legal Matters" in the Superior Court of Contra Costa County, California. The complaint asserts that, accordingNotes to the indemnification provisionsConsolidated Financial Statements in the contract pertaining to SunPower Systems’ sale of a large California solar project to NRG, SunPower Systems owes NRG $75.0 million in connection with certain tax benefits associated with the project that were approvedthis Annual Report on Form 10-K is incorporated herein by the U.S. Treasury Department ("Treasury") for an amount that was less than expected. We do not believe that the facts support NRG’s claim under the operative indemnification provisions and SunPower Systems is vigorously contesting the claim. Additionally, SunPower Systems filed a cross-complaint against NRG seeking damages in excess of $7.5 million for breach of contract and related claims arising from NRG’s failure to fulfill its obligations under the contract, including its obligation to take “reasonable, available steps” to engage Treasury. We are currently unable to determine if the resolution of this matter will have a material effect on our consolidated financial statements.reference.
Class Action and Derivative Suits
On August 16, 2016 and August 26, 2016, two securities class action lawsuits were filed against the Company and certain of its officers and directors (the "Defendants") in the United States District Court for the Northern District of California on behalf of a class consisting of those who acquired the Company's securities from February 17, 2016 through August 9, 2016 (the "Class Period"). The substantially identical complaints allege violations of Sections 10(b) and 20(a) of the Exchange Act,
15 U.S.C. §§78j(b) and 78t(a) and SEC Rule 10b-5, 17 C.F.R. §240.10b-5. The complaints were filed following the issuance of the Company's August 9, 2016 earnings release and revised guidance and generally allege that throughout the Class Period, Defendants made materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects. On December 9, 2017, the court consolidated the cases and appointed a lead plaintiff.
Four shareholder derivative actions have been filed in federal court, purporting to be brought on the Company's behalf against certain of the Company's current and former officers and directors based on the same events alleged in the securities class action lawsuits described above. The Company is named as a nominal defendant. The plaintiffs assert claims for alleged breaches of fiduciary duties, unjust enrichment, and waste of corporate assets for the period February 2016 through the present and generally allege that the defendants made or caused the Company to make materially false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects. The plaintiffs also claim that the alleged conduct is a breach of the Company's Code of Business Conduct and Ethics, and that defendants, including members of the Company's Audit Committee, breached their fiduciary duties by failing to ensure the adequacy of the Company's internal controls, and by causing or allowing the Company to disseminate false and misleading statements in the Company’s SEC filings and other disclosures. The securities class action lawsuits and the federal derivative actions have all been related by the Court and assigned to one judge.
Shareholder derivative actions purporting to be brought on the Company’s behalf were brought in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors based on the same events alleged in the securities class action and federal derivative lawsuits described above, and alleging breaches of fiduciary duties.
The Company is currently unable to determine if the resolution of these matters will have a material adverse effect on the Company's financial position, liquidity, or results of operations.
Other Litigation
We are a party to various other litigation matters and claims that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of such matters will not have a material adverse effect on our business, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Global Select Market under the trading symbol "SPWR." During fiscal 2016 and 2015, the high and low closing trading prices of our common stock were as follows:
|
| | | | | | | | |
| | | SPWR |
| | | High | | Low |
| Fiscal Year 2016 | | | | |
| Fourth quarter | | $ | 9.11 |
| | $ | 6.30 |
|
| Third quarter | | $ | 16.07 |
| | $ | 7.53 |
|
| Second quarter | | $ | 22.09 |
| | $ | 13.49 |
|
| First quarter | | $ | 30.46 |
| | $ | 20.38 |
|
| Fiscal Year 2015 | | | | |
| Fourth quarter | | $ | 30.77 |
| | $ | 19.12 |
|
| Third quarter | | $ | 28.73 |
| | $ | 20.95 |
|
| Second quarter | | $ | 34.85 |
| | $ | 30.01 |
|
| First quarter | | $ | 33.60 |
| | $ | 23.35 |
|
As of February 10, 2017,7, 2020, there were approximately 814664 holders of record holders of our common stock. A substantially greater number of holders are in "street name" or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
Dividends
We have never declared or paid any cash dividend on our common stock, and we do not currently intend to pay a cash dividend on our common stock in the foreseeable future. Certain of the Company'sour debt agreements place restrictions on the Companyus and itsour subsidiaries' ability to pay cash dividends. For more information on our common stock and dividend rights, see "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 14. Common Stock.Stock."
Issuer Purchases of Equity Securities
The following table sets forth all purchases made by or on behalf of us or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock during each of the indicated periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased1 | | Average Price
Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs |
| September 30, 2019 through October 27, 2019 | | 15,850 | | | $ | 10.55 | | | — | | | — | |
| October 28, 2019 through November 24, 2019 | | 36,526 | | | $ | 8.56 | | | — | | | — | |
| November 25, 2019 through December 29, 2019 | | 58,642 | | | $ | 7.09 | | | — | | | — | |
| | | 111,018 | | | $ | 8.73 | | | — | | | — | |
|
| | | | | | | | | | | | | |
| 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 |
| October 3, 2016 through October 30, 2016 | | 44,123 |
| | $ | 8.65 |
| | — |
| | — |
|
| October 31, 2016 through November 27, 2016 | | 6,626 |
| | $ | 7.01 |
| | — |
| | — |
|
| November 28, 2016 through January 1, 2017 | | 19,129 |
| | $ | 7.13 |
| | — |
| | — |
|
| | | 69,878 |
| | $ | 8.08 |
| | — |
| | — |
|
| |
1
| The shares purchased represent shares surrendered to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees. |
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together with "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended1 | | | | | | | | |
| (In thousands, except per share data) | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Consolidated Statements of Operations Data | | | | | | | | | | |
| Revenue | | $ | 1,864,225 | | | $ | 1,726,085 | | | $ | 1,794,047 | | | $ | 2,552,637 | | | $ | 1,576,473 | |
| Gross margin (loss) | | $ | 125,905 | | | $ | (297,081) | | | $ | (18,645) | | | $ | 221,819 | | | $ | 244,646 | |
| Operating loss | | $ | (98,115) | | | $ | (849,031) | | | $ | (1,024,917) | | | $ | (427,754) | | | $ | (206,294) | |
| Income (loss) from continuing operations before income taxes and equity in earnings (loss) of unconsolidated investees | | $ | 25,968 | | | $ | (898,671) | | | $ | (1,200,750) | | | $ | (528,392) | | | $ | (242,311) | |
| Income (loss) from continuing operations per share of common stock: | | | | | | | | | | |
| Basic | | $ | 0.15 | | | $ | (5.76) | | | $ | (6.67) | | | $ | (3.25) | | | $ | (1.39) | |
| Diluted | | $ | 0.15 | | | $ | (5.76) | | | $ | (6.67) | | | $ | (3.25) | | | $ | (1.39) | |
1Previously reported information for fiscal 2017, 2016 have been restated for the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, when it was adopted in fiscal 2018. However, fiscal 2015 has not been restated and is, therefore not comparable to the fiscal 2019, 2018, 2017, and 2016 information.
Effective December 31, 2018, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as amended ("ASC 842"). For additional information on the changes resulting from the new standard and the impact to our financial results on adoption, refer to "Item 8. Financial Statements" Note 1. Organization and Summary of Significant Accounting Policies.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of1 | | | | | | | | |
| (In thousands) | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Consolidated Balance Sheet Data | | | | | | | | | | |
| Cash and cash equivalents | | $ | 422,955 | | | $ | 309,407 | | | $ | 435,097 | | | $ | 425,309 | | | $ | 954,528 | |
| Working capital | | $ | 482,522 | | | $ | 368,765 | | | $ | 253,424 | | | $ | 832,754 | | | $ | 1,515,918 | |
| Total assets | | $ | 2,171,921 | | | $ | 2,352,649 | | | $ | 4,028,656 | | | $ | 4,968,742 | | | $ | 4,856,993 | |
| Long-term debt | | $ | 113,827 | | | $ | 40,528 | | | $ | 430,634 | | | $ | 451,243 | | | $ | 478,948 | |
| Convertible debt, net of current portion | | $ | 820,259 | | | $ | 818,356 | | | $ | 816,454 | | | $ | 1,113,478 | | | $ | 1,110,960 | |
| Total stockholders' equity | | $ | 10,163 | | | $ | (208,696) | | | $ | 588,209 | | | $ | 1,531,038 | | | $ | 1,449,149 | |
1Previously reported information for fiscal 2017 and 2016 have been restated for the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, when it was adopted in fiscal 2018. However, fiscal 2015 has not been restated and is, therefore not comparable to the fiscal 2019, 2018, 2017, and 2016 information.
Effective December 31, 2018, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as amended ("ASC 842"). For additional information on the changes resulting from the new standard and the impact to our financial results on adoption, refer to "Item 8. Financial Statements" Note 1. Organization and Summary of Significant Accounting Policies.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| (In thousands, except per share data) | | January 1, 2017 | | January 3, 2016 | | December 28, 2014
| | December 29, 2013 | | December 30, 2012 |
| Consolidated Statements of Operations Data | | | | | | | | | | |
| Revenue | | $ | 2,559,562 |
| | $ | 1,576,473 |
| | $ | 3,027,265 |
| | $ | 2,507,203 |
| | $ | 2,417,501 |
|
| Gross margin | | $ | 189,966 |
| | $ | 244,646 |
| | $ | 625,127 |
| | $ | 491,072 |
| | $ | 246,398 |
|
| Operating income (loss) | | $ | (462,414 | ) | | $ | (206,294 | ) | | $ | 251,240 |
| | $ | 158,909 |
| | $ | (287,708 | ) |
| Income (loss) from continuing operations before income taxes and equity in earnings (loss) of unconsolidated investees | | $ | (564,595 | ) | | $ | (242,311 | ) | | $ | 184,614 |
| | $ | 41,583 |
| | $ | (329,663 | ) |
| Income (loss) from continuing operations per share of common stock: | | | | | | | | | | |
| Basic | | $ | (3.41 | ) | | $ | (1.39 | ) | | $ | 1.91 |
| | $ | 0.79 |
| | $ | (3.01 | ) |
| Diluted | | $ | (3.41 | ) | | $ | (1.39 | ) | | $ | 1.55 |
| | $ | 0.70 |
| | $ | (3.01 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | As of |
| (In thousands) | | January 1, 2017 | | January 3, 2016 | | December 28, 2014 | | December 29, 2013 | | December 30, 2012 |
| Consolidated Balance Sheet Data | | | | | | | | | | |
| Cash and cash equivalents | | $ | 425,309 |
| | $ | 954,528 |
| | $ | 956,175 |
| | $ | 762,511 |
| | $ | 457,487 |
|
| Working capital | | $ | 824,524 |
| | $ | 1,515,918 |
| | $ | 1,273,236 |
| | $ | 528,017 |
| | $ | 976,627 |
|
| Total assets | | $ | 4,567,167 |
| | $ | 4,856,993 |
| | $ | 4,345,582 |
| | $ | 3,898,690 |
| | $ | 3,340,948 |
|
| Long-term debt | | $ | 451,243 |
| | $ | 478,948 |
| | $ | 214,181 |
| | $ | 93,095 |
| | $ | 375,661 |
|
| Convertible debt, net of current portion | | $ | 1,113,478 |
| | $ | 1,110,960 |
| | $ | 692,955 |
| | $ | 300,079 |
| | $ | 438,629 |
|
| Total stockholders' equity | | $ | 1,007,832 |
| | $ | 1,449,149 |
| | $ | 1,534,174 |
| | $ | 1,116,153 |
| | $ | 993,352 |
|
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not represent historical facts or the assumptions underlying such statements. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "potential," "seek," "should," "will," "would," and similar expressions to identify forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, the sufficiency of our cash and our liquidity, projected costs and cost reduction measures, development of new products and improvements to our existing products, the impact of recently adopted accounting pronouncements, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, our ability to monetize utility projects, legislative actions and regulatory compliance, competitive positions, management's plans and objectives for future operations, our ability to obtain financing, our ability to comply with debt covenants or cure any defaults, our ability to repay our obligations as they come due, our ability to continue as a going concern, our ability to complete certain divestiture transactions, trends in average selling prices, the success of our joint ventures and acquisitions, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, expected restructuring charges, risks related to privacy and data security, and the likelihood of any impairment of project assets, long-lived assets, and investments. These forward-looking statements are based on information available to us as of the date of this Annual Report on Form 10-K and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Factors that could cause or contribute to such differences include, but are not limited to, those identified above, those discussed in the section titled “Risk Factors” included in this Annual Report on Form 10-K and our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, and our other filings with the SEC. These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year, which end on the Sunday closest to the calendar month end.
Overview
SunPower Corporation (together with its subsidiaries, "SunPower," "we," "us," or "our") is a leading global energy company that delivers complete solar solutions to residential, commercial, and power plant customers worldwide through an array of hardware, software, and financing options and through utility-scale solar power system construction and development capabilities, operations and maintenance ("O&M&M") services, and "Smart Energy" solutions. Our Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids—all personalized through easy-to-use customer interfaces. Of all the solar cells commercially available to the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. For more information about our business, please refer to the section titled "Part I. Item 1. BusinessBusiness" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
Recent Developments
Effective December 31, 2018, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as amended ("ASC 842") using the optional transition method as discussed in "Part I-Item 1. Financial Statements-Notes to the Consolidated Financial Statements-Note 1. Organization and Summary of Significant Accounting Policies" inof this Annual Report on Form 10-K.
Key transactions during the fiscal quarter ended December 29, 2019 include the following:
Announcement of Separation Transaction
On November 8, 2019, we entered into the Separation and Distribution Agreement with Maxeon Solar. The Separation and Distribution Agreement governs the principal corporate transactions required to effect the separation and the Spin-Off distribution, and provides for the allocation between SunPower and Maxeon Solar of the assets, liabilities, and obligations of the respective companies as of the separation. In addition, the Separation and Distribution Agreement, together with certain Ancillary Agreements, provide a framework for the relationship between SunPower and Maxeon Solar subsequent to the completion of the Spin-Off. Also on November 8, 2019, we entered into the Investment Agreement with Maxeon Solar, TZS, and, for the limited purposes set forth therein, Total. Pursuant to the Investment Agreement, we, Maxeon Solar, TZS and, with respect to certain provisions, Total have agreed to certain customary representations, warranties and covenants, including
certain representations and warranties as to the financial statements, contracts, liabilities, and other attributes of Maxeon Solar, certain business conduct restrictions and covenants requiring efforts to complete the transactions. The Spin-Off is intended to be tax-free to SunPower stockholders.
Common Stock Offering
On November 20, 2019, we completed an offering of 25,300,000 shares of the Company's common stock at a price of $7.00 per share, which included 3,300,000 shares issued and sold pursuant to the underwriter's exercise in full of its option to purchase additional shares, for gross proceeds of $177.1 million. We received net proceeds of $171.8 million from the offering, after deducting underwriter discounts which were recorded as a reduction of additional paid in capital. We incurred other expenses of $1.1 million for the transaction which was recorded in additional paid in capital ("APIC"). In addition, we incurred incremental organization costs in connection with the offering of $1.3 million which was recorded in the consolidated statement of operations. We intend to use the net proceeds from the offering for general corporate purposes, including partially funding the repayment of our senior convertible debentures. Refer to "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements— Note 18. Subsequent Events" for further details.
Segments Overview
We operateConsistent with fiscal 2018, our segment reporting consists of upstream and downstream structure. Under this segmentation, the SunPower Energy Services Segment ("SunPower Energy Services" or "Downstream") refers to sales of solar energy solutions in three end-customer segments: (i)the North America region previously included in the legacy Residential Segment (ii)and Commercial Segment (collectively previously referred to as "Distributed Generation" or "DG") including direct sales of turn-key engineering, procurement and (iii) Power Plant Segment. construction ("EPC") services, sales to our third-party dealer network, sales of energy under power purchase agreements ("PPAs"), storage solutions, cash sales and long-term leases directly to end customers, and sales to resellers. SunPower Energy Services Segment also includes sales of our global Operations and Maintenance ("O&M") services. The SunPower Technologies Segment ("SunPower Technologies" or "Upstream") refers to our technology development, worldwide solar panel manufacturing operations, equipment supply to resellers, commercial and residential end-customers outside of North America ("International DG"), and worldwide power plant project development and project sales. Some support functions and responsibilities have been shifted to each segment, including financial planning and analysis, legal, treasury, tax and accounting support and services, among others.
The operating structure provides our management with a comprehensive financial overview of our key businesses. The application of this structure permits us to align our strategic business initiatives and corporate goals in a manner that best focuses our businesses and support operations for success.
Our President and Chief Executive Officer, as the chief operating decision maker (“CODM”), reviews our business, and manages resource allocations and measures performance of our activities among these three end-customer segments. The Residentialbetween the SunPower Energy Services Segment and Commercial Segments combined are referred to as Distributed Generation. SunPower Technologies Segment.
For more information about our business segments, see the section titled "Part I. Item 1. BusinessBusiness" of our Annual Report on Form 10-K for the fiscal year ended December 29, 2019. For more segment information, see "Item 1. Financial Statements—Note 17. Segment Information and Geographical Information" in the notes to the consolidated financial statements in this Annual Report on Form 10-K. For more segment information, see "Item 8. Financial Statements and Supplementary Data—Note 17. Segment Information" in this Annual Report.
Unit of Power
When referring to our solar power systems, our facilities’ manufacturing capacity, and total sales, the unit of electricity in watts for kilowatts ("KW"), megawatts ("MW"), and gigawatts ("GW") is direct current ("DC"), unless otherwise noted as alternating current ("AC").
Seasonal Trends
Our business is subject to industry-specific seasonal fluctuations including changes in weather patterns and economic incentives, among others. Sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two quarters of a fiscal year. The construction of solar power systems or installation of solar power components and related revenue may decline during cold winter months. In the United States, many customers make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons. In addition, revenues may fluctuate due to the timing of project sales, construction schedules, and revenue recognition of certain projects, such as those involving the sale of real estate, which may significantly impact the quarterly profile of our results of operations. We may also retain certain development projects on our balance sheet for longer periods of time than in preceding periods in order to optimize the economic value we receive at the time of sale in light of market conditions, which can fluctuate after we have committed to projects. Delays in disposing of projects, or changes in amounts realized on disposition, may lead to significant fluctuations to the period-over-period profile of our results of operations and our cash available for working capital needs.
Fiscal Years
We have a 52-to-53-week52 to 53 week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. The current fiscal year, fiscal 2016, is a 52-week fiscal year, fiscal year 2015 was a 53-week fiscal year and had a 14-week fourth fiscal quarter, while fiscal year 2014 was a 52-week53 week fiscal year. Fiscal 2016 ended on January 1,2019, 2018 and 2017 are 52 week fiscal 2015 ended on January 3, 2016, andyears. Our fiscal 20142019 ended on December 28, 2014.29, 2019, fiscal 2018 ended on December 30, 2018 and fiscal 2017 ended on December 31, 2017.
Outlook
Demand
InDuring fiscal 20162019, we faced market challenges, primarilyincluding competitive solar product pricing pressure and the impact of tariffs imposed pursuant to Section 201 and Section 301 of the Trade Act of 1974. On February 7, 2018, tariffs went into effect pursuant to Proclamation 9693, which approved recommendations to provide relief to U.S. manufacturers and imposed safeguard tariffs on imported solar cells and modules, based on the investigations, findings, and recommendations of the International Trade Commission. While solar cells and modules based on interdigitated back contact ("IBC") technology, like our X-Series (Maxeon 3), E-Series (Maxeon 2)A-Series (Maxeon 5) panels and related products, were granted exclusion from these safeguard tariffs on September 19, 2018, our solar products based on other technologies continue to be subject to the safeguard tariffs. On June 13, 2019, the Office of the United States Trade Representative (“USTR”) published a notice describing its grant of exclusion requests for three additional categories of solar products. Beginning on June 13, 2019, the following categories of solar products are not subject to the Section 201 safeguard tariffs: (i) bifacial solar panels that absorb light and generate electricity on each side of the panel and that consist of only bifacial solar cells that absorb light and generate electricity on each side of the cells; (ii) flexible fiberglass solar panels without glass components other than fiberglass, such panels having power outputs ranging from 250 to 900 watts; and (iii) solar panels consisting of solar cells arranged in rows that are laminated in the panel and that are separated by more than 10 mm, with an optical film spanning the gaps between all rows that is designed to direct sunlight onto the solar cells, and not including panels that lack said optical film or only have a white or other backing layer that absorbs or scatters sunlight. We are working to understand the opportunities and challenges created by the exclusion of these products, as well as the impact of the exclusions on the demand and availability of competing products. However, the excluded technologies currently represent a small percentage of the global solar market.
Additionally, the USTR initiated an investigation under Section 301 of the Trade Act of 1974 into the government of China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation. The USTR imposed additional import duties of up to 25% on certain Chinese products covered by the Section 301 remedy. These tariffs include certain solar power system components and finished products, including those purchased from our suppliers for use in our Power Plant Segment, which impactedproducts and used in our marginsbusiness. In the near term, imposition of these tariffs - on top of anti-dumping and countervailing duties on Chinese solar cells and modules, imposed under the prior administration - is likely to result in a wide range of impacts to the U.S. solar industry, global manufacturing market and our business. Such tariffs could cause market volatility, price fluctuations, and demand reduction. Uncertainties associated with the Section 201 and Section 301 trade cases prompted us to adopt a restructuring plan and implement changesinitiatives to reduce operating expenses and cost of revenue overhead and improve cash flow. During fiscal 2019 and 2018, we incurred total tariffs charges of approximately $6.5 million and $42.5 million, respectively.
In fiscal 2019, focused on investments that we expected would offer the best opportunities for growth including our industry-leading A-Series (Maxeon 5) cell and panel technology, solar-plus-storage solutions and digital platform to improve customer service and satisfaction in our SunPower Energy Services offerings. We believe that our strategic decision to re-segment our business in order to realign ourinto an upstream and downstream investments, optimize our supply chain, and reduce operating expenses. Our actions included the consolidation of our manufacturing operations in order to accelerate operating cost reductions and improve overall operating efficiency. Factors that impacted our margins included write-downs totaling $46.2 million on certain solar power development projects during 2016 because of adjustments to pricing assumptions,
as well as charges totaling $58.2 million that were recorded in fiscal 2016 in connection with the contracted sale of raw material inventory to third parties as we sought to improve our working capital. In fiscal 2017, we plan to focus on projects that we expect will be profitable; however, market conditions can deteriorate after we have committed to projects. For example, shifts in the timing of demand and changes in the internal rate of return ("IRR") that our customers expect can significantly affect project sale prices. A pronounced increase in expected customer and investor IRR rates in light of market conditions may continue to drive lower overall project sale prices in fiscal 2017. For more information see "Part I. Item 1A. Risk Factors—Risks Related to Our Sales Channels—Our operating results are subject to significant fluctuations and are inherently unpredictable" in this Annual Report on Form 10-K.
In the face of these near-term challenges, we remain focused on each of our three business segments as well as on continued investment in next-generation technology. We plan to expand the footprint of our SunPower EquinoxTM and HelixTM complete solutions in our Residential and Commercial businesses. We planstructure, to focus our Power Plantdownstream efforts on our leading U.S. DG business development resources on a limited number of core markets, primarily in the Americas, where we believe we have a sustainable competitive advantage. Outside of these core markets, we will focus our Power Plant business on the salewhile growing global sales of our new Oasis® complete solution, incorporating Performance Seriesupstream solar panel technology,business through our SunPower Technologies business segment, will improve transparency and enable us to developers and EPC companies in global markets. 8point3 Energy Partners remains a source of demand for our business and we plan to continue to sell to it our solar energy generating assets, including utility-scale solar power plants and commercial solar projects. We have used and expect to continue to use additional financing structures and sources of demand in order to maximize economic returns. For additional information on transactions with 8point3 Energy Partners and associated revenue recognition, see "Item 8. Financial Statements and Supplementary Data—Note 10. Equity Method Investments" in this Annual Report on Form 10-K.regain profitability.
In late fiscal 2015, the U.S. government enacted a budget bill that extended the solar commercial investment tax credit (the “Commercial ITC”"Commercial ITC") under Section 48(c) of the Internal Revenue Code, of 1986 (the “IRC”) and the individual solar investment tax credit under Section 25D of the IRCCode (together with the Commercial ITC, the “ITC”"ITC") for five years, at rates gradually decreasing from 30% through 2019 to 22% in 2021. After 2021, the Commercial ITC is retained at 10% while the individual solar investment tax credit is reduced to 0%. We also saw other recent developmentsIn fiscal 2019 we completed a transaction to purchase solar equipment in accordance with IRS safe harbor guidance, allowing us to preserve the current ITC rates for solar projects that contributed to a favorable policy environment, including (i) a significant focus on reducing world-wide carbon emissions through such events asare completed after the COP21 sustainable innovation forum heldscheduled reduction in Paris andrates. During December 2017, the announcement of the Clean Power Plan in the United States, and (ii) domestic policy measures such as the extension of bonus depreciation and approval of California Net Metering "NEM 2.0." We believe these factors will strengthen long-term demand for our products in all three business segments in U.S. and global markets and provide us an opportunity to expand our suite of energy solutions. However, in the near term, the extension of the ITC has had adverse impacts on our business, as it has reduced the pressure for commercial or residential customers to make purchases before the end of 2016, which was the time when the ITC had previously been set to expire, and instead has pushed demand from these customers into future periods. In addition, the newcurrent administration and Congress have expressed interest inpassed comprehensive reform of the U.S. tax code,Code which could resultresulted in the reduction or elimination of various industry-specific tax incentives in return for an overall reduction in corporate tax rates. For more information about the ITC and other policy mechanisms, please referThese changes are likely to result in a wide range of impacts to the section titled "Item 1. Business—Regulations—Public Policy Considerations" in this Annual Report on Form 10-K.U.S. solar industry and our business. For more information about how we avail ourselves of the benefits of public policies and the risks related to public policies, please see the risk factors set forth under the caption "Part I. Item 1A. Risk Factors—Risks Related to Our Sales Channels" in this Annual Report on Form 10-K,Channels," including "—"—The reduction, modification or elimination of government incentives could cause our revenue to decline and harm our financial results"results" and "—Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services."
Supply
We are focused on delivering complete solar power generation solutions to customers in all three of our business segments.customers. As part of our complete solutionsolutions-focused approach, we launched our SunPower HelixTM product for our Commercial Segmentcommercial business customers during fiscal 2015 and our SunPower EquinoxTM product for our Residential Segmentresidential business customers during fiscal 2016. The SunPower Equinox and Helix systems are pre-engineered modular solutions for residential and commercial applications, respectively, that combine our high-efficiency solar module technology with integrated plug-and-play power stations, cable management systems, and mounting hardware that enable our customers to quickly and easily complete system installations and manage their energy production. Our SunPower EquinoxTM systems utilize our latest X-SeriesMaxeon Gen 3 cell and ACPV technology for residential applications, where we are also expanding our initiatives on storage and Smart Energy solutions. During fiscal 2016 we also launched our new generation technology for our existing Oasis® modular solar power blocks for power plant applications. With the addition of these modular solutions in our residential and commercial applications, we are able to provide complete solutions across all end-customer segments. Additionally, we continue to focus on producing on our new lower cost, high efficiency Performance SeriesP-Series product line and our A-Series (Maxeon 5) product line, which will enhance our ability to rapidly expand our global footprint with minimal capital cost.
We continue to see significant and increasing opportunities in technologies and capabilities adjacent to our core product offerings that can significantly reduce our customers' CCOE, measurement, including the integration of energy storage and energy management functionality into our systems, and have made investments to realize those opportunities, including our investment in a data-driven Energy Services Management Platform from Tendril Networks, Inc., and our strategic partnership with EnerNOC to deploy their Software as a Service energy intelligence software solution to our commercial and power plant customers, enabling our customers to make intelligent energy choices by addressing how they buy energy, how they use energy, and when they use it. We have added advanced module-level control electronics to our portfolio of technology designed to enable longer series strings and significant balance of system components cost reductions in large arrays. We are developing next generation microinverter technology and currently offer solar panels that use microinverters designed to eliminate the need to mount or assemble additional components on the roof or the side of a building and enable optimization and monitoring at the solar panel level to ensure maximum energy production by the solar system. We also continue to work on making combined solar and distributed energy storage solutions broadly commercially available to certain customers in the United States through our agreement to offer Sunverge SIS energy solutions comprising batteries, power electronics, and multiple energy inputs controlled by software in the cloud.
We continue to improve our unique, differentiated solar cell and panel technology. We emphasize improvement of our solar cell efficiency and LCOE and CCOE performance through enhancement of our existing products, development of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies. We are now producing production efficiencies for our solar cells withof over 25% efficiency in the lab, have reached production panel efficienciesand our solar panels of over 24%, and have started up our high-volume Performance Series production lines in Mexico.22%.
We plan to reducemonitor and change our overall solar cell manufacturing output in an ongoing effort to match profitable demand
levels, with increasing bias toward our highest efficiency X-Series (Maxeon 3) product platform, which utilizes our latest solar cell technology, and our Performance SeriesP-Series product, which utilizes conventional cell technology that we purchase from third parties in low-cost supply chain ecosystems such as China. We recently closed our Fab 2 cell manufacturing facility and our panel assembly facility in the Philippines and are focusing on our latest generation, lower cost panel assembly facilities in Mexico. As part of this realignment, we expect to reduce our back-contact panel assembly capacity while rampingWe are also increasing production of our new Performance Series technology.P-Series technology at our newly-acquired U.S. manufacturing facility.
We are focused on reducing the cost of our solar panels and systems, and areincluding working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies, and expanding economies of scale. We also continually focus onscale and reducing manufacturing cost and complexity in conjunction with our overall cost-control strategies. We believe that the global demand for solar systems is highly elastic and that our current aggressive, but achievable, cost reduction roadmap will reduce installed costs for our customers across allboth of our business segments and drive increased demand for our solar solutions.
We also work with our suppliers and partners to ensure the reliability of our supply chain. We have contracted with some of our suppliers for multi-year supply agreements, under which we have annual minimum purchase obligations. For more information about our purchase commitments and obligations, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity"Liquidity and Capital Resources—Contractual Obligations"Obligations" and "Item 8.1. Financial StatementsStatements—Note 4. Business Divestiture and Supplementary Data—Sale of Assets"Note and "Note 9. Commitments and Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.Contingencies."
We currently believe our supplier relationships and various short- and long-term contracts will afford us the volume of material and services required to meet our planned output; however, we face the risk that the pricing of our long-term supply contracts may exceed market value. WeFor example, we purchase our polysilicon under fixed-price long-term supply agreements; purchases in fiscal 2016agreements. The pricing under these agreements significantly exceededin excess of market value and the volume contracted to be purchasedresults in fiscal 2017 exceeds our planned utilization, which may resultinventory write-downs based on expected net realizable value. Additionally, existing arrangements from prior years have resulted in higherabove current market pricing for purchasing polysilicon, resulting in inventory balances untillosses we are able to fully utilize the polysilicon inventory in future periods. We have alsorealized. For several years now, we have elected to sell polysilicon inventory in excess of short-term needs to third parties at a loss, and may enter into further similar transactions in future periods. For more information about these risks, please see the risk factors set forth under the caption "Part 1. Item 1A. Risk Factors—Risks Related to Our Supply Chain," including "—Our long-term, firm commitment supply agreements could result in excess or insufficient inventory, place us at a competitive disadvantage on pricing, or lead to disputes, each of which could impair our ability to meet our cost reduction roadmap"roadmap, and in some circumstances may force us to take a significant accounting charge" and "—We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and
components for our products, which could prevent us from delivering our products to our customers within required timeframestime frames and could in turn result in sales and installation delays, cancellations, penalty payments and loss of market share" under "Part 1. Item 1A. Risk Factors—Risks Related to Our Supply Chain" in this Annual Report on Form 10-K.share."
Projects Under Contract
The table below presents significant construction and development projects under contract as of January 1, 2017:
|
| | | | | | | | | | |
| Project | | Location | | Size (MW) | | Third-Party Owner / Purchaser(s) | | Power Purchase Agreement(s) | | Expected Substantial Completion of Project1 |
| Iberdrola Gala Solar Project | | Oregon, USA | | 71 | | Avangrid Renewables, LLC | | Customer A | | 2017 |
| Boulder Solar Project II | | Nevada, USA | | 62 | | AEP Renewables, LLC | | Sierra Pacific Power Company | | 2017 |
1Expected completion of revenue recognition assumes completion of construction in the stated fiscal year.
As of January 1, 2017, an aggregate of approximately $222.6 million of remaining revenue is expected to be recognized on projects reflected in the table above through the expected completion dates noted. Projects will be removed from the table above in the period in which substantially all of the revenue for such project has been recognized.
Projects with Executed Power Purchase Agreements - Not Sold / Not Under Contract
The table below presents significant construction and development projects with executed PPAs, but not sold or under contract as of January 1, 2017:
|
| | | | | | | | |
| Project | | Location | | Size (MW) | | Power Purchase Agreement(s) | | Expected Substantial Completion of Project1 |
| Ticul Solar Projects | | Mexico | | 399 | | Comision Federal Electricidad | | 2018 |
| Guajiro Solar Project | | Mexico | | 117 | | Comision Federal Electricidad | | 2018 |
| El Pelicano Solar Project | | Chile | | 111 | | Empresa de Transporte de Pasajeros Metro S.A. | | 2017 |
| |
1
| Expected completion of revenue recognition assumes completion of construction and sale of the project in the stated fiscal year. |
Our project pipeline extends beyond the projects represented in the tables above. Significant projects with development and milestone activities in progress will be excluded from the table above until an associated PPA has been executed.
Components of Results of Operations
The following section describes certain line items in our Consolidated Statements of Operations:
Revenue
We recognize revenue from the following activities and transactions within our end-customer segments:
Solar power components: the sale of panels and balance of system components, primarily to dealers, system integrators and distributors, in some cases on a multi-year, firm commitment basis.
Solar power systems: the design, manufacture, and sale of high-performance rooftop and ground-mounted solar power systems under construction and development agreements.
Residential leases: revenue recognized on systems under lease agreements with residential customers for terms of up to 20 years.
Other: revenue related to our solar power services and solutions, such as post-installation systems monitoring and maintenance in connection with construction contracts and commercial PPAs.
For a discussion of how and when we recognize revenue, see "—Critical Accounting Estimates—Revenue Recognition."
Cost of Revenue
We generally recognize our cost of revenue in the same period that we recognize related revenue. Our cost of revenue fluctuates from period to period due to the mix of projects that we complete and the associated revenue that we recognize, particularly for construction contracts and large-scale development projects involving real estate. For a discussion of how and when we recognize revenue, see "—Critical Accounting Estimates—Revenue Recognition."
The cost of solar panels is the single largest cost element in our cost of revenue. Our cost of solar panels consists primarily of: (i) polysilicon, silicon ingots and wafers used in the production of solar cells; (ii) other materials and chemicals including glass, frame, and backing; and (iii) direct labor costs and assembly costs. Other cost of revenue associated with the construction of solar power systems includes real estate, mounting systems, inverters, capitalized financing costs, and construction subcontract and dealer costs. Other factors that contribute to our cost of revenue include salaries and personnel-related costs, depreciation, facilities related charges, freight, as well as charges related to sales of raw material inventory and write-downs on certain solar power development projects when costs exceed expected selling prices.
Gross Margin
Our gross margin each quarter is affected by a number of factors, including average selling prices for our solar power components, the timing and nature of project revenue recognition, the types of projects in progress, the gross margins estimated for those projects in progress, our product mix, our actual manufacturing costs, the utilization rate of our solar cell manufacturing facilities, and actual overhead costs.
Research and Development
Research and development expense consists primarily of salaries and related personnel costs; depreciation of equipment; and the cost of solar panel materials, various prototyping materials, and services used for the development and testing of products. Research and development expense is reported net of contributions under collaborative arrangements.
Sales, General and Administrative
Sales, general and administrative expense consists primarily of salaries and related personnel costs, professional fees, bad debt expenses, and other selling and marketing expenses.
Restructuring
Restructuring expense in fiscal 2016 consists mainly of costs associated with our August 2016 and December 2016 restructuring plans aimed to realign our downstream investments, optimize our supply chain, and reduce operating expenses in response to expected near-term challenges. Charges in connection with these plans consist primarily of asset impairments, severance benefits, and lease and related termination costs. For more information, see "Item 8. Financial Statements and Supplementary Data—Note 8. Restructuring" in this Annual Report.
Restructuring expense in fiscal 2015 and 2014 consists mainly of costs associated with our November 2014 reorganization plan aimed towards realigning resources consistently with SunPower's global strategy and improving overall operating efficiency and cost structure. Charges in connection with this plan are primarily related to severance benefits. Remaining restructuring costs are related to plans effected in prior fiscal periods. Restructuring activities related to these legacy plans were substantially complete as of January 1, 2017; however, we expect to continue to incur costs as we finalize previous estimates and actions in connection with these plans, primarily due to other costs, such as legal services.
Other Income (Expense), Net
Interest expense primarily relates to: (i) amortization expense recorded for warrants issued to Total S.A. in connection with the Liquidity Support Agreement executed in the first quarter of fiscal 2012; (ii) debt under our senior convertible debentures; (iii) fees for our outstanding letters of credit; and (iv) other outstanding bank and project debt.
Other, net includes gains or losses on foreign exchange and derivatives as well as gains or losses related to sales and impairments of certain investments.
In fiscal 2016, significant items contributing to Other income (expense), net consisted of a gain on the settlement of preexisting relationships in connection with our acquisition of AUOSP, a loss on our equity method investment in connection with our acquisition of AUOSP, and goodwill impairment. For more information on these items, see "—Note 3. Business
Combinations" and "—Note 4. Goodwill and Other Intangible Assets" under "Item 8. Financial Statements and Supplementary Data" in this Annual Report.
Income Taxes
Deferred tax assets and liabilities are recognized for temporary differences between financial statement and income tax bases of assets and liabilities. Valuation allowances are provided against deferred tax assets when management cannot conclude that it is more likely than not that some portion or all deferred tax assets will be realized.
We currently benefit from income tax holidays incentives in the Philippines in accordance with our registration with the Philippine Economic Zone Authority ("PEZA"). We also benefit from a tax holiday granted by the Malaysian government to our former joint venture AUOSP (now our wholly-owned subsidiary, SunPower Malaysia Manufacturing Sdn. Bhd.) subject to certain hiring, capital spending, and manufacturing requirements. We have an auxiliary company ruling in Switzerland, where we sell our solar power products, which currently reduces our Swiss tax rate. For additional information see "—Note 1. The Company and Summary of Significant Accounting Policies" and "—Note 13. Income Taxes" under "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
For financial reporting purposes, during periods when we were a subsidiary of Cypress, income tax expense and deferred income tax balances were calculated as if we were a separate entity and had prepared our own separate tax return. Effective with the closing of our public offering of common stock in June 2006, we were no longer eligible to file federal and most state consolidated tax returns with Cypress. As of September 29, 2008, Cypress completed a spin-off of all of its shares of our former class B common stock to its shareholders, so we are no longer eligible to file any remaining state consolidated tax returns with Cypress. Under our tax sharing agreement with Cypress, we agreed to pay Cypress for any federal and state income tax credit or net operating loss carryforwards utilized in our federal and state tax returns in subsequent periods that originated while our results were included in Cypress’s federal tax returns.
Equity in Earnings (Loss) of Unconsolidated Investees
Equity in earnings (loss) of unconsolidated investees represents our reportable share of earnings (loss) generated from entities in which we own an equity interest accounted for under the equity method.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
We have entered into facilities with third-party investors under which the parties invest in entities that hold SunPower solar power systems and leases with residential customers. We determined that we hold controlling interests in these less-than-wholly-owned entities and have fully consolidated these entities as a result. The investors were determined to hold noncontrolling interests, some of which are redeemable at the option of the noncontrolling interest holder. We apply the hypothetical liquidation at book value method in allocating recorded net income (loss) to each investor based on the change in the reporting period of the amount of net assets of the entity to which each investor would be entitled to under the governing contractual arrangements in a liquidation scenario.
Results of Operations
RevenueResults of operations in dollars and as a percentage of net revenue were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | % of total revenue | | 2015 | | % of total revenue | | 2014 | | % of total revenue |
| Distributed Generation | | | | | | | | | | | | |
| Residential | | $ | 720,331 |
| | 28% | | $ | 643,520 |
| | 41% | | $ | 655,936 |
| | 22% |
| Commercial | | 436,915 |
| | 17% | | 277,143 |
| | 17% | | 361,828 |
| | 12% |
| Power Plant | | 1,402,316 |
| | 55% | | 655,810 |
| | 42% | | 2,009,501 |
| | 66% |
| Total revenue | | $ | 2,559,562 |
| | | | $ | 1,576,473 |
| | | | $ | 3,027,265 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | | | | | | | | | |
| | | December 29, 2019 | | | | December 30, 2018 | | | | December 31, 2017 | | |
| | in thousands | | | % of Revenue | | in thousands | | | % of Revenue | | in thousands | | | % of Revenue |
| Total revenue | | 1,864,225 | | | 100 | | | 1,726,085 | | | 100 | | | 1,794,047 | | | 100 | |
| Total cost of revenue | | 1,738,320 | | | 93 | | | 2,023,166 | | | 117 | | | 1,812,692 | | | 101 | |
| Gross profit (loss) | | 125,905 | | | 7 | | | (297,081) | | | (17) | | | (18,645) | | | (1) | |
| Research and development | | 67,515 | | | 4 | | | 81,705 | | | 5 | | | 82,247 | | | 5 | |
| Sales, general and administrative | | 260,443 | | | 14 | | | 260,111 | | | 15 | | | 278,645 | | | 16 | |
| Restructuring charges | | 14,110 | | | 1 | | | 17,497 | | | 1 | | | 21,045 | | | 1 | |
| Loss on sale and impairment of residential lease assets | | 25,352 | | | 1 | | | 251,984 | | | 15 | | | 624,335 | | | 35 | |
| Gain on business divestitures | | (143,400) | | | (8) | | | (59,347) | | | (3) | | | — | | | — | |
| Operating loss | | (98,115) | | | (5) | | | (849,031) | | | (50) | | | (1,024,917) | | | (56) | |
| Other income (expense), net | | 124,083 | | | 7 | | | (49,640) | | | (3) | | | (175,833) | | | (10) | |
| Income (loss) before income taxes and equity in losses of unconsolidated investees | | 25,968 | | | 2 | | | (898,671) | | | (53) | | | (1,200,750) | | | (66) | |
| (Provision) benefit for income taxes | | (26,631) | | | (1) | | | (1,010) | | | — | | | 3,944 | | | — | |
| Equity in earnings (losses) of unconsolidated investees | | (7,058) | | | — | | | (17,815) | | | (1) | | | 25,938 | | | 1 | |
| Net loss | | (7,721) | | | (1) | | | (917,496) | | | (54) | | | (1,170,868) | | | (65) | |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | 29,880 | | | 2 | | | 106,405 | | | 6 | | | 241,747 | | | 13 | |
| Net income (loss) attributable to stockholders | | $ | 22,159 | | | 1 | | | $ | (811,091) | | | (48) | | | $ | (929,121) | | | (52) | |
Total Revenue:
Our total revenue increased by 62%8% during fiscal 20162019 as compared to fiscal 2015, primarily due to increased sales of solar power systems across all Segments and particularly due to revenue recognized on the sale of several
utility-scale solar power projects in the Power Plant Segment during the second half of fiscal 2016, such as the 128 MW Henrietta project and the 125 MW Boulder Solar I project.
Our total revenue decreased 48% during fiscal 2015 as compared to fiscal 2014 primarily because during fiscal 2015 we deferred the recognition of any revenue or profit on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Item 8. Financial Statements and Supplementary Data—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The decrease in revenue in fiscal 2015 was also due to substantial completion of revenue recognition at the end of fiscal 2014 on certain large-scale solar power systems. A decline in sales of solar power systems and components to residential and commercial customers also contributed to the period-over-period decrease in total revenue.
Concentrations: The Power Plant Segment as a percentage of total revenue recognized was approximately 55% during fiscal 2016 as compared to 42% during fiscal 2015. The revenue for the Power Plant Segment as a percentage of total revenue recognized increased primarily due to: (i) an increase in the volume of utility-scale solar power projects sold in fiscal 2016 in our Power Plants Segment, and (ii) an increase in the revenue recognized in fiscal 2016 in our Power Plant Segment due to the accounting treatment of certain utility-scale projects as partial sales of real estate as described in "Item 8. Financial Statements and Supplementary Data—Note 10. Equity Method Investments" in this Annual Report on Form 10-K.
Sales for the Power Plant Segment as a percentage of total revenue recognized were approximately 42% and 66% during fiscal 2015 and fiscal 2014, respectively. The revenue for the Power Plant Segment as a percentage of total revenue recognized decreased primarily because we deferred the recognition of any revenue or profit on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Item 8. Financial Statements and Supplementary Data—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The decrease during fiscal 2015 was additionally driven by substantial completion of revenue recognition at the end of fiscal 2014 on certain large-scale solar power systems.
The table below represents our significant customers that accounted for greater than 10 percent of total revenue in fiscal 2016, 2015, and 2014, respectively.
|
| | | | | | | | | | |
| | | Fiscal Year |
| Revenue | | 2016 | | 2015 | | 2014 |
| Significant Customers: | | Business Segment | | | | | | |
| 8point3 Energy Partners | | Power Plant | | 10% | | n/a |
| | n/a |
|
| Southern Renewable Partnerships, LLC | | Power Plant | | 15% | | n/a |
| | n/a |
|
| MidAmerican Energy Holdings Company | | Power Plant | | * | | 14 | % | | 49 | % |
| |
* | denotes less than 10% during the period |
Residential Revenue: Residential revenue increased 12% percent during fiscal 2016 as compared to fiscal 2015,2018, primarily due to an increase in our SunPower Technologies Segment. Increase and decrease by segments is further discussed below.
Our total revenue decreased by 4% during fiscal 2018 as compared to fiscal 2017, primarily due to reduced sales in our SunPower Technologies Segment in the U.S. and in Asia as result of residentialour decision to cease the development of large-scale solar power systemsprojects. We sold our remaining U.S. power plant development portfolio in North America driventhe third quarter of fiscal 2018. This was partially offset by stronger sales through our dealer network, an increase in our SunPower Energy Services Segment in the numberproportion of capital leases placed in service relative to total leases placed in service under our residential leasing program within the United States,U.S., as well as stronger sales of solar power systems and an increasecomponents to residential customers in all regions, and stronger sales of commercial solar power projects in all regions.
We did not have customers that accounted for greater than 10% of total revenue in the proportionyears ended December 29, 2019 and December 30, 2018.
Revenue - by Segment:
A description of our segments, along with other required information can be found in service.Note 17, "Segment and Geographical Information" of the consolidated financial statements in Item 8 of Part II, which is incorporated herein by reference.
ResidentialBelow, we have further discussed increase and decrease in revenue decreased 2%for each segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | | | | | |
| (In thousands, except percentages) | | December 29, 2019 | | % Change | | December 30, 2018 | | % Change | | December 31, 2017 |
| SunPower Energy Services | | $ | 1,148,006 | | | — | % | | $ | 1,143,967 | | | (2) | % | | $ | 1,170,253 | |
SunPower Technologies1 | | 1,314,076 | | | 24 | % | | 1,059,506 | | | (26) | % | | 1,425,254 | |
| Intersegment Eliminations and other | | (597,857) | | | 25 | % | | (477,388) | | | (40) | % | | (801,460) | |
| Total Revenue | | 1,864,225 | | | 8 | % | | 1,726,085 | | | (4) | % | | 1,794,047 | |
SunPower Energy Services
Overall, revenue for the segment remained flat during fiscal 20152019 as compared to fiscal 20142018. Higher volume of sales to our residential customers, was partially offset by a decrease in our commercial business.
Revenue from residential customers increased 10% during fiscal 2019 as compared to fiscal 2018, primarily due to a declinehigher volume in residential deals, as well as an increase in the sales of solar power components and systems to our residential customers particularly in Japan, where a reduction in the country's feed-in tariff during the last half of fiscal 2015 reduced demand for solar power systems and the decline in the value of the Japanese Yen reduced demand for imported goods in general. The decrease in residential revenue wasU.S., partially offset by an increaselower third-party dealer cash transactions. Revenue from commercial customers decreased 24% during fiscal 2019 as compared to fiscal 2018 primarily due to reduction in power generation revenue due to sale of our commercial sale-leaseback portfolio in the first and second quarters of fiscal 2019, and lower volume of systems sales and EPC contracts.
Revenue from residential customers increased 28% during fiscal 2018 as compared to fiscal 2017, primarily due to a higher volume in residential component salesdeals together with the increased proportion of capital leases placed in North America driven by stronger sales through our dealer network and an increase in the number ofservice relative to total leases placed in service under our residential leasing program within the United States.
Commercial Revenue: Commercial revenue increased 58%U.S., as well as an increase in the sales of solar power components and systems to our residential customers in the U.S., partially offset by lower third-party dealer cash transactions. Revenue from commercial customers decreased 57% during fiscal 20162018 as compared to fiscal 2015,2017 primarily because of strongerweaker sales of EPC and PPA commercial components and systems in North America due to a favorable policy environment that encouraged investment in renewable energy by commercial customers.systems.
Commercial revenue decreased 23%SunPower Technologies
Revenue for the segment increased 24% during fiscal 20152019 as compared to fiscal 20142018, primarily because we deferred the recognitiondue to higher volume of anymodule sales in Europe and Asia, as well as revenue or profit on thefrom sale to 8point3 Energy Partners of development projects involving real estate under the accounting treatment described in "Item 8. Financial StatementsJapan, Chile, and Supplementary Data—Note 3. 8point3 Energy PartnersMexico.
LP" in our Annual Report on Form 10-KRevenue for the fiscal year ended January 3, 2016. The decrease in revenuesegment decreased 26% during fiscal 2015 was also2018 as compared to fiscal 2017, primarily due to the completion of certain commercial solardivesting our U.S. power system projects, and the associated revenue recognition, during fiscal 2014 and a decrease in commercial component sales across all geographies, particularly in Japan, where a reduction in the country's feed-in tariffplant development portfolio during the third quarter of fiscal 2015 reduced demand for2018 partially offset by increased sales of power plant development and solar power systems and the declinesolutions sales in the valueregions outside of the Japanese Yen reduced demand for imported goods in general.U.S.
Power Plant Revenue: Power PlantConcentrations:
Our SunPower Energy Services Segment as a percentage of total revenue increased 114%recognized was 62% during fiscal 20162019 as compared to 66% during fiscal 2015, respectively, primarily due to: (i) an2018. The relative change in revenue for SunPower Energy Services Segment as a percentage of total revenue recognized reflects the impact of a significant increase in the volume of utility-scale solar power projects sold in fiscal 2016, primarily in North America, including the 128 MW Henrietta project and the 125 MW Boulder Solar I project, and (ii) the deferral of revenue in fiscal 2015 due to the accounting treatmentSunPower Technologies Segment. Our SunPower Technologies Segment as a percentage of certain utility-scale projects as partial sales of real estate as described in "Item 8. Financial Statements and Supplementary Data—Note 10. Equity Method Investments" in this Annual Report.
Power Planttotal revenue decreased 67%recognized was 70% during fiscal 20152019, as compared to 61% during fiscal 2014 primarily because we deferred the recognition2018. The relative change in revenue for SunPower Technologies Segment as a percentage of anytotal revenue or profit on therecognized reflects higher volume of module sales in Europe and Asia, as well as revenue from sale of development projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Item 8. Financial StatementsJapan, Chile, and Supplementary Data—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The decrease in revenue during fiscal 2015 was also due to substantial completion of revenue recognition at the end of fiscal 2014 on certain large-scale solar power systems located within the United States.
Cost of RevenueMexico.
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Distributed Generation | | | | | | |
| Residential | | $ | 603,559 |
| | $ | 508,449 |
| | $ | 541,812 |
|
| Commercial | | 438,711 |
| | 259,600 |
| | 326,324 |
|
| Power Plant | | 1,327,326 |
| | 563,778 |
| | 1,534,002 |
|
| Total cost of revenue | | $ | 2,369,596 |
| | $ | 1,331,827 |
| | $ | 2,402,138 |
|
| Total cost of revenue as a percentage of revenue | | 93 | % | | 84 | % | | 79 | % |
| Total gross margin percentage | | 7 | % | | 16 | % | | 21 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (As a percentage of total revenue) | | | 2019 | | 2018 | | 2017 |
| Significant Customer: | Business Segment: | | | | | | |
| Actis GP LLP | Power Plant | | n/a | | * | | | 13 | % |
* percentage is less than 10%.
Total Cost of Revenue: Our total cost of revenue increased 78% during fiscal 2016 as compared to fiscal 2015, primarily as a result of the increase in the recognition of revenue and corresponding costs of certain large-scale solar power systems within the United States during fiscal 2016, as well as write-downs totaling $46.2 million on certain solar power development projects during fiscal 2016. The increase in total cost of revenue during 2016 was also a result of charges totaling $58.2 million recorded in fiscal 2016 in connection with the contracted sale of raw material inventory to third parties.
Our total cost of revenue decreased 45% in14% during fiscal 20152019 as compared to fiscal 20142018, primarily because we deferreddue to the recognitionnon-cash impairment charge of any revenue or profit, and corresponding costs, on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described$355.1 million during fiscal 2018, offset by increases in "Item 8. Financial Statements and Supplementary Data—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The decrease in the cost of salesrevenue in both SunPower Energy Services segment and SunPower Technology segment. Increase and decrease by segments is discussed below in detail.
Our total cost of revenue increased 12% during fiscal 2015 was also a result of the substantial completion at the end of fiscal 2014 of recognition of revenue and corresponding costs of certain large-scale solar power systems within the United States.
Gross Margin
|
| | | | | | |
| | | Fiscal Year |
| | | 2016 | | 2015 | | 2014 |
| Distributed Generation | | | | | | |
| Residential | | 16% | | 21% | | 17% |
| Commercial | | —% | | 6% | | 10% |
| Power Plant | | 5% | | 14% | | 24% |
Residential Gross Margin: Gross margin for our Residential Segment decreased five percentage points during fiscal 20162018 as compared to fiscal 2015,2017, primarily as a result of declining average selling pricesa non-cash impairment charge of $355.1 million, total tariffs charge of approximately $42.5 million, higher volume in Japan, where a reductionU.S. residential deals, and increased cost in the country's
feed-in tariff during the last half of fiscal 2015 continued to reduce demand for solar power systems and the volatility of the value of the Japanese Yen reduced demand for imported goodssolutions in general,our sales to commercial customers. The increase was partially offset by an increased volumelower project cost in our sales to power plant following our decision to cease the development of sales with favorable margins for residential leases and higher average selling prices for residential components and systems in North America. The decrease in gross marginlarge-scale power projects. During fiscal 2018, we incurred a write-down of $24.7 million on certain solar development projects which we sold during 2016 was also a resultthe third quarter of fiscal 2018. In addition, we incurred charges totaling $15.2$31.6 million recorded in fiscal 2016 in connection with the contracted sale of raw material inventory to third parties during 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | | | | | |
| (In thousands, except percentages) | | December 29, 2019 | | % Change | | December 30, 2018 | | % Change | | December 31, 2017 |
| SunPower Energy Services | | $ | 1,026,832 | | | 2 | % | | $ | 1,001,879 | | | (4) | % | | $ | 1,040,885 | |
SunPower Technologies1 | | 1,142,671 | | | 10 | % | | 1,040,456 | | | (19) | % | | 1,289,681 | |
| Intersegment elimination and other | | (431,183) | | | 2,149 | % | | (19,169) | | | (96) | % | | (517,874) | |
| Total Cost of Revenue | | 1,738,320 | | | (14) | % | | 2,023,166 | | | 12 | % | | 1,812,692 | |
1 Balance is net of intersegment elimination
Cost of Revenue - by Segment:
Below, we have further discussed increase and decrease in cost of revenue for each segment.
SunPower Energy Services
Cost of revenue for the segment increased by 2% during fiscal 2019 as compared to fiscal 2018, primarily due to a similar chargehigher volume of $10.9 millionsales to our residential customers, partially offset by a decrease in our commercial business as a result of sale of commercial sale-leaseback portfolio in the first and second quarter of fiscal 2019.
Cost of revenue for the segment decreased by 4% during fiscal 2018 as compared to fiscal 2017, primarily due to a higher volume of sales to our residential customers.
SunPower Technologies
Cost of revenue for the segment increased by 10% during fiscal 2019 as compared to fiscal 2018, primarily due to higher volume of module sales in Europe and Asia, offset by a gain on the sale and leaseback of our Oregon manufacturing facility, (refer to Note 4 Business Divestiture and Sale of Assets for further details), as well as a reduction in cost of revenues relating to power plant development as we ceased the development of large-scale solar power projects in the fourth quarter of fiscal 2018.
Cost of revenue for the segment decreased by 19% during fiscal 2018 as compared to fiscal 2017, primarily due to divesting our U.S. power plant development portfolio during the third quarter of fiscal 2018 partially offset by increased sales of power plant development and solar power solutions sales in regions outside of the U.S.
Gross Margin
Our gross margin increased from (17%) in fiscal 2018 to 7% in fiscal 2019, primarily due to non-cash impairment charges on certain property, plant and equipment recorded in fiscal 2015.2018.
Our gross margin decreased from (1%) in fiscal 2017 to (17%) in fiscal 2018, primarily due to non-cash impairment charges on certain property, plant and equipment recorded in fiscal 2018.
Gross Margin - by Segment
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| | 2019 | | 2018 | | 2017 |
| SunPower Energy Services | | 11 | % | | 12 | % | | 11 | % |
| SunPower Technologies | | 13 | % | | 2 | % | | 10 | % |
SunPower Energy Services
Gross margin for the segment decreased by 1% during fiscal 2019 as compared to fiscal 2018, primarily as a result of lower margin on sales in our residential business and higher project costs in our commercial business.
Gross margin for our ResidentialSunPower Energy Services Segment increased four percentage pointsby 1% during fiscal 20152018 as compared to fiscal 20142017. Gross margin improved primarily due to a higher volume in residential deals together with the increased proportion of capital leases placed in service on residential sales, offset by lower margin on sales to residential customers and higher cost incurred related to solar power solutions deals.
SunPower Technologies
Gross margin for the segment increased by 11%, during fiscal 2019 as compared to fiscal 2018, primarily due to higher volume of module sales in Europe and Asia, as well as the sale of development projects in Japan and Chile, and profit contributed by the gain on sale and leaseback of our Oregon manufacturing facility.
Gross margin for our SunPower Technologies Segment decreased by 8% during fiscal 2018 as compared to fiscal 2017, primarily as a result of increasedlower volume ofin sales, with favorable margins for residential leases and solar power systems and components in the United States, partially offset by lower margins on solar power components resulting from declines in average selling prices in Japan and a charge of $10.9 million recorded in fiscal 2015 in connection with the contracted sale of raw material inventory to a third party.
Commercial Gross Margin: Gross margin for our Commercial Segment decreased six percentage points during fiscal 2016 as compared to fiscal 2015, primarily because of pricing pressures on sales of solar power systemsreduction due to factors such as an increase in the internal rate of return expected by our customers in light of market conditions, as well as declining average selling prices in Japan, where a reduction in the country's feed-in tariff during the during the last half of fiscal 2015 continued to reduce demand for solar power systems and the volatility of the value of the Japanese Yen reduced demand for imported goods in general. The decrease in gross margin during 2016 was also a result of charges totaling $12.5 million recorded in fiscal 2016 in connection with the contracted sale of raw material inventory to third parties, as compared to a similar charge of $5.7 million recorded in fiscal 2015.
Gross margin for our Commercial Segment decreased four percentage points during fiscal 2015 as compared to fiscal 2014 primarily because we deferred the recognition of any profit on the sale of projects involving real estate to 8point3 Energy Partners under the accounting treatment described in "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. Gross margin during fiscal 2015 also decreased as a result of higher than expected costs on and changes in the scope of certain commercial EPC projects in the United States and a charge of $5.7 million recorded in fiscal 2015 in connection with the contracted sale of raw material inventory to a third party.
Power Plant Gross Margin: Gross margin for our Power Plant Segment decreased nine percentage points during fiscal 2016 as compared to fiscal 2015 primarily because we experienced pressure on project pricing due to increased global competition and other factors, including an increase in the internal rate of return expected by our customers in light of market conditions, which led to write-downs totaling $46.2 million in fiscal 2016 on certain solar power development projects. The decrease in gross margin during 2016 was also a result of charges totaling $30.5 million recorded in fiscal 2016 in connection with the contracted sale of raw material inventory to third parties, as compared to a similar charge of $16.1 million recorded in fiscal 2015.factors.
Gross margin for our Power Plant Segment decreased 10 percentage points during fiscal 2015 as compared to fiscal 2014 primarily because we deferred the recognition of any profit on the sale to 8point3 Energy Partners of projects involving real estate under the accounting treatment described in "Item 8. Financial Statements and Supplementary Data—Note 3. 8point3 Energy Partners LP" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The decrease in gross margin during 2015 was also a result of the substantial completion of large-scale solar power systems with favorable margins at the end of fiscal 2014 within the United States and a charge of $16.1 million recorded in fiscal 2015 in connection with the contracted sale of raw material inventory to a third party.
Research and Development ("R&D")
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| R&D | | 67,515 | | | 81,705 | | | 82,247 | |
| As a percentage of revenue | | 4 | % | | 5 | % | | 5 | % |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| R&D | | $ | 116,130 |
| | $ | 99,063 |
| | $ | 73,343 |
|
| As a percentage of revenue | | 5 | % | | 6 | % | | 2 | % |
R&D expense increased $17.1decreased by $14.2 million induring the fiscal 20162019 as compared to fiscal 2015,2018, primarily due to an increasea decrease in labor and facility costs as a result of reductions in headcount driven by our February 2018 restructuring plan.
R&D expense decreased by $0.5 million during fiscal 2018 as compared to fiscal 2017. The decrease was primarily due to a decrease in labor costs as a result of additionalreductions in headcount and salary expenses driven by our February 2018 restructuring plan. The decrease was partially offset by the impairment of property, plant and equipment related expenses, as well as an increase in other net expenses such as materials, consulting and outside services as we continue to develop our next generation solar technology and expand our product offering. The remaining increase was a result of other net expenses to support R&D programs as well as amortizationfacilities of $12.8 million.
of intangible assets attributable to R&D activity.
R&D expense increased $25.7 million or 35%, in fiscal 2015 as compared to fiscal 2014 primarily due to a $16.8 million increase in labor costs as a result of additional headcount and salary related expenses and a $4.5 million increase in consulting and outside services as we continue to develop our next generation solar technology and expand our product offerings. The remaining increase was a result of other net expenses to support R&D programs as well as amortization of intangible assets attributable to R&D activity. These increases were partially offset by contributions under the R&D Agreement with Total.
Sales, General and Administrative ("SG&A")
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| SG&A | | 260,443 | | | 260,111 | | | 278,645 | |
| As a percentage of revenue | | 14 | % | | 15 | % | | 16 | % |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| SG&A | | $ | 329,061 |
| | $ | 345,486 |
| | $ | 288,321 |
|
| As a percentage of revenue | | 13 | % | | 22 | % | | 10 | % |
SG&A expense increased by $0.3 million during fiscal 2019 as compared to fiscal 2018 primarily due to an increase in transaction expenses incurred as a result of the proposed spin-off, as well as organization expenses incurred as a result of the equity offering in the fourth quarter of 2019, offset by reductions in headcount and salary expenses driven by our February 2018 restructuring plan and ongoing cost reduction efforts.
SG&A expense decreased $16.4by $18.5 million induring fiscal 20162018 as compared to fiscal 20152017 primarily due to labor savings resulting fromreductions in headcount and salary expenses driven by our August 2016February 2018 restructuring plan and December 2016 restructuring plans, as well as a decrease in stock-based compensation expense attributable to SG&A functions. The decrease was partially offsetongoing cost reduction efforts.
Restructuring Charges
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Restructuring charges | | 14,110 | | | 17,497 | | | 21,045 | |
| As a percentage of revenue | | 1 | % | | 1 | % | | 1 | % |
Restructuring charges decreased by an increase in marketing activity for residential and commercial products in North America and through digital media, as well as increased other costs related to ongoing legal proceedings and non-cash charges primarily related to depreciation and the amortization and disposition of intangible assets.
SG&A expense increased $57.2$3.4 million or 19.8%, during fiscal 20152019 as compared to fiscal 20142018, due to lower severance charges incurred in fiscal 2019 in connection with the newly implemented December 2019 restructuring plan compared to February 2018 restructuring plan. During the fourth quarter of fiscal 2019, we adopted a $21.4 million increaserestructuring plan ("December 2019 Restructuring Plan") to realign and optimize workforce requirements in selling and marketing expenses as we grow our sales teams and increase our marketing activity in North America and through digital media and a $26.5 million increase in legal, consulting, and otherlight of recent changes to its business, including the previously announced planned spin-off of Maxeon Solar. Total costs related toincurred under the formation and IPO of 8point3 Energy Partners, acquisitions, and ongoing legal proceedings.
Restructuring Charges
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Restructuring charges | | $ | 207,189 |
| | $ | 6,391 |
| | $ | 12,223 |
|
| As a percentage of revenue | | 8 | % | | — | % | | — | % |
Restructuring charges increased $200.8 millionDecember 2019 Plan during fiscal 2016 as compared to fiscal 2015 due to our August 2016 and December 2016 restructuring plans, $166.7 million of which consisted of non-cash charges related to asset impairments. The remaining charges were primarily related to severance benefits and lease and related termination costs.
Restructuring charges decreased $5.8 million, or 48%, during fiscal 2015 as compared to fiscal 2014 and were primarily related to severance and other charges associated with our November 2014 restructuring plan. Remaining charges are associated with legacy restructuring plans approved in fiscal 2012 and 2011.
2019 was $7.4 million. See "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 8. Restructuring"8 Restructuring" in the Notes to the consolidated financial statements in this annual report on Form 10-K for further information regarding our restructuring plans. As a result of the December 2019 Restructuring Plan, we expect to generate total cost savings of $1.3 million of operating expenses and $1.3 million of cost of goods sold, which are expected to be cash savings, primarily from a reduction in U.S. workforce, with effects beginning the first quarter of 2020. Actual savings realized may, however, differ if our assumptions are incorrect or if other unanticipated events occur.
Restructuring charges decreased by $3.5 million during fiscal 2018 as compared to fiscal 2017, primarily because we have incurred slightly lower severance and benefits charges in connection with the February 2018 restructuring plan compared to the facilities related expenses in the prior periods in connection with our December 2016 restructuring plan. See "Item 8. Financial Statements—Note 9. Restructuring" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further information regarding our restructuring plans. As a result of the February 2018 restructuring plan, we expected to generate annual cost savings of approximately $20.5 million in operating expenses, which are expected to be cash savings primarily from a reduction in global workforce, and the effects commenced in the first quarter of fiscal 2018. Actual savings realized may, however, differ if our assumptions are incorrect or if other unanticipated events occur.
Loss on sale and impairment of residential lease assets
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Loss on sale and impairment of residential lease assets | | 25,352 | | | 251,984 | | | 624,335 | |
| As a percentage of revenue | | 1 | % | | 15 | % | | 35 | % |
Loss on sale and impairment of residential lease assets decreased by $226.6 million during the fiscal 2019 as compared to fiscal 2018, primarily due to the sale of a majority of our residential lease assets portfolio in the fourth quarter of fiscal 2018. During fiscal year 2019, we sold the remaining portion of the portfolio of residential lease assets to SunStrong Capital Holdings, LLC, and recorded a loss on sale of $7.2 million.
In the fourth quarter of fiscal 2017, in conjunction with our efforts to generate more available liquid funds in the near-term, we made the decision to sell a portion of our interest in our Residential Lease Portfolio. As a result, in the fourth quarter
of fiscal 2017, we determined it was necessary to evaluate the potential for impairment in our ability to recover the carrying amount of our Residential Lease Portfolio. As a result of our evaluation, we recognized noncash impairment charges of $624.3 million. In fiscal 2018, we continued recording additional non-cash impairment charges through the sale of a portion of our equity interests in SunStrong, our previously wholly-owned subsidiary, to Hannon Armstrong in November 2018. During the year ended December 30, 2018, we recognized, in aggregate, loss on sale and impairment of residential lease assets of $252.0 million on the consolidated statements of operations for fiscal 2018. See Note 4. Business Divestitures and Sale of Assets for further details.
Gain on business divestiture
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Gain on business divestiture | | $ | (143,400) | | | $ | (59,347) | | | $ | — | |
| As a percentage of revenue | | (8) | % | | (3) | % | | — | % |
Gain on business divestiture increased by $84.1 million during the fiscal 2019 as compared to fiscal 2018, primarily due to the gain on the sale of our commercial sale-leaseback portfolio of $143.4 million, compared to the gain on sale of $59.3 million for the sale of our microinverter business recorded during fiscal 2018.
Gain on business divestiture increased by $59.3 million during the fiscal 2018 as compared to fiscal 2017, primarily due to the gain on sale of $59.3 million for sale of our microinverter business recorded in fiscal 2018.
Other Income (Expense), Net
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Interest income | | $ | 2,652 |
| | $ | 2,120 |
| | $ | 2,583 |
|
| Interest expense | | (60,735 | ) | | (43,796 | ) | | (69,658 | ) |
| Gain on settlement of preexisting relationships in connection with acquisition | | 203,252 |
| | — |
| | — |
|
| Loss on equity method investment in connection with acquisition | | (90,946 | ) | | — |
| | — |
|
| Goodwill impairment | | (147,365 | ) | | — |
| | — |
|
| Other, net | | (9,039 | ) | | 5,659 |
| | 449 |
|
| Other expense, net | | $ | (102,181 | ) | | $ | (36,017 | ) | | $ | (66,626 | ) |
| As a percentage of revenue | | (4 | )% | | (2 | )% | | (2 | )% |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Interest income | | $ | 2,702 | | | $ | 3,057 | | | $ | 2,100 | |
| Interest expense | | (53,353) | | | (108,011) | | | (90,288) | |
| Other Income (expense): | | | | | | |
| Other, net | | 174,734 | | | 55,314 | | | (87,645) | |
| Other income (expense), net | | $ | 124,083 | | | $ | (49,640) | | | $ | (175,833) | |
| As a percentage of revenue | | 7 | % | | (3) | % | | (10) | % |
OtherInterest expense net increased $66.2decreased $54.7 million induring fiscal 20162019 as compared to fiscal 2015,2018, primarily drivendue to elimination of the non-recourse residential financing obligations in connection with the sale of the Residential Lease Portfolio in November 2018, as well as the elimination of the sales-leaseback financing obligations in connection with the sale of the commercial sale-leaseback portfolio during the first and second quarters of fiscal 2019.
Interest expense increased $17.7 million in fiscal 2018 as compared to fiscal 2017 primarily due to new debt and new commercial sale-leaseback arrangements.
Other income increased by $119.4 million during fiscal 2019 as compared to fiscal 2018, primarily due to a $147.4$158.3 million expense relatedgain on an equity investment with readily determinable fair value in fiscal 2019, as compared to a loss of $6.4 million in fiscal 2018. Additionally, gain on sale of equity investments during fiscal 2019 was $17.7 million, compared to $54.2 million in fiscal 2018.
Other income increased by $143.0 million in fiscal 2018 as compared to fiscal 2017. The change is primarily due to a $54.2 million gain on the impairment of goodwill and a $90.9 million expense related to the impairmentsale of our equity method investments in fiscal 2018, a $73.0 million impairment charge in fiscal 2017 in our 8point3 Energy Partners LP equity investment in AUOSP, partially offset by a $203.3 million gain recognized onbalance due to the terminationadoption of our preexisting relationships upon completing our acquisitionASC 606 which materially increased the investment balance and consequently, led to the recognition of AUOSP, all of which occurredan other-than-temporary impairment in the thirdfirst quarter of fiscal 2016. For more information on these transactions, see "—Note 3. Business Combinations" and "—Note 4. Goodwill and Other Intangible Assets" in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.2017.
The remainder
Other expense, net decreased $30.6 million, or 46%, in fiscal 2015 as compared to fiscal 2014 primarily driven by the $27.9 million gain recognized on the sale of a residential lease portfolio to 8point3 Energy Partners, a decrease in interest expense due to the maturity of the 4.50% debentures in March of fiscal 2015, as well as favorable changes in the fair value of foreign currency derivatives and other net expenses.
Income Taxes
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Benefit from (provision for) income taxes | | (26,631) | | | (1,010) | | | 3,944 | |
| As a percentage of revenue | | (1) | % | | — | % | | — | % |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Provision for income taxes | | $ | (7,319 | ) | | $ | (66,694 | ) | | $ | (8,760 | ) |
| As a percentage of revenue | | — | % | | (4 | )% | | — | % |
In fiscal 2016,the year ended December 29, 2019, our income tax provision of $7.3$26.6 million on a profit before income taxes and equity in earnings (losses) of unconsolidated investees of $26.0 million was primarily due to related tax expense in foreign jurisdictions that were profitable. In the year ended December 30, 2018, our income tax provision of $1.0 million on a loss before income taxes and equity in earnings of unconsolidated investees of $564.6$898.7 million was also primarily due to tax expense in profitableforeign jurisdictions the amortization of U.S. prepaid income tax related to intercompany transactions,that were profitable, offset by tax benefits from provision to return adjustments in U.S. and foreign jurisdictions and realization of the tax benefit related to net operating losses that are eligiblerelease of valuation allowance in a foreign jurisdiction and release of tax reserve due to be claimed as a refund on the prior year U.S. tax returns.
In fiscal 2015, ourlapse of statutes of limitation. The income tax provisionbenefit of $66.7$3.9 million in the year ended December 31, 2017 on a loss before income taxes and equity in earnings of unconsolidated investees of $242.3$1,200.8 million, was primarily due to an increase in taxable income resulting from gains realized primarily on the salerelated tax effects of projects involving real estate and a coinciding utilizationthe carryback of carryforward tax attributes; however, revenue and margin on the transactions that generated tax gains were deferred duefiscal 2016 net operating losses to real estate accounting guidelines. For further information on the accounting treatment of projects involving real estate, see "Item 8. Financial Statements and Supplementary Data—Note 10. Equity Method Investments" in this Annual Report on Form 10-K. Other factors contributing to the increase in provision for income taxes in fiscal 2015 were a shiftdomestic tax returns, partially offset by tax expense in the geographic mix of taxable income to jurisdictions with higher statutory tax rates, prior year transfer pricing adjustments, intracompany profit deferral and accrual of unrecognized tax benefits, and deemed foreign dividends.profitable jurisdictions.
A material amount of our total revenue is generated from customers located outside of the United States, and a substantial portion of our assets and employees are located outside of the United States. U.S. income taxes and foreign withholding taxes have not been provided on the undistributed earnings of our non-U.S. subsidiaries as such earnings are intended to be indefinitely reinvested in operations outside the United States to the extent that such earnings have not been currently or previously subjected to taxation of the United States.
We record a valuation allowance to reduce our U.S., France, and Spain deferred tax assets in the U.S., Malta, South Africa, Spain, and Mexico 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
A material amount of January 1,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. Because of the one-time transition tax related to the Tax Cuts and Jobs Act enacted in 2017, we believe there is insufficient evidencea significant portion of the accumulated foreign earnings were deemed to realize additionalhave been repatriated, and accordingly taxed, and were no longer subject to the U.S. federal deferred tax assets other thanliability, and the post-2017 accumulated foreign-sourced earnings are generally not taxed in the U.S. net operating losses that canupon repatriation. Foreign withholding taxes have not been provided on the existing undistributed earnings of our non-U.S. subsidiaries as of December 29, 2019 as these are intended to be carried backindefinitely reinvested in operations outside the United States.
In June 2019, the U.S. Court of Appeals for the Ninth Circuit overturned the 2015 U.S. tax court decision in Altera Co v. Commissioner, regarding the inclusion of stock-based compensation costs under cost sharing agreements. In July 2019, Altera Corp., a refundsubsidiary of Intel Inc., requested en banc review of the decision from the Ninth Circuit panel and the request was denied in November 2019. In February 2020, Altera Corp. petitioned the U.S. Supreme Court for review. While a final decision remains outstanding, we quantified and recorded the impact of the case of $5.8 million as a reduction to deferred tax asset, fully offset by a reduction to valuation allowance of the same amount, without any income tax expense impact. If the Altera Ninth Circuit opinion is reversed by the U.S. Supreme Court, we would anticipate unwinding the reduction to both deferred tax asset and valuation allowance impact as aforementioned. We will continue to monitor the effects of the case’s outcome on prior yearour tax returns.provision and related disclosures once more information becomes available.
Equity in Earnings (Losses) of Unconsolidated Investees
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Equity in earnings (losses) of unconsolidated investees | | $ | (7,058) | | | $ | (17,815) | | | $ | 25,938 | |
| As a percentage of revenue | | — | % | | (1) | % | | 1 | % |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Equity in earnings of unconsolidated investees | | $ | 28,070 |
| | $ | 9,569 |
| | $ | 7,241 |
|
| As a percentage of revenue | | 1 | % | | 1 | % | | — | % |
Our equity in earningslosses of unconsolidated investees increased $18.5decreased by $10.8 million in fiscal 2016,2019 as compared to fiscal 2015,2018, primarily due todriven by a decrease in our share of thelosses of unconsolidated investees, specifically, 8point3 Energy Partners and its affiliates (the "8point3 Group") which we divested in June 2018.
Our equity in earnings generated(losses) of unconsolidated investees decreased $43.8 million in fiscal 2018 as compared to fiscal 2017, primarily driven by the activities of the 8point3 Group, during fiscal 2016 as well as our sharewhich we divested in June 2018. As a result of this transaction, we received, after the earnings generated by the activitiespayment of our former joint venture AUOSP during fiscal 2016 prior to the acquisitionfees and subsequent consolidationexpenses, merger proceeds of AUOSP on September 29, 2016. For more information on the acquisitionapproximately $359.9 million in cash and no longer
directly or indirectly owns any equity interests in this Annual Report on Form 10-K.
In fiscal 2015 and 2014, our equity in earnings of unconsolidated investees was a net gain of $9.6 million and $7.2 million, respectively, and was primarily due to increased activities at AUOSP during the two fiscal years. The $9.6 million net gain in fiscal 2015 also includes the activities of the 8point3 Group that took place during the last half of fiscal 2015.
Net Income (loss)
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net income (loss) | | $ | (543,844 | ) | | $ | (299,436 | ) | | $ | 183,095 |
|
Net loss increased by $244.4 million in fiscal 2016 as compared to fiscal 2015. The increase in net loss was primarily driven by: (i) a $200.8 million increase in restructuring expense related to our August 2016 and December 2016 restructuring plans; (ii) a $66.2 million increase in other expense, net primarily driven by the impairment of goodwill and the loss on our equity method investment in our former joint venture AUOSP during fiscal 2016 (partially offset by the settlement of preexisting relationships with AUOSP), a gain recognized on the sale of a residential lease portfolio to 8point3 Energy Partners during fiscal 2015 which did not recur in fiscal 2016, an overall increase in interest expense in fiscal 2016 due to the issuance of our 4.00% debentures late in the fourth quarter of fiscal 2015 and additional interest incurred on financing activities related to our residential lease business, and unfavorable changes in the fair value of foreign currency derivatives and other net expenses; (iii) a decrease in gross margin of $54.7 million primarily driven by charges totaling $58.2 million recorded in fiscal 2016 inGroup. In connection with the contracted sale, of raw material inventory to third parties, partially offset bywe recognized a similar charge of $32.7$34.4 million gain within "Other, net" in fiscal 2015, write-downs totaling $46.2 million on certain solar power development projects during fiscal 2016 that were based on the estimated selling price of such projects, and by declines in the margins"Other income (expense), net" of our Residential and Commercial Segments due to lower average selling prices in some markets; and (iv) a $0.6 million net increase in operating expenses due to increased marketing spend and increased R&D headcount, mostly offset by a reduction in total labor costs and stock-based compensation expense in SG&A functions resulting from our August 2016 and December 2016 restructuring plans. The increase in net loss was partially offset by: (i) a $59.4 million decrease in provision for income taxes primarily due to a shift from domestic taxable income to domestic taxable loss which reduced the overall tax provision in the period; and (ii) a $18.5 million increase in our equity in earnings of unconsolidated investees due to the activities of the 8point3 Group during fiscal 2016 and the activities at our former AUOSP joint venture prior to our acquisition of AUOSP.
Net income decreased by $482.5 million and changed from a net income to a net loss in fiscal 2015 as compared to fiscal 2014. The decrease in net income (loss) was primarily driven by: (i) a $380.5 million decrease in gross margin, primarily due to the substantial completion of revenue recognition on various large-scale solar power systems at the end of fiscal 2014 and the deferral of all profits on transactions with the 8point3 Group involving real estate in fiscal 2015; (ii) a $77.1 million increase in operating expenses due to increased headcount and marketing spend and costs incurred for acquisition-related diligence and the formation and IPO of 8point3 Energy Partners; and (iii) a $57.9 million increase in income tax due to an increase in taxable income resulting from gains realized primarily on the sale of projects involving real estate, on which revenue was deferred, and a coinciding utilization of carryforward tax attributes. The decrease in net income was partially offset by: (i) a $30.6 million decrease in Other expense, net driven by the gain recognized on the sale of a residential lease portfolio to 8point3 Energy Partners, a decrease in interest expense due to the maturity of the 4.50% debentures in March of fiscal 2015, as well as favorable changes in the fair value of foreign currency derivatives and other net expenses; and (ii) a $2.3 million increase in our equity in earnings of unconsolidated investees due to activities at AUOSP and the 8point3 Group during fiscal 2015.
Information about other significant variances in our resultsconsolidated statements of operations is described above.for fiscal 2018.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2017 |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | $ | 29,880 | | | $ | 106,405 | | | $ | 241,747 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | $ | 72,780 |
| | $ | 112,417 |
| | $ | 62,799 |
|
We have entered into facilities with third-party tax equity investors under which the investors invest in a structure known as a partnership flip. We determined that we hold controlling interests in these less-than-wholly-owned entities and therefore we have fully consolidated these entities. We apply the hypothetical liquidation at book valueHLBV method in allocating recorded net income (loss) to each investor based on the change in the reporting period, of the amount of net assets of the entity to which each investor would be entitled to under the governing contractual arrangements in a liquidation scenario.
In fiscal 2016, 2015, and 2014,2019, we attributed $72.8$29.9 million $112.4of net losses primarily to the third-party investors as a result of allocating certain assets, including tax credits and accelerated tax depreciation benefits, to the investors. The $76.5 million decrease in net loss attributable to noncontrolling interests and redeemable noncontrolling interests is primarily due to the deconsolidation of a majority of our residential lease assets in the last quarter of fiscal 2018 and during the third quarter of fiscal 2019, and partially offset by an increase in contributions by Hannon Armstrong for the equity interest in a new joint venture formed during the third quarter of fiscal 2019.
In fiscal 2018 and 2017, we attributed $106.4 million and $62.8$241.7 million, respectively, of net losses primarily to the third-party investors as a result of allocating certain assets, including tax credits and accelerated tax depreciation benefits, to the investors. The $39.6$135.3 million decreaseincrease in net loss attributable to noncontrolling interests and redeemable noncontrolling interests is primarily attributable to a decrease in income per watt for leases placed in service under new facilities executed with third-party investors, partially offset bythe allocated portion of the impairment charge related to our residential lease assets of $150.6 million (see "Item 1. Financial Statements—Note 7. Leasing"), and an increase in total number of leases placed in service under new and existing facilities with third-party investors. The $49.6 million increase in net loss attributable to noncontrolling interests and redeemable noncontrolling interests in fiscal 2015, as compared to fiscal 2014, is primarily attributable to additional leases placed in service under new facilities executed with third-party investors in fiscal 2015.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues, and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. In addition to our most critical estimates discussed below, we also have other key accounting policies that are less subjective and, therefore, judgments involved in their application would not have a material impact on our reported results of operations (See "Item 8. Financial Statements and Supplementary Data—NoteData-Notes to Consolidated Financial Statements-Note 1. The CompanyOrganization and Summary of Significant Accounting Policies" in this Annual Report on Form 10-K)Policies").
Revenue Recognition
Solar Power ComponentsModule and Component Sales
We sell our solar panels and balance of system components primarily to dealers, system integrators and distributors, and recognizerecognizes revenue netat a point in time when control of accruals for estimated sales returns, when persuasive evidence of an arrangement exists, delivery of the product has occurred, title and risk of loss has passedsuch products transfers to the customer, which generally occurs upon shipment or delivery depending on the sales price is fixed or determinable, collectability
terms of the resulting receivable is reasonably assured andcontracts with the risks and rewardscustomer. There are no rights of ownership have passed to the customer.return. Other than standard warranty obligations, there are no rights of return and there are no significant post-shipment obligations including(including installation, training or customer acceptance clauses,clauses) with any of our customers that could have an impact on revenue recognition. Our revenue recognition policy is consistent across all geographic areasareas.
Solar Power System Sales and end-customer segments.Engineering, Procurement, and Construction Services
Construction ContractsWe design, manufacture and sell rooftop and ground-mounted solar power systems under construction and development agreements, to our residential and commercial customers. In contracts where we sell completed systems as a single performance obligation, primarily to our joint venture for residential projects, we recognize revenue at the point-in-time when such systems are placed in service. Any advance payments received before control is transferred is classified as "contract liabilities."
Revenue is also composed of EPCEngineering, procurement and construction ("EPC") projects which are governed by customer contracts that require us to deliver functioning solar power systems and are generally completed within three to twelve months from commencement of construction. Construction on large projects may be completed within eighteen to thirty sixthirty-six months, depending on the size and location. We recognize revenue from fixed-price construction contracts, which do not include landEPC services over time as our performance creates or land rights, usingenhances an energy generation asset controlled by the percentage-of-completioncustomer. We use an input method based on cost incurred as we believe that this method most accurately reflects our progress toward satisfaction of accounting.the performance obligation. Under this method, revenue arising from fixed pricefixed-price construction contracts is recognized as work is performed based on the percentageratio of costs incurred to date to the total estimated costs to estimated total forecasted costs.at completion of the performance obligations.
Incurred costs used in our percentage-of-completion calculation include all direct material, labor and subcontract costs, and those indirect costs related to contract performance, such as indirect labor, supplies, and tools. Project material costs are included in incurred costs when the project materials have been installed by being permanently attached or fitted to the solar power system as required by the project’s engineering design. Cost-based input methods of revenue recognition require us to make estimates of net contract revenues and costs to complete the projects. In making such estimates, significant judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance incentives, liquidated damages, and other payments to customers. Significant judgment is also required to evaluate assumptions related to the costs to complete the projects, including materials, labor, contingencies, and other system costs. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known and can be reasonably estimated.
In addition to an EPC deliverable, a limited number ofOur arrangements also include multiple deliverablesmay contain clauses such as contingent repurchase options, delay liquidated damages or early performance bonus, most favorable pricing, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics or milestones. Variable consideration is estimated at each measurement date at its most likely amount to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur and true-ups are applied prospectively as such estimates change.
Changes in estimates for sales of systems and EPC services occur for a variety of reasons, including but not limited to (i) construction plan accelerations or delays, (ii) product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. The cumulative effect of revisions to transaction prices or input cost estimates are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
Operations and Maintenance
We offer our customers various levels of post-installation systems monitoring and maintenance. For contracts with separately priced monitoringoperations and maintenance we recognize revenue related to such separately priced elements("O&M") services with the objective of optimizing our customers' electrical energy production over the contract period. For contracts including monitoring and maintenance not separately priced, we determinedlife of the system. We determine that the post-installation systems monitoring and maintenance qualifyqualifies as a separate units of accounting. Such post-installationperformance obligation. Post-installation monitoring and maintenance areis deferred at the time the contract is executed, based on the best estimate of selling price on a standalone basis, and areis recognized to revenue over time as customers receive and consume benefits of such services. The non-cancellable term of the contractual term.O&M contracts are typically 90 days for commercial and residential customers and 180 days for power plant customers.
We typically provide a system output performance warranty, separate from our standard solar panel product warranty, to customers that have subscribed to our post-installation O&M services. In connection with system output performance warranties, we agree to pay liquidated damages in the event the system does not perform to the stated specifications, with certain exclusions. The remaining EPC revenuewarranty excludes system output shortfalls attributable to force majeure events, customer curtailment, irregular weather, and other similar factors. In the event that the system output falls below the warrantied performance level during the applicable warranty period, and provided that the shortfall is not caused by a factor that is excluded from the performance warranty, the warranty provides that we will pay the customer an amount based on the value of the shortfall of energy produced relative to the applicable warrantied performance level. Such liquidated damages represent a form of variable consideration and are estimated at contract inception and updated at each reporting period and recognized over time as customers receive and consume the benefits of the O&M services.
Lease Accounting
Effective December 31, 2018, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as amended ("ASC 842"). For additional information on the changes resulting from the new standard and the impact to our financial results on adoption, refer to the section Recently Adopted Accounting Pronouncements below.
Arrangements with SunPower as a percentage-of-completion basis.lessee
In addition, when arrangements include contingent revenue clauses, such as customer termination or put rights for non-performance, we defer the contingent revenueWe determine if therean arrangement is a reasonable possibility that such rights or contingencies may be triggered. In certain limited cases, we could be requiredlease at inception. Our operating lease agreements are primarily for real estate and are included within operating lease right-of-use ("ROU") assets and operating lease liabilities on the consolidated balance sheets. We elected the practical expedient to buy-back a customer’s systemcombine our lease and related non-lease components for all our leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at fairthe commencement date based on the present value on specified future dates if certain minimum performance thresholdsof lease payments over the lease term. Variable lease payments are not met for specified periods. To date, no such repurchase obligations have been triggered (see "Note 9. Commitmentsexcluded from the ROU assets and Contingencies" under "Item 8. Financial Statementslease liabilities and Supplementary Data—Notes to Consolidated Financial Statements" in this Annual Report on Form 10-K).
Provisions for estimated losses on uncompleted contracts, if any, are recognized in the period in which the loss first becomes probableobligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease prepayments made and reasonably estimable. Contracts mayexclude lease incentives. Many of our lessee agreements include profit incentives such as milestone bonuses. These profit incentives are included inoptions to extend the contract value when their realization is reasonably assured.
Development Projects
We develop and sell solar power plantslease, which generally include the sale or lease of related real estate. Revenue recognition for these solar power plants require adherence to specific guidance for real estate sales, which provides that if we execute a sale of land in conjunction with an EPC contract requiring the future development of the property, we recognize revenue and the corresponding costs under the full accrual method when all of the following requirements are met: the sale is consummated, the buyer's initial and any continuing investments are adequate, the resulting receivables are not subject to subordination, the future costs to develop the property can be reasonably estimated, we have transferred the customary risk and rewards of ownership to the buyer, and we do not have prohibited continuing involvementinclude in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Sale-Leaseback Arrangements
We enter into sale-leaseback arrangements under which solar power systems are sold to third parties and subsequently leased back by us over lease terms of up to 25 years.
We classify our initial sale-leaseback arrangements of solar power systems as operating leases or sales-type leases, in accordance with the property orunderlying accounting guidance on leases. We may sell our lessee interests in these arrangements in entirety before the buyer. In general, a sale is consummated upon the execution of an agreement documenting the termsend of the sale and receiptunderlying term of a minimum initial payment by the buyer to substantiateleaseback.
For all sale-leaseback arrangements classified as operating leases, the transfer of riskprofit related to the buyer. Depending on the valueexcess of the initial and continuing investment ofproceeds compared to the buyer, and provided the recovery of the costsfair value of the solar power plantsystems is deferred and recognized over the term of the lease. Sale-leaseback arrangements classified as finance leases or failed sale, are assured ifaccounted for under the buyer defaults, we may defer revenue and profit during construction by aligning our revenue recognition and release of deferred project costs to cost of sales withfinancing method, the receipt of paymentproceeds received from the buyer. At the time we have unconditionally received payment from the buyer, revenue is recognized and deferred project costs are released to cost of sales at the same rate of profit estimated throughout the constructionsale of the project. Further, in situations where we have a noncontrolling equitysolar power systems are recorded as financing liabilities. The financing liabilities are subsequently reduced by our payments to lease back the solar power systems, less interest inexpense calculated based on our incremental borrowing rate adjusted to the buyer, we may defer all or a portionrate required to prevent negative amortization. Refer to Note 4. Business Divestiture and Sale of Assets, for details of the sale of our revenue or profit in accordancecommercial sale-leaseback portfolio during fiscal 2019.
Arrangements with specific guidance for partial sales of real estate.SunPower as a lessor
Solar Services
We have determined that our standard product and workmanship warranties do not represent prohibited forms of continuing involvement that would otherwise preclude revenue recognition as these warranties do not result in the retention of substantial risks or rewards of ownership or result in a seller guarantee as described in real estate accounting guidance.
Similarly, we have determined that when we provide post-installation monitoring and maintenance services and associated system output performance warranties to customers of projects that include the sale or lease of real estate, these are not forms of prohibited continuing involvement since the terms and conditions of the post-installation monitoring and maintenance services are commensurate with market rates, control over the right to terminate the post-installation monitoring and maintenance contract and associated system output performance warranties rests with the customer since the customer has the right to terminate for convenience, and the terms and conditions for the system output performance warranties do not result in any additional services or efforts by us or in the retention of ownership risks outside of our control.
Residential Leases
We offer a solar lease program,services, in partnership with third-party financial institutions, which allows our residential customers to obtain continuous access to SunPower solar power systems under lease agreementscontracts for terms of up to 20 years. Leases are classified as either operating- or sales-type leases in accordance withSolar services revenue is primarily comprised of revenue from such contracts wherein we provide continuous access to an operating solar system to third parties.
We begin to recognize revenue on solar services when permission to operate ("PTO") is given by the relevant accounting guidelines, which involve making a variety of estimates, includinglocal utility company, the fair valuesystem is interconnected and residual value of leased solar power systems. Changes in these estimates can have a significant impact onoperation commences. We recognize revenue evenly over the related accounting results, includingtime that we satisfy our performance obligations over the relative proportion of leases classified as operating- or sales-type leases.
For those systems classified as sales-type leases, the net present valueinitial term of the minimum lease payments, netsolar services contracts. Solar services contracts typically have an initial term 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 our Consolidated Balance Sheets. The difference between20 years. After the initial net amounts and the gross amounts are amortized to revenue over the leasecontract term, using the interest method. The residual valuesour customers may request an extension of our solar systems are determined at the inception of the lease by 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.contract on prevailing market terms, or request to remove the system. Otherwise, the contract will automatically renew and continue on a month-to-month basis.
We also apply for and receive Solar Renewable Energy Credits ("SRECs") associated with the energy generated by our solar energy systems and sell them to third parties in certain jurisdictions. SREC revenue is estimated net of any variable consideration related to possible liquidated damages if we were to deliver fewer SRECs than contractually committed, and is generally recognized upon delivery of the SRECs to the counterparty.
We typically provide a system output performance warranty, separate from our standard solar panel product warranty, to our solar services customers. In connection with system output performance warranties, we agree to pay liquidated damages in the event the system does not perform to the stated specifications, with certain exclusions. The warranty excludes system output shortfalls attributable to force majeure events, customer curtailment, irregular weather, and other similar factors. In the event that the system output falls below the warrantied performance level during the applicable warranty period, and provided that the shortfall is not caused by a factor that is excluded from the performance warranty, the warranty provides that we will pay the customer an amount based on the value of the shortfall of energy produced relative to the applicable warrantied performance level. Such liquidated damages represent a form of variable consideration and are estimated at contract inception and updated at each reporting period and recognized over time as customers receive and consume the benefits of the solar services.
There are rebate programs offered by utilities in various jurisdictions and are issued directly to homeowners, based on the lease agreements, the homeowners assign these rights to rebate to us. These rights to rebate are considered non-cash consideration, measured based on the utilities' rebates from the installed solar panels on the homeowners' roofs and recognized over the lease term.
Revenue from solar services contracts entered into prior to the adoption of ASC 842 were accounted for as leases under the superseded lease accounting guidance and reported within "Residential leasing" on the consolidated statement of operations.
Shipping and Handling Costs
We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer goods and, accordingly, records such costs in cost of revenue.
Taxes Collected from Customers and Remitted to Governmental Authorities
We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of revenue or cost of revenue.
Impairment of Residential Lease Assets
We evaluate our long-lived assets, including property, plant and equipment, solar power systems leased and to be leased, and other intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets, and significant negative industry or economic trends. Our impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analysis.
Financing receivables are generated by solar power systems leased to residential customers under sales-type leases. Financing receivables represent gross minimum lease payments to be received from customers over a period commensurate with the remaining lease term and the system's estimated residual value, net of unearned income and allowance for estimated losses. Our evaluation of the recoverability of these financing receivables is based on evaluation of the likelihood, based on current information and events, and whether we will be able to collect all amounts due according to the contractual terms of the underlying lease agreements. In accordance with this evaluation, we recognize an allowance for losses on financing receivables based on our estimate of the amount equal to the probable losses net of recoveries. The combination of the leased solar power systems discussed in the preceding paragraph together with the lease financing receivables is referred to as the "Residential Lease Portfolio."
We performed a recoverability test for assets in the residential assets by estimating future undiscounted net cash flows
expected to be generated by the assets, based on our own specific alternative courses of action under consideration. The
alternative courses were either to sell or refinance the assets, or hold the assets until the end of their previously estimated useful
lives. Upon consideration of the alternatives, we determined that market value, in the form of indicative purchase price from a
third-party investor was available for a portion of our residential assets. As we intend to sell these remaining residential portfolio assets, we used the indicative purchase price from a third-party investor as fair value of the underlying net assets in our impairment evaluation.
Allowance for Doubtful Accounts and Sales Returns
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A considerable amount of judgment is required to assess the likelihood of the ultimate realization of accounts receivable. We make our estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends.
In addition, at the time revenue is recognized from the sale of solar panels and balance of system components, we record estimates for sales returns which reduce revenue. These estimates are based on historical sales returns and analysis of credit memo data, among other known factors.
Warranty ReservesProduct Warranties
We generally provide a 25-year standard warranty for our solar panels that we manufacture for defects in materials and workmanship. The warranty provides that we will repair or replace any defective solar panels during the warranty period. In addition, we pass through to customerscustomers’ long-term warranties from the original equipment manufacturers of certain system components, such as inverters. Warranties of 25 years from solar panel suppliers are standard in the solar industry, while certain system components carry warranty periods ranging from five to 20 years.
In addition, we generally warrant our workmanship on installed systems for periods ranging up to 25 years and also provide a separate system output performance warranty to customers that have subscribed to our post-installation monitoring and maintenance services which expires upon termination of the post-installation monitoring and maintenance services related to the system. The warrantied system output performance level varies by system depending on the characteristics of the system and the negotiated agreement with the customer, and the level declines over time to account for the expected degradation of the system. Actual system output is typically measured annually for purposes of determining whether warrantied performance levels have been met. The warranty excludes system output shortfalls attributable to force majeure events, customer curtailment, irregular weather, and other similar factors. In the event that the system output falls below the warrantied performance level during the applicable warranty period, and provided that the shortfall is not caused by a factor that is excluded from the performance warranty, the warranty provides that we will pay the customer a liquidated damage based on the value of the shortfall of energy produced relative to the applicable warrantied performance level.
We maintain reserves to cover the expected costs that could result from these warranties. Our expected costs are
generally in the form of product replacement or repair. Warranty reserves are based on our best estimate of such costs and are recognized as a cost of revenue. We continuously monitor product returns for warranty failures and maintain 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. Due to the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our consolidated financial statements. If actual product failure rates or the frequency or severity of reported claims differ from our estimates or if there are delays in our responsiveness to outages, we may be required to revise our estimated warranty liability. Historically, warranty costs have been within management’s expectations.
Inventories
Inventories are accounted for on a first-in-first-out basis and are valued at the lower of cost or net realizable value. We evaluate the realizability of our inventories, including future purchase commitments under fixed-price long-term supply agreements, based on assumptions about expected demand and market conditions. Our assumption of expected demand is developed based on our analysis of bookings, sales backlog, sales pipeline, market forecast and competitive intelligence. Our assumption of expected demand is compared to available inventory, production capacity, future polysilicon purchase commitments, available third-party inventory and growth plans. Our factory production plans, which drive materials requirement planning, are established based on our assumptions of expected demand. We respond to reductions in expected demand by temporarily reducing manufacturing output and adjusting expected valuation assumptions as necessary. In addition, expected demand by geography has changed historically due to changes in the availability and size of government mandates and economic incentives.
We evaluate the terms of our long-term inventory purchase agreements with suppliers for the procurement of polysilicon, ingots, wafers, and solar cells and establish accruals for estimated losses on adverse purchase commitments as necessary, such as lower of cost or net realizable value adjustments, forfeiture of advanced deposits and liquidated damages. Obligations related to non-cancellable purchase orders for inventories match current and forecasted sales orders that will consume these ordered materials and actual consumption of these ordered materials are compared to expected demand regularly. We anticipate total obligations related to long-term supply agreements for inventories will be realized because quantities are less than management's expected demand for its solar power products over a period of years; however, if raw materials inventory balances temporarily exceed near-term demand, we may elect to sell such inventory to third parties to optimize working capital needs. In addition, because the purchase prices required by our long-term polysilicon agreements are significantly higher than current market prices for similar materials, if we are not able to profitably utilize this material in our operations or elect to sell near-term excess, we may incur additional losses. Other market conditions that could affect the realizable value of our inventories and are periodically evaluated by management include the aging of inventories on hand, historical inventory turnover ratio, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, the current market price of polysilicon as compared to the price in our fixed-price arrangements, and product merchantability, among other factors. If, based on assumptions about expected demand and market conditions, we determine that the cost of inventories exceeds its net realizable value or inventory is excess or obsolete, or we enter into arrangements with third parties for the sale of raw materials that do not allow us to recover our current contractually committed price for such raw materials, we record a write-down or accrual, which may be material, equal to the difference between the cost of inventories and the estimated net realizable value. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could negatively affect our gross margin and operating results. If actual market conditions are more favorable, we may have higher gross margin when products that have been previously written down are sold in the normal course of business. Additionally, the Company’s classification of its inventory as either current or long-term inventory requires it to estimate the portion of on-hand inventory that we estimate will be realized over the next 12 months.
Stock-Based Compensation
We provide stock-based awards to our employees, executive officers and directors through various equity compensation plans including our employee stock option and restricted stock plans. We measure and record compensation expense for all stock-based payment awards based on estimated fair values. The fair value of restricted stock awards and units is based on the market price of our common stock on the date of grant. We have not granted stock options since fiscal 2008. We are required under current accounting guidance to estimate forfeitures at the date of grant. Our estimate of forfeitures is based on our historical activity, which we believe is indicative of expected forfeitures. In subsequent periods if the actual rate of forfeitures differs from our estimate, the forfeiture rates are required to be revised, as necessary. Changes in the estimated forfeiture rates can have a significant effect on stock-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.
We also grant performance share units to executive officers and certain employees that require us to estimate expected achievement of performance targets over the performance period. This estimate involves judgment regarding future
expectations of various financial performance measures. If there are changes in our estimate of the level of financial performance measures expected to be achieved, the related stock-based compensation expense may be significantly increased or reduced in the period that our estimate changes.
Variable Interest Entities ("VIE")
We regularly evaluate our relationships and involvement with unconsolidated VIEs including our investments in the 8point3 Group and our other equity and cost method investments, to determine whether we have a controlling financial interest in them or have become the primary beneficiary, thereby requiring us to consolidate their financial results into our financial statements. In connection with the sale of the equity interests in the entities that hold solar power plants, we also consider whether we retain a variable interest in the entity sold, either through retaining a financial interest or by contractual means. If we determine that the entity sold is a VIE and that we hold a variable interest, we then evaluate whether we are the primary beneficiary. If we determine that we are the primary beneficiary, we will consolidate the VIE. The determination of whether we are the primary beneficiary is based upon whether we have the power to direct the activities that most directly impact the economic performance of the VIE and whether we absorb any losses or benefits that would be potentially significant to the VIE.
Accounting for Business CombinationsDivestitures
From time to time, we may dispose of significant assets or portion of our business by sale or exchange for other assets. In accounting for such transactions, we apply the applicable guidance of U.S. GAAP pertaining to discontinued operations and disposals of components of an entity. We record all acquired assetsassess such transaction as regards specified significance measures to determine whether a disposal qualifies as a discontinuance of operations verses a sale of asset components of our entity. Our assessment includes how such a disposal may represent a significant strategic shift in our operations and liabilities, including goodwill, other intangible assets and in-process research and development, at fair value. The initial recordingits impact on our continuing involvement as regards that portion of goodwill, other intangible assets and in-process research and development requires certain estimates and assumptions concerning the determinationour business. Instances where disposals do not remove our ability to participate in a significant portion of the fair values and useful lives. The judgments madeour business are accounted as disposal of assets. Instances where disposals remove our ability to participate in the contexta significant portion of the purchase price allocation can materially affect our future results ofbusiness are accounted as discontinued operations. Accordingly, for significant acquisitions, we obtain assistance from third-party valuation specialists. The valuations calculated from estimates are based on information available at the acquisition date. Goodwill is not amortized, but is subject to annual tests for impairment or more frequent tests if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. For additional details see "Note 3. Note 4. Business Combinations"Combinations and "Note 4. Goodwill and Other Intangible Assets"Divestitures" under "Item 8. Financial Statements and Supplementary Data—Data-Notes to Consolidated Financial Statements" in this Annual Report on Form 10-K.Statements." We charge disposal related costs that are not part of the consideration to general and administrative expense as they are incurred. These costs typically include transaction and disposal costs, such as legal, accounting, and other professional fees.
Valuation of Long-Lived Assets
Our long-lived assets include property, plant and equipment, solar power systems leased and to be leased, and other intangible assets with finite lives. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets and significant negative industry or economic trends. Our impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses.
Valuation of Project Assets - Plant and Land
Project assets consist primarily of capitalized costs relating to solar power system projects in various stages of development that we incur prior to the sale of the solar power system to a third-party. These costs include costs for land and costs for developing and constructing a solar power system. Development costs can include legal, consulting, permitting, and other similar costs. Once we enter into a definitive sales agreement, we reclassify these project asset costs to deferred project costs within "Prepaid expenses and other current assets" in our Consolidated Balance Sheet until we have met the criteria to recognize the sale of the project asset or solar power project as revenue. We release these project costs to cost of revenue as each respective project asset or solar power system is sold to a customer, since the project is constructed for a customer (matching the underlying revenue recognition method).
We evaluate the realizability of project assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider the project to be recoverable if it is anticipated to be sellable for a profit once it is either fully developed or fully constructed or if costs incurred to date may be recovered via other means, such as a sale prior to the completion of the development cycle. We examine a number of factors to determine if the project will be profitable,
including whether there are any environmental, ecological, permitting, or regulatory conditions that have changed for the project since the start of development. In addition, we must anticipate market conditions, such as the future cost of energy and changes in the factors that our future customers use to value our project assets in sale arrangements, including the internal rate of return that customers expect. Changes in such conditions could cause the cost of the project to increase or the selling price of the project to decrease. Due to the development, construction, and sale timeframe of our larger solar projects, we classify project assets which are not expected to be sold within the next 12 months as "Project assets - plants and land, net of current portion" on the Consolidated Balance Sheets. Once specific milestones have been achieved, we determine if the sale of the project assets will occur within the next 12 months from a given balance sheet date and, if so, we then reclassify the project assets as current.
Goodwill Impairment
Goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. If goodwill is determined more likely than not to be impaired upon an initial assessment of qualitative factors, a two-step valuation and accounting process is used to test for goodwill impairment. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value, including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment, a second step is performed to determine the amount of the impairment by comparing the implied fair value of the reporting unit’s goodwill with its carrying value.
We conduct our annual impairment test of goodwill as of the first day of the fourth fiscal quarter of each year, or on an interim basis if circumstances warrant. Impairment of goodwill is tested at our reporting unit level. Management determined that the Residential Segment, the Commercial Segment, and the Power Plant Segment are also the reporting units. In estimating the fair value of the reporting units, we make estimates and judgments about our future cash flows using an income approach defined as Level 3 inputs under fair value measurement standards. The income approach, specifically a discounted cash flow analysis, included assumptions for, among others, forecasted revenue, gross margin, operating income, working capital cash flow, perpetual growth rates and long-term discount rates, all of which require significant judgment by management. The sum of the fair values of our reporting units are also compared to our total external market capitalization to validate the appropriateness of its assumptions and such reporting unit values are adjusted, if appropriate. These assumptions also consider the current industry environment and the resulting impact on our expectations for the performance of our business. In the event that management determines that the value of goodwill has become impaired, we will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. For additional details see "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Goodwill and Other Intangible Assets" in this Annual Report on Form 10-K.
Accounting for Income Taxes
Our global operations involve manufacturing, research and development, and selling and project development activities. Profit from non-U.S. activities is subject to local country taxation, but not subject to U.S. tax until repatriated to the United States.taxation. It is our intention to indefinitely reinvest these earnings outside the United States. We record a valuation allowance to reduce our U.S., French,Malta, South Africa, Mexico, and SpanishSpain entities’ 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 January 1, 2017,December 29, 2019, we believe there is insufficient evidence to realize additional deferred tax assets beyond the U.S. net operating losses that can be benefittedbenefited through a carryback election; however, the reversal of the valuation allowance, which could be material, could occur in a future period.
The calculation of tax expense and liabilities involves dealing with uncertainties in the application of complex global tax regulations, including in the tax valuation of projects sold to tax equity partnerships and other third parties. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which we determine the liabilities are
no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense would result. We accrue interest and penalties on tax contingencies which are classified as "Provision for income taxes" in our Consolidated Statements of Operations and are not considered material. In addition, foreign exchange gains (losses) may result from estimated tax liabilities which are expected to be realized in currencies other than the U.S. dollar.
Pursuant to the Tax Sharing Agreement with Cypress, our former parent company, we are obligated to indemnify Cypress upon current utilization of carryforward tax attributes generated while we were part of the Cypress consolidated or combined group. Further, to the extent Cypress experiences any tax examination assessments attributable to our operations while part of the Cypress consolidated or combined group, Cypress will require an indemnification from us for those aspects of the assessment that relate to our operations. See also "Item 1A. Risk Factors—Factors - Risks Related to Our Operations—OurOperations-Our agreements with Cypress require us to indemnify Cypress for certain tax liabilities. These indemnification obligations and related contractual restrictions may limit our ability to pursue certain business initiatives."
In addition, foreign exchange gains (losses) may result from estimated tax liabilities which are expected to be realized in currencies other than the U.S. dollar.
Liquidity and Capital Resources
Cash Flows
A summary of the sources and uses of cash, cash equivalents, restricted cash and restricted cash equivalents is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | | | |
| (In thousands) | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Net cash used in operating activities | | $ | (270,413) | | | $ | (543,389) | | | $ | (267,412) | |
| Net cash provided by (used in) investing activities | | $ | 21,366 | | | $ | 274,900 | | | $ | (293,084) | |
| Net cash provided by financing activities | | $ | 344,314 | | | $ | 85,847 | | | $ | 589,932 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net cash provided by (used in) operating activities | | $ | (312,283 | ) | | $ | (726,231 | ) | | $ | 8,360 |
|
| Net cash provided by (used in) investing activities | | $ | (377,450 | ) | | $ | 109,399 |
| | $ | (309,239 | ) |
| Net cash provided by financing activities | | $ | 159,779 |
| | $ | 619,967 |
| | $ | 498,566 |
|
Operating Activities
Net cash used in operating activities for the year ended December 29, 2019 was $270.4 million and was primarily the result of: (i) $158.3 million mark-to-market gain on equity investments with readily determinable fair value; (ii) $143.4 million gain on business divestiture; (iii) $128.4 million increase in inventories to support the construction of our solar energy projects; (iv) $66.2 million increase in accounts receivable, primarily driven by billings in excess of collections; (v) $38.2 million increase in contract assets driven by construction activities; (vi) $25.2 million gain on sale of assets; (vii) $17.3 million gain on sale of equity investments without readily determinable fair value; (viii) $8.9 million decrease in operating lease liabilities; (ix) $8.8 million increase in prepaid expenses and other assets, primarily related to movements in prepaid inventory; (x) net loss of $7.7 million; and (xi) $2.2 million increase in project assets, primarily related to the construction of our commercial solar energy projects. This was offset by: (i) $80.1 million depreciation and amortization; (ii) $79.3 million increase in accounts payable and other accrued liabilities; (iii) $50.2 million increase in advances to suppliers; (iv) $33.8 million loss on sale and impairment of residential lease assets; (v) $27.5 million increase in contract liabilities driven by construction activities; (vi) stock-based compensation of $26.9 million; (vii) $9.5 million non-cash interest expense; (viii) $8.6 million decrease in operating lease right-of-use assets; (ix) $7.1 million loss in equity in earnings of unconsolidated investees; (x) $5.9 million non-cash restructuring charges; and (xi) $5.0 million net change in deferred income taxes; and (xii) impairment of long-lived assets of $0.8 million.
In December 2018 and May 2019, we entered into factoring arrangements with two separate third-party factor agencies related to our accounts receivable from customers in Europe. As a result of these factoring arrangements, title of certain accounts receivable balances was transferred to third-party vendors, and both arrangements were accounted for as a sale of financial assets given effective control over these financial assets has been surrendered. As a result, these financial assets have been excluded from our consolidated balance sheets. In connection with the factoring arrangements, we sold accounts receivable invoices amounting to $119.4 million and $26.3 million in fiscal 2019 and 2018, respectively. As of December 29, 2019 and December 30, 2018, total uncollected accounts receivable from end customers under both arrangements were $11.6 million and $21.0 million, respectively.
Net cash used in operating activities in fiscal 20162018 was $312.3$543.4 million and was primarily the result of: (i) a net loss of $543.8$917.5 million; (ii) a $203.3 million non-cash settlement of preexisting relationships in connection with the acquisition of AUOSP; (iii) a $172.5$182.9 million increase in long-term financing receivables related to our net investment in sales-type leases; (iv) a $70.4 million increase in inventories driven by purchases of polysilicon; (v) a $38.2 million decrease in billings in excess of costs and estimated earnings driven by the recognition revenue and corresponding costs of certain utility-scale projects; (vi) a $33.5 million increase in accounts receivable, primarily driven by billings; (vii) a $28.1 million increase in equity in earnings of unconsolidated investees; (viii) a $17.0 million decrease in customer advances; (ix) a $12.1(iii) $127.3 million decrease in accounts payable and other accrued liabilities, primarily attributable to recognitionpayments of revenueaccrued expenses; (iv) $59.3 million gain on business divestiture; (v) $54.2 million gain on the sale of certain utility-scaleequity investments; (vi) $43.5 million increase in contract assets driven by construction activities; (vii) $39.2 million increase in inventories due to the support of various construction projects; (x) a $6.6(viii) $30.5 million net changedecrease in contract liabilities driven by construction activities; (ix) $6.9 million increase in deferred income taxes,taxes; (x) $6.8 million increase due to other various activities; and (xi) a $2.8$0.2 million increase in excess tax benefit from stock-based compensation.accounts receivable, primarily driven by billings. This was partially offset by: (i) otherimpairment of property, plant and equipment of $369.2 million; (ii) impairment of residential lease assets of $189.7 million; (iii) net non-cash charges of $241.6$162.1 million related to depreciation, stock-based compensation and other non-cash interest charges and stock-based compensation; (ii) $166.7 million in non-cash restructuring charges; (iii) a $147.4 million impairment(iv) loss on sale of goodwill; (iv) $90.9 million in impairmentresidential lease assets of equity method investments;$62.2 million; (v) a $74.3$44.4 million decrease in advance payments made to suppliers; (vi) a $48.8$39.5 million decrease in project assets, primarily related to the construction of our Commercial solar energy projects; (vii) $22.8 million decrease in prepaid expenses and other assets, primarily related to recognitionthe receipt of revenue and corresponding costs of certain utility-scale projects; (vii) a $33.2prepaid inventory; (viii) $17.8 million decrease in project assets primarily related to revenue recognitionequity in earnings of unconsolidated investees; (ix) $6.9 million net change in income taxes; (x) $6.4 million unrealized loss on equity investments with readily determinable fair value; and corresponding costs of certain utility-scale and commercial projects; (viii) $6.9(xi) $3.9 million dividend from 8point3 Energy Partners LP; (ix) a $6.2 million decrease in costs and estimated earnings in excess of billings driven by milestone billings.equity method investees.
Net cash used in operating activities in fiscal 20152017 was $726.2$267.4 million and was primarily the result of: (i) a net loss of $299.4$1,170.9 million; (ii) a $763.1$216.3 million increasedecrease in project assetsaccounts payable and other accrued liabilities, primarily relatedattributable to our Henrietta, Hooper and Quinto Solar Energy Projects;payment of accrued expenses; (iii) a $237.8 million increase in inventories driven by project assets for construction of solar power systems for Commercial and Power Plant projects in North America and purchases of polysilicon; (iv) a $143.0$123.7 million increase in long-term financing receivables related to our net investment in
sales-type leases; (v) a $87.0(iv) $38.2 million increase in prepaid expenses and other assets;inventories to support the construction of our solar energy projects; (vi) a $39.4 million excess tax benefit from stock-based compensation; (vii) a $27.9 million gain on the sale of a residential lease portfolio to 8point3 Energy Partners; (viii) a $20.8 million increase in customer advances; and (ix) a $9.6$25.9 million increase in equity in earnings of unconsolidated investees. This was partially offset by: (i) a $311.7investees; (vii) $7.0 million net change in income taxes; (viii) $5.3 million gain on sale of equity method investment; and (ix) $1.2 million decrease in accounts receivable, primarily driven by the collectioncollections; This was partially offset by: (i) $624.3 million impairment of retainage related to Solar Star Projects;residential lease assets; (ii) other net non-cash charges of $205.7$239.6 million related to depreciation, stock-based compensation and other non-cash interest charges and stock-based compensation;charges; (iii) a $148.4 million decrease in costs and estimated earnings in excess of billings driven by a decrease related to the Solar Star Projects; (iv) a $90.9$145.2 million increase in accounts payable and other accrued liabilities; (v) a $63.7 million increase in deferred income taxes and income tax liabilities; (vi) a $50.6 million decrease in advance payment made to suppliers; and (vii) a $30.7 million increase in billings in excess of costs and estimated earningscontract liabilities driven by an increase related to Solar Star and other projects.
Net cash provided by operating activities in fiscal 2014 was $8.4 million and was primarily the result of: (i) a net income of $183.1 million; (ii) a $205.5construction activities; (iv) $110.5 million decrease in prepaid expenses and other assets, driven by a decline in deferred costsprimarily related to the Solar Star Projects;receipt of prepaid inventory; (v) $89.6 million impairment of 8point3 Energy Partners investment balance; (vi) $68.8 million decrease in advance payments made to suppliers; (vii) $30.1 million dividend from 8point3 Energy Partners; (viii) $10.7 million decrease in contract assets driven by milestone billings; (ix) $2.3 million decrease in project assets, primarily related to the construction of our commercial and power plant solar energy projects
Investing Activities
Net cash provided by investing activities in the year ended December 29, 2019 was $21.4 million, which included (i) proceeds of $60.0 million from sale of property, plant, and equipment; (ii) $42.9 million proceeds from sale of investments; (iii) net non-cash chargesproceeds of $186.0$40.5 million related to depreciation, non-cash interest charges,from business divestiture; and stock based compensation; (iv) $2.0 million of proceeds resulting from realization of estimated receivables from a $45.8business divestiture. This was offset by (i) cash paid for solar power systems of $53.3 million; (ii) $47.4 million increaseof purchases of property, plant and equipment; (iii) cash paid for investments in accounts payableunconsolidated investees of $12.4 million; and other accrued liabilities;(iv) $10.9 million of cash de-consolidated from the sale of residential lease assets.
Net cash provided by investing activities in fiscal 2018 was $274.9 million, which included (i) proceeds from the sale of investment in joint ventures and (v)non-public companies of $420.3 million; (ii) proceeds of $23.3 million from business divestiture; and (iii) a $21.7$13.0 million net increase in deferred income taxes and other liabilities.dividend from equity method investees. This was partially offset by: (i) a $225.2$167.0 million decrease in billings in excess of costs and estimated earnings driven by a declinecapital expenditures primarily related to the Solar Star Projects;expansion of our solar cell manufacturing capacity and costs associated with solar power systems, leased and to be leased; and (ii) a $155.3$14.7 million increasepaid for investments in costsconsolidated and estimated earnings in excess of billings driven by an increase related to the Solar Star Projects; (iii) a $94.3 million increase in long-term financing receivables related to our net investment in sales-type leases; (iv) a $68.2 million increase in project assets primarily related to our Quinto Solar Energy project; (v) a $26.3 million increase in advance payments made to suppliers; (vi) a $31.5 million increase in accounts receivable; (vii) a $23.5 million decrease in customer advances; and (viii) a $9.4 million net change in other operating assets.unconsolidated investees.
Investing Activities
Net cash used in investing activities in fiscal 20162017 was $377.5$293.1 million, which included (i) $310.1$283.0 million in capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems, leased and to be leased; (ii) $24.0 million paid for the acquisition of AUOSP, net of cash acquired; (iii) a $22.7 million increase in restricted cash; (iv) $11.5$18.6 million paid for investments in consolidated and unconsolidated investees; (v) $9.8and (iii) $1.3 million in payments to 8point3 Energy Partners; (vi) $5.0 million paid for purchasespurchase of marketable securities; and (vii) $0.5 million paid for intangibles.securities. This was partially offset by: (i) $6.2 million inby proceeds from sales or maturitiesthe sale of marketable securities.investment in joint ventures of $6.0 million and a $3.8 million dividend from equity method investees.
Financing Activities
Net cash provided by investingfinancing activities in fiscal 2015the year ended December 29, 2019 was $109.4$344.3 million, which included $539.8included: (i) $171.9 million from the common stock offering; (ii) $110.9 million in net proceeds of bank loans and other debt; (iii) $69.2 million net proceeds from 8point3 Energy Partners.the issuance of non-recourse residential financing, net of issuance costs; (iv) $35.5 million of net contributions from noncontrolling interests and redeemable noncontrolling interests related to residential lease projects; (v) $3.0 million of proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs. This was partially offset by (i) $328.4$39.0 million of payment associated with prior business combination; (ii) $5.6 million in capital expenditures primarily related to the expansionpurchases of our solar cell manufacturing capacitytreasury stock for tax withholding obligations on vested restricted stock; and costs associated with solar power systems, leased and to be leased; (ii) $64.8(iii) $1.6 million paid for acquisitions; (iii) a $23.2 million increase in restricted cash; (iv) $9.9 million paid for intangibles; and (v) $4.1 million paid for investments in unconsolidated investees.settlement of contingent consideration arrangement, net of cash received.
Net cash used in investing activities in fiscal 2014 was $309.2 million, which included: (i) $166.9 million related to capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems, leased and to be leased; (ii) $97.0 million paid for investments in unconsolidated investees driven by a $72.0 million equity contribution to AUOSP; (iii) $35.1 million paid for acquisitions; and (iv) a $11.6 million increase in restricted cash. This was partially offset by $1.4 million proceeds from maturities of marketable securities.
Financing Activities
Net cash provided by financing activities in fiscal 20162018 was $159.8$85.8 million, which included: (i) $146.1$174.9 million in net proceeds from the issuance of non-recourse residential financing, net of issuance costs; and (ii) $127.3$129.3 million of net contributions from noncontrolling interests and redeemable noncontrolling interests related to the residential lease projects.projects; and (iii) $94.7 million in net proceeds from the issuance of non-recourse power plant and commercial financing, net of issuance costs. This was partially offset by: (i) $56.4$307.6 million in net repayments of 0.75% debentures due 2018, bank loans and other debt; and (ii) $5.5 million in purchases of treasury stock for tax withholding obligations on vested restricted stock.
Net cash provided by financing activities in fiscal 2017 was $589.9 million, which included: (i) $351.8 million in net proceeds from the issuance of non-recourse power plant and commercial financing, net of issuance costs; (ii) $30.0$179.2 million of net contributions from noncontrolling interests and redeemable noncontrolling interests primarily related to residential lease projects; and (iii) $82.7 million in net proceeds from the issuance of non-recourse residential financing, net of issuance costs. This was partially offset by: (i) 19.1 million in net repayments of bank loans and other debt; (iii) $21.5and (ii) $4.7 million in purchases of treasury stock for tax withholding obligations on vested restricted stock; and (iv) $5.7 million in cash paid for acquisitions.stock.
Net cash provided by financing activities in fiscal 2015 was $620.0 million, which included: (i) $416.3 million in proceeds from issuance
Net cash provided by financing activities in fiscal 2014 was $498.6 million, which included: (i) $395.3 million in net proceeds from the issuance of our 0.875% convertible debentures due 2021; (ii) $100.7 million of contributions from noncontrolling interests and redeemable noncontrolling interests related to the residential lease program; (iii) $81.9 million of proceeds from issuance of non-recourse debt financing to finance solar power systems and leases under our residential lease program; (iv) $61.5 million in proceeds from issuance of project loans; (v) $46.4 million in net proceeds from sale-leaseback financing arrangements; and (vi) $3.4 million in proceeds from exercise of stock options and excess tax benefit from stock-based compensation. This was partially offset by: (i) $57.5 million in purchases of stock for tax withholding obligations on vested restricted stock; (ii) $42.3 million cash paid to repurchase convertible debt; (iii) a $40.7 million assumption of a project loan by a customer; (iv) $17.1 million in repayments of bank loans, project loans and other debt; (v) $15.7 million of repayments of residential lease financing; (vi) a $12.2 million net payment to settle the 4.75% Bond Hedge and Warrant; and (vii) $5.1 million of distributions to noncontrolling interests and redeemable noncontrolling interests.
Debt and Credit Sources
Convertible Debentures
As of January 1, 2017,December 29, 2019, an aggregate principal amount of $425.0 million of the 4.00% senior convertible debentures due 2023 (the "4.00% debentures due 2023") remained issued and outstanding. The 4.00% debentures due 2023 were issued on December 15, 2015. Interest on the 4.00% debentures due 2023 is payable on January 15 and July 15 of each year, beginning on July 15, 2016. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price approximately equal to $30.53 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 4.00% debentures due 2023 mature on January 15, 2023. Holders may require us to repurchase all or a portion of their 4.00% debentures due 2023, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control, fundamental change, as described in the related indenture, the 4.00% debentures due 2023 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control, fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 4.00% debentures due 2023 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo Bank, National Association ("Wells Fargo"), the trustee, or the holders of a specified amount of then-outstanding 4.00% debentures due 2023 will have the right to declare all amounts then outstanding due and payable.
As of January 1, 2017,December 29, 2019, an aggregate principal amount of $400.0 million of the 0.875% senior convertible debentures due 2021 (the “0.875% debentures due 2021”) remained issued and outstanding. The 0.875% debentures due 2021 were issued on June 11, 2014. Interest on the 0.875% debentures due 2021 is payable on June 1 and December 1 of each year. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price approximately equal to $48.76 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 0.875% debentures due 2021 mature on June 1, 2021. Holders may require us to repurchase all or a portion of their 0.875% debentures due 2021, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control, fundamental change, as described in the related indenture, the 0.875% debentures due 2021 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control, fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 0.875% debentures due 2021 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.875% debentures due 2021 will have the right to declare all amounts then outstanding due and payable. (See "Item 8. Financial Statements - Note 18. Subsequent Event")
As of January 1, 2017, an aggregate principal amount of $300.0 million of the 0.75% debentures due 2018 remained issued and outstanding. The 0.75% debentures due 2018 were issued on May 29, 2013. Interest on the 0.75% debentures due 2018 is payable on June 1 and December 1 of each year. Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price equal to $24.95 per share. The applicable conversion rate may be subject to adjustment in certain circumstances. If not earlier converted, the 0.75% debentures due 2018 mature on June 1, 2018. Holders may require us to repurchase all or a portion of their 0.75% debentures due 2018, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control fundamental change, as described in the related indenture, the 0.75% debentures due 2018 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control fundamental change, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 0.75% debentures due 2018 are not redeemable at our option prior to the maturity date. In the event of certain events of default, Wells Fargo, the trustee, or the holders of a specified amount of then-outstanding 0.75% debentures due 2018 will have the right to declare all amounts then outstanding due and payable. Please see "Part I. Item 1A. Risk Factors—Risks Related to our Debt and Equity Securities—Conversion of our outstanding 0.75% debentures, 0.875% debentures, 4.00% debentures, and future substantial issuances or dispositions of our common stock or other securities, could dilute ownership and earnings per share or cause the market price of our stock to decrease" in this Annual Report on 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 borrowed $75.0 million and are required to repay the amount borrowed starting two years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. We are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. We may prepay all or a part of the outstanding principal, subject to a 1% prepayment premium. We have pledged certain assets as collateral supporting repayment obligations.
As of January 1, 2017, we had $17.5 million outstanding under the mortgage loan agreement. Additionally, in accordance with the terms of the mortgage loan agreement, we are required to establish a debt service reserve account which shall contain the amount, as determined by IFC, equal to the aggregate principal and interest due on the next succeeding interest payment date after such date. As of January 1, 2017, we had restricted cash and cash equivalents of $9.2 million related to the IFC debt service reserve. On January 17, 2017, the Company repaid the entire outstanding balance, and the associated interest, of the mortgage loan agreement with IFC (see Note 18).
Loan Agreement with California Enterprise Development Authority ("CEDA")
On December 29, 2010, we borrowed from CEDA the proceeds of the $30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation - Headquarters Project) Series 2010 (the "Bonds") maturing April 1, 2031 under a loan agreement with CEDA. Certain of our obligations under the loan agreement were contained in a promissory note dated December 29, 2010 issued by us to CEDA, which assigned the promissory note, along with all right, title and interest in the loan agreement, to Wells Fargo, as trustee, with respect to the Bonds for the benefit of the holders of the Bonds. The Bonds bear interest at a fixed-rate of 8.50% per annum.As of December 29, 2019, the fair value of the Bonds was $32.1 million, determined by using Level 2 inputs based on quarterly market prices as reported by an independent pricing source.
As of January 1, 2017,December 29, 2019, the $30.0 million aggregate principal amount of the Bonds was classified as "Long-term debt" in our Consolidated Balance Sheets.consolidated balance sheets.
Revolving Credit Facility with Credit Agricole
On July 3, 2013,October 29, 2019, we entered into a revolving credit agreementnew Green Revolving Credit Agreement (the “2019 Revolver”) with CreditCrédit Agricole Corporate and Investment Bank ("(“Credit Agricole"Agricole”), as administrative agent, and certain financial institutions, under which we may borrow up to $250.0 million. On August 26, 2014, we entered into an amendment to thelender, with a revolving credit facility that extends, among other things, the maturity datecommitment of the facility from July 3, 2016 to August 26,$55.0 million. The 2019 (the "Maturity Date"). Amounts borrowed may be repaid and reborrowed until the Maturity Date. On February 17, 2016, the Company entered into an amendment to the credit agreement, expanding the available borrowings under the revolving credit facility to $300.0 million and adding a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. The revolving credit facility includes representations,Revolver contains affirmative covenants, and events of default customary for financing transactionsand repayment provisions customarily applicable to similar facilities and has a per annum commitment fee of this type. The revolving credit facility was entered into in conjunction with0.05% on the delivery by Total S.A. of a guarantee of our obligationsdaily unutilized amount, payable quarterly. Loans under the facility. On January 31, 2014, (i) our obligations under2019 Revolver bear either an adjusted LIBOR interest rate for the revolving credit facility became secured byperiod elected for such loan or a pledge of certain accounts receivable and inventory, (ii) certain of our subsidiaries entered into guarantiesfloating interest rate of the revolving credit facility, and (iii) Total S.A.'s guaranteehigher of our obligations under the revolving credit facility expired.
We are required to pay (a) interest on outstanding borrowings under the facility of (i) with respect to any LIBOR rate loan, an amount ranging from 1.50% to 2.00% (depending on our leverage ratio from time to time) plus the LIBOR rate divided by a percentage equal to one minus the stated maximum rate of all reserves required to be maintained against "Eurocurrency liabilities" as specified in Regulation D; and (ii) with respect to any alternate base rate loan, an amount ranging from 0.50% to 1.00% (depending on our leverage ratio from time to time) plus the greater of (1) the prime rate, (2) the Federal Fundsfederal funds effective rate, or LIBOR for an interest period of one month, plus 0.50%, and (3) the one-month LIBOR rate plus 1%; and (b) a commitment feean applicable margin, ranging from 0.25% to 0.35% (depending0.60%, depending on our leverage ratio from time to time) per annumthe base interest rate applied, and each matures on funds available for borrowing and not borrowed. We will be required to pay interest on lettersthe earlier of creditApril 29, 2021, or the termination of commitments thereunder. Our payment obligations under the agreement of (a) with respect to any performance letter of credit, an amount ranging from 0.90% to 1.20% (depending on our leverage ratio from time to time); and (b) with respect to any other letter of credit, an amount ranging from 1.50% to 2.00% (depending on our leverage ratio from time to time).
As of January 1, 2017, we had $4.7 million of outstanding borrowings under the revolving credit facility, all of which were related to letters of credit that are fully cash collateralized. Although we are not in default with Credit Agricole, we are currently not in compliance with the covenant for this credit facility that would permit us to draw further and therefore we may not make additional draws on the facility without collateralizing the borrowings with cash. We expect to not be in compliance with the covenant for the Credit Agricole credit facility for at least the remainder of the 2017 fiscal year, which will affect the availability of borrowings under the line, if not remedied.
August 2016 Letter of Credit Facility Agreement
In August 2016, we entered into a letter of credit facility with Banco Santander, S.A. which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed $85 million. As of January 1, 2017, there were no letters of credit issued and outstanding under the facility with Banco Santander, S.A.
2016 Letter of Credit Facility Agreements
In June 2016, we entered into a Continuing Agreement for Standby Letters of Credit and Demand Guarantees with Deutsche Bank AG New York Branch and Deutsche Bank Trust Company Americas (the “2016 Non-Guaranteed LC Facility”) which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed $50.0 million. The 2016 Non-Guaranteed LC Facility will terminate on June 29, 2018. As of January 1, 2017, letters of credit issued and outstanding under the 2016 Non-Guaranteed LC Facility totaled $45.8 million.
In June 2016, we entered into bilateral letter of credit facility agreements (the “2016 Guaranteed LC Facilities”) with The Bank of Tokyo-Mitsubishi UFJ ("BTMU"), Credit Agricole, and HSBC USA Bank, National Association ("HSBC"). Each letter of credit facility agreement provides for the issuance, upon our request, of letters of credit by the issuing bank thereunder in order to support certain of our obligations until December 31, 2018. Payment of obligations under each of the letter of credit facilities2019 Revolver are guaranteed by Total S.A. pursuantup to the Credit Support Agreement. Aggregate lettermaximum aggregate principal amount of credit amounts may be increased upon the agreement$55.0 million. In consideration of the respective parties but, otherwise, may not exceed $75.0 million with BTMU, $75.0 million with Credit Agricolecommitments of Total S.A., we are required
to pay them a guaranty fee of 0.25% per annum on any amounts borrowed under the 2019 Revolver and $175.0 million with HSBC,to reimburse Total S.A. for any amounts paid by them under the parent guaranty. We have pledged the equity of a total capacity of $325.0 million. Each letter of credit issued under onewholly-owned subsidiary of the letterCompany that holds our shares of credit facilities generally mustEnphase Energy, Inc. common stock to secure our reimbursement obligation under the 2019 Revolver. We have an expiration date, subjectalso agreed to certain exceptions,limit our ability to draw funds under the 2019 Revolver, to no latermore than the earlier of (a) two years from completion67% of the applicable project and (b) March 31, 2020.
In June 2016, in connection with the 2016 Guaranteed LC Facilities, we entered into a transfer agreement to transfer to the 2016 Guaranteed LC Facilities all existing outstanding letters of credit issued under our letter of credit facility agreement with Deutsche Bank AG New York Branch and Deutsche Bank Trust Company Americas, as administrative agent, and certain financial institutions, entered into in August 2011 and amended from time to time. In connection with the transferfair market value of the existingcommon stock held by our subsidiary at the time of the draw.
As of December 29, 2019, we had no outstanding letters of credit, the aggregate commitment amountborrowings under the August 2011 letter of credit facility was permanently reduced to zero on June 29, 2016. As of January 1, 2017, there were no letters of credit issued and outstanding under the August 2011 letter of credit facility with Deutsche Bank. As of January 1, 2017, letters of credit issued and outstanding under the 2016 Guaranteed LC Facilities totaled $244.8 million.2019 Revolver.
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, of letters of credit to support our obligations in an aggregate amount not to exceed $200.0 million.$200.0 million. Each letter of credit issued under the facility is fully cash-collateralized and we have entered into a security agreement with Deutsche Bank Trust, granting them a security interest in a cash collateral account established for this purpose.
As of January 1, 2017December 29, 2019, letters of credit issued under the Deutsche Bank Trust facility totaled $3.1$3.6 million,, which was fully collateralized with restricted cash as classified on the Consolidated Balance Sheets.consolidated balance sheets.
Revolving CreditOther Facilities
Asset-Backed Loan with Bank of America
On March 29, 2019, we entered in a Loan and Security Agreement with Bank of America, N.A., which provides a revolving credit facility secured by certain inventory and accounts receivable in the maximum aggregate principal amount of $50.0 million. The Loan and Security Agreement contains negative and affirmative covenants, events of default and repayment and prepayment provisions customarily applicable to asset-backed credit facilities. The facility bears a floating interest rate of LIBOR plus an applicable margin, and matures on the earlier of March 29, 2022, a date that is 91 days prior to the maturity of our 2021 convertible debentures, or the termination of the commitments thereunder. During fiscal 2019, we drew loans totaling $31.3 million, under this facility and we repaid loans of$12.2 million, leaving a balance outstanding of $19.2 millionas of December 29, 2019.
SunTrust Facility with Mizuho and Goldman Sachs
On May 4, 2016,June 28, 2018, we entered into a Financing Agreement with SunTrust Bank, which provides a revolving credit facility (the "Construction Revolver") with Mizuho Bank Ltd., as administrative agent, and Goldman Sachs Bank USA, under which we may borrow up to $200 million. The Construction Revolver also includes a $100 million accordion feature. Amounts borrowed under the Construction Revolver may be repaid and reborrowed in support of our commercial and small scale utility projects in the United States untilmaximum aggregate principal amount of $75.0 million. Each loan draw from the May 4, 2021 maturity date. The Construction Revolver includes representations, covenants, and events of default customary for financing transactions of this type.
Borrowings under the Construction Revolver bearfacility bears interest at the applicable LIBOReither a base rate or federal funds rate plus 1.50% for the first two years (with the final year atan applicable margin or a floating interest rate of LIBOR plus 1.75%). All outstanding indebtedness underan applicable margin, and matures no later than three years following the facility may be voluntarily prepaid in whole or in part without premium or penalty (with certain limitations to partial repayments), other than customary breakage costs. The Construction Revolver is secured bydate of the assets of, and equity in, the various project companies to which the borrowings relate, but is otherwise non-recourse to us and our other affiliates.
draw. As of January 1, 2017, outstanding borrowingsDecember 29, 2019, we had $75.0 million in borrowing capacity under the Construction Revolver totaled $10.5 million.this limited recourse construction financing facility.
Non-recourse Financing and Other Debt
In order to facilitate the construction, sale or ongoing operation of certain solar projects, including our residential leasing program, we regularly obtain project-level financing. These financings are secured either by the assets of the specific project being financed or by our equity in the relevant project entity and the lenders do not have recourse to theour general assets of the
Company for repayment of such debt obligations, and hence the financings are referred to as non-recourse. Non-recourse financing is typically in the form of loans from third-party financial institutions, but also takes other forms, including "flip partnership" structures, sale-leaseback arrangements, or other forms commonly used in the solar or similar industries. We may seek non-recourse financing covering solely the construction period of the solar project or may also seek financing covering part or all of the operating life of the solar project. We classify non-recourse financings in our Consolidated Balance Sheetsconsolidated balance sheets in accordance with their terms; however, in certain circumstances, we may repay or refinance these financings prior to stated maturity dates in connection with the sale of the related project or similar such circumstances. In addition, in certain instances, the customer may assume the loans at the time that the project entity is sold to the customer. In these instances, subsequent debt assumption is reflected as a financing outflow and operating inflow in the Consolidated Statementsconsolidated statements of Cash Flowscash flows to reflect the substance of the assumption as a facilitation of customer financing from a third party.
For our residential lease program, non-recourse financing is typically accomplished by aggregating an agreed-upon volume of solar power systems and leases with residential customers into a specific project entity. The Company has entered into the following non-recourse financings with respect to its residential lease program:
In fiscal 2016, we entered into bridge loans to finance solar power systems and leases under our residential lease program. The loans are repaid over terms ranging from two to seven years. Some loans may be prepaid without penalties at our option at any time, while other loans may be prepaid, subject to a prepayment fee, after one year. During fiscal 2016, we had net proceeds of $5.7 million, in connection with these loans. As of January 1, 2017, the aggregate carrying amount of these loans, presented in "Long-term debt" on our Consolidated Balance Sheets, was $6.7 million.
We enter into long-term loans to finance solar power systems and leases under our residential lease program. The loans are repaid over their terms of between 17 and 18 years, and may be prepaid without penalty at our option beginning seven years after the original issuance of the loan. During fiscal 2016 and 2015, we had net proceeds of $111.8 million and $90.6 million, respectively, in connection with these loans. As of January 1, 2017, and January 3, 2016, the aggregate carrying amount of these loans, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $283.9 million and $171.8 million, respectively.
We have entered into multiple arrangements under which solar power systems are financed by third-party investors or customers, including by a legal sale of the underlying asset that is accounted for as a borrowing under relevant accounting guidelines as the requirements to recognize the transfer of the asset were not met. Under the terms of these arrangements, the third parties make an upfront payment to us, which we recognize as a liability that will be reduced over the term of the arrangement as lease receivables and government incentives are received by the third party. As the liability is reduced, we make a corresponding reduction in receivables. We use this approach to account for both operating and sales-type leases with our residential lease customers in our consolidated financial statements. During fiscal 2016 and 2015, we had net proceeds (repayments) of $28.5 million and $(32.0) million, respectively, in connection with these facilities. As of January 1, 2017 and January 3, 2016, the aggregate carrying amount of these facilities, presented in "Accrued liabilities" and "Other long-term liabilities" on our Consolidated Balance Sheets, was $29.4 million and $36.8 million, respectively (see Note 5).
We also enter into facilities with third-party tax equity investors under which the investors invest in a structure known as a partnership flip. We hold controlling interests in these less-than-wholly-owned entities and therefore fully consolidate these entities. We account for the portion of net assets in the consolidated entities attributable to the investors as noncontrolling interests in our consolidated financial statements. Noncontrolling interests in subsidiaries that are redeemable at the option of the noncontrolling interest holder are classified accordingly as redeemable, between liabilities and equity on the Company's Consolidated Balance Sheets. During fiscal 2016 and 2015, we had net contributions of $127.3 million and $170.6 million, respectively, under these facilities and attributed losses of $74.9 million and $111.5 million, respectively, to the non-controlling interests corresponding principally to certain assets, including tax credits, which were allocated to the non-controlling interests during the periods. As of January 1, 2017 and January 3, 2016, the aggregate carrying amount of these facilities, presented in “Redeemable non-controlling interests in subsidiaries” and “Non-controlling interests in subsidiaries” on our Consolidated Balance Sheets, was $183.1 million and $128.6 million, respectively.
For our power plant and commercial solar projects, non-recourse financing is typically accomplished using an individual solar power system or a series of solar power systems with a common end customer, in each case owned by a specific project entity. We have entered into the following non-recourse financings with respect to our power plant and commercial projects:
In fiscal 2016, we entered into the Construction Revolver credit facility to support the construction of our commercial and small scale utility projects in the United States. During fiscal 2016, we had net proceeds of $9.9 million, in connection with the facility. As of January 1, 2017, the aggregate carrying amount of the Construction Revolver, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $10.5 million.
In fiscal 2016, we entered into a long-term credit facility to finance the 125 MW utility-scale Boulder power plant project in Nevada. During fiscal 2016, we had net proceeds of $21.9 million, in connection with the facility. As of January 1, 2017, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $28.8 million.
In fiscal 2016, we entered into a short-term credit facility to finance the utility-scale Rio Bravo power plant projects in California, with an aggregate size of approximately 50 MW. During fiscal 2016, in connection with the sale of the project, the Company repaid the full amount outstanding, and as a result, the Company had net proceeds of $114.8 million and net repayments of $117.6 million in connection with the facility. As of January 1, 2017, the aggregate carrying amount of this facility, presented in "Short-term debt" on our Consolidated Balance Sheets, was zero.
In fiscal 2016, we entered into a short-term credit facility to finance the 20 MW utility-scale Wildwood power plant project in California. During fiscal 2016, in connection with the sale of the project, the Company repaid the full amount outstanding, and as a result, the Company had net proceeds of $44.5 million and net repayments of $45.6 million, in connection with the facility. As of January 1, 2017, the aggregate carrying amount of this facility, presented in "Short-term debt" on our Consolidated Balance Sheets, was zero.
In fiscal 2016, we entered into a long-term credit facility to finance several related utility-scale power plant projects in California, including the Stanford and Turlock projects, with an aggregate size of approximately 350 MW. During fiscal 2016, in connection with the sale of the project, the Company repaid the full amount outstanding, and as a result, the Company had net proceeds of $192.2 million and net repayments of $201.6 million, in connection with the facility. As of January 1, 2017, the aggregate carrying amount of this facility, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was zero.
In fiscal 2016, we entered into a long-term credit facility to finance the 111 MW utility-scale El Pelicano power plant project in Chile. During fiscal 2016, we had net proceeds of $84.6 million in connection with the facility. As of January 1, 2017, the aggregate carrying amount of this facility, presented in "Long-term debt" on our Consolidated Balance Sheets, was $90.5 million.
In fiscal 2015, we entered into a long-term credit facility to finance the 128 MW utility-scale Henrietta power plant in California. During fiscal 2016, in connection with the sale of the project, we repaid the full amount outstanding, and as a result, the Company had net repayments of $216.7 million in connection with the facility. As of January 1, 2017 and January 3, 2016, the aggregate carrying amount of this loan, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was zero and $216.7 million, respectively.
In fiscal 2015, we entered into a long-term credit facility to finance the 60 MW Hooper utility-scale power plant in Colorado. In the first quarter of fiscal 2016, we repaid the full amount outstanding. During fiscal 2016, we had net repayments of $37.3 million in connection with the facility. As of January 1, 2017 and January 3, 2016, the carrying amount of this facility, presented in "Long-term debt" on our Consolidated Balance Sheets, was zero and $37.3 million, respectively.
In fiscal 2013, we entered into a long-term loan agreement to finance a 5.4 MW utility and power plant operating in Arizona. As of January 1, 2017 and January 3, 2016, the aggregate carrying amount under this loan, presented in "Short-term debt" and "Long-term debt" on our Consolidated Balance Sheets, was $7.6 million and $8.1 million, respectively.
Other debt is further composed of non-recourse project loans in EMEA, which are scheduled to mature through 2028.
See "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 6. Leasing" for a discussion of the Company’s sale-leasebacks accounted for under the financing method.
Liquidity
As of January 1, 2017,December 29, 2019, we had unrestricted cash and cash equivalents of $425.3$423.0 million as compared to $954.5$309.4 million as of January 3, 2016.December 30, 2018. Our cash balances are held in numerous locations throughout the world, and as of January 1, 2017,December 29, 2019, we had approximately $149.8$79.6 million held outside of the United States. This offshore cash is used to fund operations of our business in the Europe and Asia Pacific regions as well as non-U.S. manufacturing operations, which require local payment for product materials and other expenses. The amounts held outside of the United States represent the earnings of our foreign subsidiaries which if repatriated tounder the United States under current law,enacted Tax Act, incurred a one-time transition tax (such amounts were previously tax deferred), however, would be subject to United States federal and state tax less applicable foreign tax credits. Repatriation of earnings that have not been subjected to U.S. or foreign withholding tax and that
have been indefinitely reinvested outside the U.S. could result in additional United States federal income tax or foreign withholding tax payments in future years.
a cash payment due to our cumulative net operating loss position. We expect total capital expenditures related to purchases of property, plant and equipment in the range of $110 million to $130approximately $96.8 million in fiscal 20172020 in order to increase our manufacturing capacity for our highest efficiency X-SeriesA-Series (Maxeon 5) product platform and our new Performance SeriesP-Series technology, improve our current and next generation solar cell manufacturing technology, and other projects. In addition, while we have begun the transition away from our project development business, we still expect to invest a significant amount of capital to develop solar power systems and plants for sale to customers. The development of solar power plants can require long periods of time and substantial initial investments. Our efforts in this area may consist of all stages of development, including land acquisition, permitting, financing, construction, operation and the eventual sale of the projects. We often choose to bear the costs of such efforts prior to the final sale to a customer, which involves significant upfront investments of resources (including, for example, large transmission deposits or other payments, which may be non-refundable), land acquisition, permitting, legal and other costs, and in some cases the actual costs of constructing a project, in advance of the signing of PPAs and EPC contracts and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Any delays in disposition of one or more projects could have a negative impact on our liquidity.
Certain of our customers also require performance bonds issued by a bonding agency or letters of credit issued by financial institutions, which are returned to us upon satisfaction of contractual requirements. If there is a contractual dispute with the customer, the customer may withhold the security or make a draw under such security, which could have an adverse impact on our liquidity. Obtaining letters of credit may require adequate collateral. All letters of credit issued under our 2016 Guaranteed LC Facilities are guaranteed by Total S.A. pursuant to the Credit Support Agreement. Our September 2011 letter of credit facility with Deutsche Bank Trust is fully collateralized by restricted cash, which reduces the amount of cash available for operations. As of January 1, 2017,December 29, 2019, letters of credit issued under the Deutsche Bank Trust facility amounted to $3.1$3.6 million which were fully collateralized with restricted cash on the Consolidated Balance Sheets.
In fiscal 2011, we launched our residential lease program with dealers in the United States, in partnership with a third-party financial institution, which allows customers to obtain SunPower systems under lease agreements up to 20 years, subject to financing availability. We have entered into facilities with financial institutions that will provide financing to support additional residential solar lease projects. Under the terms of certain programs, we receive upfront payments for periods under which the third-party financial institution has agreed to assume collection risk for certain residential leases. Changes in the amount or timing of upfront payments received from the financial institutions may have an impact on our cash position within the next twelve months. The normal collection of monthly rent payments for leases placed in service is not expected to have a material impact on our cash position within the next twelve months. We have entered into multiple facilities with third-party investors under which both parties will invest in entities that hold SunPower solar power systems and leases with residential customers. We determined that we hold a controlling interest in these less-than-wholly-owned entities and have fully consolidated these entities as a result (see "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 6. Leasing"). During fiscal 2016, we received $146.3 million in contributions from investors under the related facility agreements. Additionally, during fiscal 2014, 2015 and 2016, we entered into several long-term non-recourse loans to finance solar power systems and leases under our residential lease program. In fiscal 2016, we drew down $116.1 million of proceeds, net of issuance costs, under the loan agreements. The loans have 17- and 18-year terms and as of January 1, 2017, the short-term and long-term balances of the loans were $7.3 million and $276.6 million, respectively. We are actively arranging additional third-party financing for our residential lease program; however, the credit markets are unpredictable, and if they become challenging, we may be unable to arrange additional financing partners for our residential lease program in future periods, which could have a negative impact on our sales. In the unlikely event that we enter into a material number of additional leases without promptly obtaining corresponding third-party financing, our cash and working capital could be negatively affected. Additionally, we have approximately $33.1 million of cash and cash equivalents within our consolidated residential leasing subsidiaries that is used by those subsidiaries for their working capital needs. This cash is typically not available to us to use for general corporate purposes unless certain financial obligations are first settled. In the event that we choose to transfer cash out of these subsidiaries for general corporate purposes in the future, we would first be required to distribute a portion of the cash to lender debt reserves and investors who hold noncontrolling interests in the relevant subsidiaries.balance sheets.
Solar power plant projects often require significant up-front investments. These include payments for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible. We often make arrangements with third-party financiers to acquire and build solar power systems or to fund project construction using non-recourse project debt. As of January 1, 2017,December 29, 2019, outstanding amounts related to our project financing totaled $427.9$9.1 million.
We believe that our current cash, cash equivalents, cash expected to be generated from operations and funds available under our existing credit facilities will be sufficient to meet our working capital needs and fund our committed capital
expenditures over the next 12 months from the date of the issuance of the financial statements, including the development and construction of solar power systems and plants. As such, we do not believe substantial doubt exists regarding the Company's ability to continue as a going concern. In conjunction with evaluating our ability to continue as a going concern, we have considered our historical ability to work with our vendors to obtain favorable payment terms, when possible, and our ability to reduce manufacturing output to reduce inventory in order to optimize our working capital. We may also choose to explore additional options in connection with our short-term liquidity needs, such as selling raw materials inventory to third parties, liquidating certain investments, discontinuing the development of certain projects, implementing additional restructuring plans, and deferring or canceling uncommitted capital expenditures and other investment or acquisition activities. We expect to be able to supplement our short-term liquidity, if necessary, with access to capital markets and additional credit facilities, including non-recourse debt, made available by various domestic and foreign financial institutions. However, there can be no assurance that our liquidity will be adequate over time or that we will in fact have access to capital markets on reasonable terms or at all, whether to meet operating needs or to refinance debt. A significant portion of our revenue is generated from a limited number of customers and large projects and our inability to execute these projects, or to collect from these customers or for these projects, would have a significant negative impact on our business. Our capital expenditures and use of working capital may be greater than we expect if we decide to make additional investments in the development and construction of solar power plants and sales of power plants and associated cash proceeds are delayed, or if we decide to accelerate increases in our manufacturing capacity internally or through capital contributions to joint ventures. We require project financing in connection with the construction of solar power plants, which financing may not be available on terms acceptable to us. In addition, we could in the future make additional investments or guarantee certain financial obligations of our investments, which could reduce our cash flows, increase our indebtedness and expose us to the credit risk of our joint ventures. See also "Risks Related to Our Sales Channels—A limited number of customers and large projects are expected to continue to comprise a significant portion of our revenues and any decrease in revenues from those customers or projects, payment of liquidated damages, or an increase in related expenses, could have a material adverse effect on our business, results of operations and financial condition," and "Risks Related to Our Liquidity—We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments as planned due to the general economic environment and the continued market pressure driving down the average selling prices of our solar power products," among other factors in Part I. "Item 1A. Risk Factors".
On February 17, 2016, we entered into an amendment to the credit agreement with Credit Agricole to expand the available borrowings under the revolving credit facility to $300.0 million and to add a $200.0 million letter of credit subfacility, subject to the satisfaction of certain conditions. Proceeds from our revolving credit facility with Credit Agricole may be used for general corporate purposes. Our revolving credit facility with Credit Agricole requires that we maintain certain financial ratios, including the ratio that our debt at the end of each quarter to our EBITDA for the last twelve months, as defined, will not exceed 4.5 to 1. As of January 1, 2017, $295.3 million remained undrawn under our revolving credit facility with Credit Agricole; however we are currently not in compliance with the covenant for the Credit Agricole credit facility that requires the ratio of our debt at the end of each quarter to our EBITDA for the last twelve months, as defined, to not exceed 4.5 to 1. We are not in default with Credit Agricole; however, we may not draw on the facility without collateralizing additional future borrowings with cash. We expect to not be in compliance with the aforementioned financial ratio covenant for the Credit Agricole credit facility for at least the remainder of fiscal 2017, which will affect the availability of borrowings under the line, if not remedied. Additionally, on May 4, 2016, we entered into the Construction Revolver credit facility, under which we may borrow up to $200 million, with a $100 million accordion feature, in support of our commercial and small scale utility projects in the United States until its May 4, 2021 maturity date, subject to certain conditions. As of January 1, 2017, we had $189.5 million available to us under the Construction Revolver credit facility. There are no assurances, however, that we will have sufficient available cash to repay our indebtedness or that we will be able to refinance such indebtedness on similar terms to the expiring indebtedness. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securitiesinvestments or debt securities or obtain other debt financing. The current economic environment, however, could limit our ability to raise capital by issuing new equity or debt securities on acceptable terms, and lenders may be unwilling to lend funds on acceptable terms in the amounts that would be required to supplement cash flows to support operations. The sale of additional equity securitiesinvestments or convertible debt securities would result in additional dilution to our stockholders (and the potential for further dilution upon the exercise of warrants or the conversion of convertible debt) and may not be available on favorable terms or at all, particularly in light of the current conditions in the financial and credit markets. Additional debt would result in increased expenses and would likely impose new restrictive covenants which may be similar or different than those restrictions contained in the covenants under our current loan agreements and debentures. In addition, financing arrangements, including project financing for our solar power plants and letters of credit facilities, may not be available to us, or may not be available in amounts or on terms acceptable to us.
While challenging industry conditions and a competitive environment extended throughout fiscal 2019, we believe that our total cash and cash equivalents, including cash expected to be generated from operations, will be sufficient to meet our obligations over the next 12 months from the date of issuance of our consolidated financial statements. Also, we have been successful in our ability to divest certain investments and non-core assets, such as the sale of membership interests in our Commercial Sale-Leaseback Portfolio, and the sale and leaseback of Hillsboro facility (Note 4. Business Divestiture and Sale of Assets). Additionally, we have secured other sources of financing to satisfy our liquidity needs such as the issuance of common stock through the public offering completed in November 2019 and realizing cash savings resulting from restructuring actions and cost reduction initiatives (Note 14. Common Stock and Note 8. Restructuring). We continue to focus on improving our overall operating performance and liquidity, including managing cash flows and working capital.
While we have not drawn on it, we also have the ability to enhance our available cash by borrowing up to $55 million under our 2019 Revolver. See Note 11. Debt and Credit Sources.
Although we have historically been able to generate liquidity, we cannot predict, with certainty, the outcome of our actions to generate liquidity as planned.
Contractual Obligations
The following table summarizes our contractual obligations as of JanuaryDecember 29, 2019:
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| | | | | Payments Due by Fiscal Period | | | | | | |
| (In thousands) | | Total | | 2020 | | 2021-2022 | | 2023-2024 | | Beyond 2024 |
Convertible debt, including interest1 | | $ | 881,958 | | | $ | 20,500 | | | $ | 435,750 | | | $ | 425,708 | | | $ | — | |
CEDA loan, including interest2 | | 59,325 | | | 2,550 | | | 5,100 | | | 5,100 | | | 46,575 | |
Other debt, including interest3 | | 209,283 | | | 114,437 | | | 89,153 | | | 2,048 | | | 3,645 | |
Future financing commitments4 | | 2,900 | | | 2,900 | | | — | | | — | | | — | |
Operating lease commitments5 | | 110,312 | | | 15,390 | | | 29,189 | | | 17,902 | | | 47,831 | |
Finance lease commitments6 | | 2,087 | | | 627 | | | 1,282 | | | 178 | | | — | |
Non-cancellable purchase orders7 | | 154,653 | | | 154,653 | | | — | | | — | | | — | |
Purchase commitments under agreements8 | | 513,803 | | | 354,666 | | | 119,197 | | | 33,858 | | | 6,082 | |
Deferred purchase consideration in connection with acquisition9 | | 30,000 | | | 30,000 | | | | | | — | | | — | |
| Total | | $ | 1,964,321 | | | $ | 695,723 | | | $ | 679,671 | | | $ | 484,794 | | | $ | 104,133 | |
1Convertible debt, including interest, relates to the aggregate of $825.0 million in outstanding principal amount of our senior convertible debentures on December 29, 2019. 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.
2CEDA loan, including interest, relates to the proceeds of the $30.0 million aggregate principal amount of the Bonds. The Bonds mature on April 1, 2017:2031 and bear interest at a fixed rate of 8.50% through maturity. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Fiscal Period |
| (In thousands) | | Total | | 2017 | | 2018-2019 | | 2020-2021 | | Beyond 2021 |
Convertible debt, including interest1 | | $ | 1,246,360 |
| | $ | 22,750 |
| | $ | 341,944 |
| | $ | 438,958 |
| | $ | 442,708 |
|
IFC mortgage loan, including interest2 | | 17,526 |
| | 17,526 |
| | — |
| | — |
| | — |
|
CEDA loan, including interest3 | | 66,338 |
| | 2,550 |
| | 5,100 |
| | 5,100 |
| | 53,588 |
|
Other debt, including interest4 | | 680,238 |
| | 71,031 |
| | 77,222 |
| | 70,623 |
| | 461,362 |
|
Future financing commitments5 | | 8,233 |
| | 8,233 |
| | — |
| | — |
| | — |
|
Operating lease commitments6 | | 130,419 |
| | 15,894 |
| | 29,169 |
| | 24,427 |
| | 60,929 |
|
Sale-leaseback financing7 | | 187,627 |
| | 27,987 |
| | 23,848 |
| | 22,079 |
| | 113,713 |
|
Capital lease commitments8 | | 4,510 |
| | 1,032 |
| | 1,509 |
| | 1,192 |
| | 777 |
|
Non-cancellable purchase orders9 | | 209,372 |
| | 209,372 |
| | — |
| | — |
| | — |
|
Purchase commitments under agreements10 | | 1,073,537 |
| | 526,734 |
| | 381,955 |
| | 162,848 |
| | 2,000 |
|
| Deferred purchase consideration in connection with acquisition | | 61,100 |
| | — |
| | 31,100 |
| | 30,000 |
| | — |
|
| Total | | $ | 3,685,260 |
| | $ | 903,109 |
| | $ | 891,847 |
| | $ | 755,227 |
| | $ | 1,135,077 |
|
| |
1
| Convertible debt, including interest, relates to the aggregate of $1,125.0 million in outstanding principal amount of our senior convertible debentures on January 1, 2017. 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.
|
3Other debt, including interest, primarily relates to non-recourse finance projects and solar power systems and leases under our residential lease program as described in "Item 1. Financial Statements—Note 9. Commitments and Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
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2
| IFC mortgage loan, including interest, relates to the $17.5 million outstanding principal amount as of January 1, 2017. Under the loan agreement, we are required to repay the amount borrowed, starting 2 years after the date of borrowing, in 10 equal semiannual installments over the following 5 years. We are required to pay interest of LIBOR plus 3% per annum on outstanding borrowings; a front-end fee of 1% on the principal amount of borrowings at the time of borrowing; and a commitment fee of 0.5% per annum on funds available for borrowing and not borrowed. |
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3
| CEDA loan, including interest, relates to the proceeds of the $30.0 million aggregate principal amount of the Bonds. The Bonds mature on April 1, 2031 and bear interest at a fixed rate of 8.50% through maturity. |
4In connection with purchase and joint venture agreements with non-public companies, we will be required to provide additional financing to such parties of up to $2.9 million, subject to certain conditions.
| |
4
| Other debt, including interest, primarily relates to non-recourse finance projects and solar power systems and leases under our residential lease program as described in "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies." |
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5
| In connection with purchase and joint venture agreements with non-public companies, we will be required to provide additional financing to such parties of up to $8.2 million, subject to certain conditions. |
5Operating lease commitments primarily relate to certain solar power systems leased from unaffiliated third parties over minimum lease terms of up to 20 years as of December 29, 2019, and various facility lease agreements including leases entered into that have not yet commenced.
| |
6
| Operating lease commitments primarily relate to certain solar power systems leased from unaffiliated third parties over minimum lease terms of up to 20 years and various facility lease agreements. |
| |
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.
|
6Finance lease commitments primarily relate to certain buildings, manufacturing and equipment under capital leases in Europe for terms of up to 6 years.
| |
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. |
7Non-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 some of our non-consolidated investees, for polysilicon, ingots, wafers, and Solar Renewable Energy Credits, among others. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 8 years and there are certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that we terminate the arrangements. During fiscal 2016, we did not fulfill all of the purchase commitments we were otherwise obligated to take by December 31, 2016, as specified in related contracts with a supplier. As of January 1, 2017, the Company has recorded an offsetting
|
8Purchase commitments under agreements primarily relate to arrangements entered into with several suppliers, including some of our unconsolidated investees, for polysilicon, ingots, wafers, and module-level power electronics and alternating current cables, among others. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 5 years and there are certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event we terminate these arrangements.
9In connection with the acquisition of AUO SunPower Sdn. Bhd. in 2016, we are required to make noncancellable annual installment payments during 2019 and 2020. The payment due in fiscal 2019 was made on the first day of the fourth quarter of fiscal 2019.
asset, recorded within "Prepaid expenses and other current assets," and liability, recorded within "Accrued liabilities," totaling $83.9 million. This amount represents the unfulfilled amount as of that date as the Company expects to satisfy the obligation via purchases of inventory in fiscal 2017, within the applicable contractual cure period.
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 January 1, 2017,December 29, 2019 and December 30, 2018, total liabilities associated with uncertain tax positions were $47.2$20.1 million and $16.8 million, respectively, and are included inwithin "Other long-term liabilities" in our Consolidated Balance Sheetsconsolidated balance sheets as they are not expected to be paid within the next twelve months.
Off-Balance Sheet Arrangements
As of January 1, 2017,December 29, 2019, we did not have any significant off-balance-sheetoff-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Our exposure to movements in foreign currency exchange rates is primarily related to sales to European customers that are denominated in Euros. Revenue generated from European customers represented 3%10%, 8%7% and 10%5% of our total revenue in fiscal 2016, 20152019, 2018 and 2014,2017, respectively. A 10% change in the Euro exchange rate would have impacted our revenue by approximately $7.6$17.9 million, $12.2$11.5 million and $28.9$10.0 million in fiscal 2016, 20152019, 2018 and 2014,2017, respectively.
In the past,Since we have experienced an adverse impactoperate in many countries, we could experience a volatility on our revenue, gross margin and profitability as a result of foreign currency fluctuations.fluctuations, which could positively or negatively impact the operating results. When foreign currencies appreciate against the U.S. dollar, inventories and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our solar power products more expensive for international customers, thus potentially leading to a reduction in demand, our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies.
We currently conduct hedging activities which involve the use of option andand/or 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 January 1, 2017,December 29, 2019 and December 30, 2018, we had designated outstanding cash flow hedge forward contracts with a notional value of $48.9 million and zero, respectively. As of December 29, 2019 and December 30, 2018, we also had designated outstanding cash flow hedge option currency contracts with a notional value of $142.9 million and zero, respectively. As of December 29, 2019 and December 30, 2018, we had non-designated outstanding forward currency contracts with aggregate notional values of $28.3$17.5 million and $42.9 million, respectively. As of January 3, 2016, we had outstanding hedge option currency contracts and forward currency contracts with aggregate notional values of zero and $35.7$11.4 million, respectively. Because we hedge some of our expected future foreign exchange exposure, if associated revenues do not materialize we could experience a reclassification of ineffective gains or losses into earnings. Such a reclassification could adversely impact our revenue, margins and results of operations. We cannot predict the impact of future exchange rate fluctuations on our business and operating results.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 January 1, 2017December 29, 2019 and January 3, 2016,December 30, 2018, advances to suppliers totaled $284.8$121.4 million and $359.1$171.6 million, respectively. Two suppliersOne supplier accounted for 90%100.0% and 10%99.6% of total advances to suppliers as of January 1, 2017,December 29, 2019 and 82% and 16% as of January 3, 2016.December 30, 2018, respectively.
We enter into foreign currency derivative contracts and convertible debenture hedge transactions with high-quality financial institutions and limit the amount of credit exposure to any single counterparty. The foreign currency derivative contracts are limited to a time period of 12 monthsa month or less. We regularly evaluate the credit standing of our counterparty financial institutions.
Interest Rate Risk
We are exposed to interest rate risk because many of our customers depend on debt financing to purchase our solar power systems. An increase in interest rates could make it difficult for our customers to obtain the financing necessary to purchase our solar power systems on favorable terms, or at all, and thus lower demand for our solar power products, reduce revenue and adversely impact our operating results. An increase in interest rates could lower a customer's return on investment in a system or make alternative investments more attractive relative to solar power systems, which, in each case, could cause our customers to seek alternative investments that promise higher returns or demand higher returns from our solar power systems, reduce gross margin and adversely impact our operating results. This risk is significant to our business because our sales model is highly sensitive to interest rate fluctuations and the availability of credit, and would be adversely affected by increases in interest rates or liquidity constraints.
Our interest expense would increase to the extent interest rates rise in connection with our variable interest rate borrowings. AsDuring the fourth quarter of January 1, 2017, the outstanding principal balancefiscal 2018, we repaid all of our variable interest borrowings was $201.4 million.rate borrowings. We do not believe that an immediate 10% increase in interest rates would have a material effect on our financial statements.statements under potential future borrowings. In addition, lower interest rates would have an adverse impact on our interest income. Our investment portfolio primarily consists of $3.0 million in money market funds as of January 1, 2017 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% increasedecrease 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 Public and Non-Public Companies
Our investments held in joint ventures and other non-public companies expose us to equity price risk. As of January 1, 2017December 29, 2019 and January 3, 2016,December 30, 2018, investments of $(6.9)$26.7 million and $186.4$34.8 million, respectively, are accounted for using the equity method,method. As of December 29, 2019 and $39.4December 30, 2018, investments of $8.5 million and $36.4$8.8 million, respectively, are accounted for using the costmeasurement alternative method.
On August 9, 2018, we completed the sale of certain assets and intellectual property related to the production of microinverters to Enphase in exchange for $25.0 million in cash and 7.5 million shares of Enphase common stock (NASDAQ: ENPH). We received the common stock and a $15.0 million cash payment upon closing, and received the final $10.0 million cash payment of the purchase price on December 10, 2018. The carryingcommon stock was recorded as an equity investment with readily determinable fair value (Level 1), with changes in fair value recognized in net income. For fiscal 2019 and 2018, we recorded mark-to-market gains of our equity method investments as of January 1, 2017 and January 3, 2016 included the negative balance of $60.6$158.3 million and $30.9mark-to-market loss of $6.4 million, respectively, within "other, net" in our consolidated statement of our investment inoperations. During the 8point3 Group (See "Item 8. Financial Statements—Notes to Consolidated Financial Statements—Note 10. Equity Method Investments"). year ended December 29, 2019, we sold 1 million of shares of Enphase common stock for cash proceeds of $20.6 million.
These strategic equity 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
As of December 29, 2019, we held outstanding convertible debentures with an aggregate face value of $825.0 million, comprised of $400.0 million of 0.875% debentures due in 2021 and $425.0 million of 4.00% debentures due in 2023. The aggregate estimated fair value of our outstanding convertible debentures was $719.7 million and $648.9 million as of December 29, 2019 and December 30, 2018, respectively. Estimated fair values are based on quoted market prices as reported by an independent pricing source. 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,When our common stock price is in-the-money relative to these fixed stock price conversion rates, the fair market value of the debentures will generally increase as the market price of our common stock increases, and decrease as theour common stock's market price of our common stock falls.falls, based on each debenture's respective fixed conversion rate. The interest and market value changes affect the fair market value of the debentures, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligations, except to the extent increases in the value of our common stock may provide the holders of our 4.00% debentures due 2023, 0.875% debentures due 2021, or 0.75% debentures due 2018 the right to convert such debentures into stock, or cash, in certain instances.instances, but only applicable during periods when our common stock is in-the-money relative to such conversion rights. As our common stock price is significantly below the conversion price for both debentures and therefore unlikely to be exercised by the holders, a 10% increase or decrease in our common stock will not impact our financial statements. Also refer to Note 18. Subsequent Event for early repayment of the convertible debentures.
We also have interest rate risk relating to our other outstanding debt, besides debentures, all of which bear fixed rates of interest (Refer Note 11. Debt and Credit Sources). The aggregate estimatedinterest and market value changes affect the fair market value of these debts, but do not impact our outstanding convertible debentures was $839.2 million asfinancial position, cash flows or results of January 1, 2017. The aggregate estimatedoperations due to the fixed nature of the debt obligations. A hypothetical 10 basis points increase or decrease on market interest rates related to these debts would have an immaterial impact on the fair market value of our outstanding convertible debentures was $1,253.2 million as of January 3, 2016. Estimated fair values are based on quoted market prices as reported by an independent pricing source. A 10% increase in quoted market prices would increase the estimated fair value of our then-outstanding debentures to $923.1 million and $1,378.5 million as of January 1, 2017 and January 3, 2016, respectively, and a 10% decrease in the quoted market prices would decrease the estimated fair value of our then-outstanding debentures to $755.3 million and $1,127.9 million as of January 1, 2017 and January 3, 2016, respectively.these debts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUNPOWER CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Page |
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| REPORTS OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
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| FINANCIAL STATEMENTS | |
| CONSOLIDATED BALANCE SHEETS | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |
| CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
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Report of Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors and Shareholders of SunPower Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SunPower Corporation (the Company) as of January 1, 2017December 29, 2019 and January 3, 2016, andDecember 30, 2018, the related consolidated statements of operations, comprehensive income (loss), equity (deficit), and cash flows for each of the three years in the period ended JanuaryDecember 29, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2019 and December 30, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 14, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 1 2017. to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SunPower Corporation at January 1, 2017 and January 3, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SunPower Corporation's internal control over financial reporting as of January 1, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
San Jose, California
February 17, 201714, 2020
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors and Shareholders of SunPower Corporation
Opinion on Internal Control over Financial Reporting
We have audited SunPower Corporation’s internal control over financial reporting as of January 1, 2017,December 29, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, SunPower Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 29, 2019 and December 30, 2018, the related consolidated statements of operations, comprehensive income (loss), equity (deficit), and cash flows for each of the three years in the period ended December 29, 2019, and the related notes and our report dated February 14, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SunPower Corporation’s former AUOSP joint venture (now a wholly-owned subsidiary, SunPower Malaysia Manufacturing Sdn. Bhd.), which is included in the January 1, 2017 consolidated financial statements of SunPower Corporation and constituted 7% of the Company's consolidated total assets as of January 1, 2017. Our audit of internal control over financial reporting of SunPower Corporation also did not include an evaluation of the internal control over financial reporting of SunPower Corporation’s former AUOSP joint venture (now a wholly-owned subsidiary, SunPower Malaysia Manufacturing Sdn. Bhd.).
In our opinion, SunPower Corporation maintained, in all material respects, effective internal control over financial reporting as of January 1, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of SunPower Corporation and our report dated February 17, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 17, 201714, 2020
SunPower Corporation
Consolidated Balance Sheets
(In thousands, except share data)par values)
| | | | | | | | | | | |
| | December 29, 2019 | | December 30, 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | | $ | 422,955 | | | $ | 309,407 | |
| Restricted cash and cash equivalents, current portion | 26,348 | | | 41,762 | |
| Restricted short-term marketable securities | | 6,187 | | | — | |
Accounts receivable, net1 | 226,476 | | | 175,605 | |
Contract assets1 | 99,426 | | | 58,994 | |
| Inventories | 358,257 | | | 308,146 | |
| Advances to suppliers, current portion | 107,388 | | | 37,878 | |
| Project assets - plants and land, current portion | 12,650 | | | 10,796 | |
| Prepaid expenses and other current assets | 121,244 | | | 131,183 | |
| Total current assets | 1,380,931 | | | 1,073,771 | |
| | | |
| Restricted cash and cash equivalents, net of current portion | 9,354 | | | 12,594 | |
| Restricted long-term marketable securities | — | | | 5,955 | |
| Property, plant and equipment, net | 323,726 | | | 839,871 | |
| Operating lease right-of-use assets | 51,258 | | | — | |
| Solar power systems leased and to be leased, net | 54,338 | | | 92,557 | |
| Advances to suppliers, net of current portion | 13,993 | | | 133,694 | |
| Long-term financing receivables, net - held for sale | — | | | 19,592 | |
| Other intangible assets, net | 7,466 | | | 12,582 | |
| Other long-term assets | 330,855 | | | 162,033 | |
| Total assets | $ | 2,171,921 | | | $ | 2,352,649 | |
| | | |
| Liabilities and Equity | | | |
| Current liabilities: | | | |
Accounts payable1 | $ | 441,759 | | | $ | 325,550 | |
Accrued liabilities1 | 203,890 | | | 235,252 | |
| Operating lease liabilities, current portion | 9,463 | | | — | |
Contract liabilities, current portion1 | 138,441 | | | 104,130 | |
| Short-term debt | 104,856 | | | 40,074 | |
| Total current liabilities | 898,409 | | | 705,006 | |
| | | |
| Long-term debt | 113,827 | | | 40,528 | |
Convertible debt1 | 820,259 | | | 818,356 | |
| Operating lease liabilities, net of current portion | 46,089 | | | — | |
Contract liabilities, net of current portion1 | 67,538 | | | 99,509 | |
| Other long-term liabilities | 204,300 | | | 839,136 | |
| Total liabilities | 2,150,422 | | | 2,502,535 | |
| Commitments and contingencies (Note 9) | | | | |
| Equity: | | | |
| Preferred stock, $0.001 par value; 10,000 shares authorized; NaN issued and outstanding as of December 29, 2019 and December 30, 2018 | — | | | — | |
|
| | | | | | | |
| | January 1, 2017 | | January 3, 2016 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 425,309 |
| | $ | 954,528 |
|
| Restricted cash and cash equivalents, current portion | 33,657 |
| | 24,488 |
|
Accounts receivable, net1 | 219,638 |
| | 190,448 |
|
Costs and estimated earnings in excess of billings1 | 32,780 |
| | 38,685 |
|
| Inventories | 401,707 |
| | 382,390 |
|
| Advances to suppliers, current portion | 111,479 |
| | 85,012 |
|
Project assets - plants and land, current portion1 | 374,459 |
| | 479,452 |
|
Prepaid expenses and other current assets1 | 315,670 |
| | 359,517 |
|
| Total current assets | 1,914,699 |
| | 2,514,520 |
|
| | | | |
| Restricted cash and cash equivalents, net of current portion | 55,246 |
| | 41,748 |
|
| Restricted long-term marketable securities | 4,971 |
| | 6,475 |
|
| Property, plant and equipment, net | 1,027,066 |
| | 731,230 |
|
| Solar power systems leased and to be leased, net | 621,267 |
| | 531,520 |
|
| Project assets - plants and land, net of current portion | 33,571 |
| | 5,072 |
|
| Advances to suppliers, net of current portion | 173,277 |
| | 274,085 |
|
| Long-term financing receivables, net | 507,333 |
| | 334,791 |
|
| Goodwill and other intangible assets, net | 44,218 |
| | 119,577 |
|
Other long-term assets1 | 185,519 |
| | 297,975 |
|
| Total assets | $ | 4,567,167 |
| | $ | 4,856,993 |
|
| | | | |
| Liabilities and Equity | |
| | |
|
| Current liabilities: | |
| | |
|
Accounts payable1 | $ | 540,295 |
| | $ | 514,654 |
|
Accrued liabilities1 | 391,226 |
| | 313,497 |
|
| Billings in excess of costs and estimated earnings | 77,140 |
| | 115,739 |
|
| Short-term debt | 71,376 |
| | 21,041 |
|
Customer advances, current portion1 | 10,138 |
| | 33,671 |
|
| Total current liabilities | 1,090,175 |
| | 998,602 |
|
| | | | |
| Long-term debt | 451,243 |
| | 478,948 |
|
Convertible debt1 | 1,113,478 |
| | 1,110,960 |
|
Customer advances, net of current portion1 | 298 |
| | 126,183 |
|
Other long-term liabilities1 | 721,032 |
| | 564,557 |
|
| Total liabilities | 3,376,226 |
| | 3,279,250 |
|
| Commitments and contingencies (Note 9) |
|
| | |
| Redeemable noncontrolling interests in subsidiaries | 103,621 |
| | 69,104 |
|
| Equity: | |
| | |
|
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both January 1, 2017 and January 3, 2016 | — |
| | — |
|
| Common stock, $0.001 par value, 367,500,000 shares authorized; 148,079,718 shares issued, and 138,510,325 outstanding as of January 1, 2017; 145,242,705 shares issued, and 136,712,339 outstanding as of January 3, 2016 | 139 |
|
| 137 |
|
| Additional paid-in capital | 2,410,395 |
| | 2,359,917 |
|
| Accumulated deficit | (1,218,681 | ) | | (747,617 | ) |
| Accumulated other comprehensive loss | (7,238 | ) | | (8,023 | ) |
| Treasury stock, at cost; 9,569,393 shares of common stock as of January 1, 2017; 8,530,366 shares of common stock as of January 3, 2016 | (176,783 | ) | | (155,265 | ) |
| Total stockholders' equity | 1,007,832 |
| | 1,449,149 |
|
| Noncontrolling interests in subsidiaries | 79,488 |
| | 59,490 |
|
| Total equity | 1,087,320 |
| | 1,508,639 |
|
| Total liabilities and equity | $ | 4,567,167 |
| | $ | 4,856,993 |
|
| |
1
| The Company has related-party balances for transactions made with Total S.A. and its affiliates as well as unconsolidated entities in which the Company has a direct equity investment. These related-party balances are recorded within the "Accounts Receivable, net," "Costs and estimated earnings in excess of billings," "Project assets - plants and land, current portion," "Prepaid expenses and other current assets," "Other long-term assets," "Accounts payable," "Accrued Liabilities," and "Convertible debt, net of current portion," financial statement line items in the Consolidated Balance Sheets (see Note 2, Note 7, Note 10, Note 11, and Note 12). |
| | | | | | | | | | | |
| | December 29, 2019 | | December 30, 2018 |
| Common stock, $0.001 par value, 367,500 shares authorized; 179,845 shares issued, and 168,121 shares outstanding as of December 29, 2019; 152,085 shares issued, and 141,180 shares outstanding as of December 30, 2018 | 168 | | | 141 | |
| Additional paid-in capital | 2,661,819 | | | 2,463,370 | |
| Accumulated deficit | (2,449,679) | | | (2,480,988) | |
| Accumulated other comprehensive loss | (9,512) | | | (4,150) | |
| Treasury stock, at cost: 11,724 shares of common stock as of December 29, 2019; 10,905 shares of common stock as of December 30, 2018 | (192,633) | | | (187,069) | |
| Total stockholders' equity (deficit) | 10,163 | | | (208,696) | |
| Noncontrolling interests in subsidiaries | 11,336 | | | 58,810 | |
| Total equity (deficit) | 21,499 | | | (149,886) | |
| Total liabilities and equity | $ | 2,171,921 | | | $ | 2,352,649 | |
1We have related-party balances for transactions made with Total S.A. and its affiliates as well as unconsolidated entities in which we have a direct equity investment. These related-party balances are recorded within the "accounts receivable, net," "contract assets," "prepaid expenses and other current assets," "accounts payable," "accrued liabilities," "contract liabilities, current portion," "convertible debt," and "contract liabilities, net of current portion," financial statement line items on our consolidated balance sheets (see Note 2, Note 9, Note 10, and Note 11).
The accompanying notes are an integral part of these consolidated financial statements.
SunPower Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
| | | | | | | | | | | Fiscal Year Ended | |
| | | Fiscal Year | | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Revenue: | | Revenue: | | | | | | |
Solar power systems, components, and other1 | | Solar power systems, components, and other1 | | $ | 1,835,149 | | | $ | 1,453,876 | | | $ | 1,594,941 | |
| Residential leasing | | Residential leasing | | 10,405 | | | 272,209 | | | 199,106 | |
| Solar services | | Solar services | | 18,671 | | | — | | | — | |
| | | January 1, 2017 | | January 3, 2016 | | December 28, 2014 | | 1,864,225 | | | 1,726,085 | | | 1,794,047 | |
| Cost of revenue: | | Cost of revenue: | |
Solar power systems, components, and other1 | | Solar power systems, components, and other1 | | 1,722,871 | | | 1,843,150 | | | 1,678,400 | |
| Residential leasing | | Residential leasing | | 7,345 | | | 180,016 | | | 134,292 | |
| Solar services | | Solar services | | 8,104 | | | — | | | — | |
| | | | | | | | 1,738,320 | | | 2,023,166 | | | 1,812,692 | |
Revenue1 | | | | | | | |
| Solar power systems, components, and other | | $ | 2,294,608 |
| | $ | 1,389,660 |
| | $ | 2,897,305 |
| |
| Residential leasing | | 264,954 |
| | 186,813 |
| | 129,960 |
| |
| | $ | 2,559,562 |
| | $ | 1,576,473 |
| | $ | 3,027,265 |
| |
Cost of revenue1 | | | | | | | |
| Solar power systems, components, and other | | 2,173,364 |
| | 1,192,535 |
| | 2,315,894 |
| |
| Residential leasing | | 196,232 |
| | 139,292 |
| | 86,244 |
| |
| | 2,369,596 |
| | 1,331,827 |
| | 2,402,138 |
| |
| Gross margin | | 189,966 |
| | 244,646 |
| | 625,127 |
| |
| Gross profit (loss) | | Gross profit (loss) | | 125,905 | | | (297,081) | | | (18,645) | |
| Operating expenses: | | | | | | | Operating expenses: | |
Research and development1 | | 116,130 |
| | 99,063 |
| | 73,343 |
| Research and development1 | | 67,515 | | | 81,705 | | | 82,247 | |
Sales, general and administrative1 | | 329,061 |
| | 345,486 |
| | 288,321 |
| |
| Sales, general and administrative | | Sales, general and administrative | | 260,443 | | | 260,111 | | | 278,645 | |
| Restructuring charges | | 207,189 |
| | 6,391 |
| | 12,223 |
| Restructuring charges | | 14,110 | | | 17,497 | | | 21,045 | |
| Loss on sale and impairment of residential lease assets | | Loss on sale and impairment of residential lease assets | | 25,352 | | | 251,984 | | | 624,335 | |
| Gain on business divestitures | | Gain on business divestitures | | (143,400) | | | (59,347) | | | — | |
| Total operating expenses | | 652,380 |
| | 450,940 |
| | 373,887 |
| Total operating expenses | | 224,020 | | | 551,950 | | | 1,006,272 | |
| Operating income (loss) | | (462,414 | ) | | (206,294 | ) | | 251,240 |
| |
| Operating loss | | Operating loss | | (98,115) | | | (849,031) | | | (1,024,917) | |
| Other income (expense), net: | | | | | | | Other income (expense), net: | |
| Interest income | | 2,652 |
| | 2,120 |
| | 2,583 |
| Interest income | | 2,702 | | | 3,057 | | | 2,100 | |
Interest expense1 | | (60,735 | ) | | (43,796 | ) | | (69,658 | ) | Interest expense1 | | (53,353) | | | (108,011) | | | (90,288) | |
Gain on settlement of preexisting relationships in connection with acquisition2 | | 203,252 |
| | — |
| | — |
| |
Loss on equity method investment in connection with acquisition2 | | (90,946 | ) | | — |
| | — |
| |
| Goodwill impairment | | (147,365 | ) | | — |
| | — |
| |
| Other, net | | (9,039 | ) | | 5,659 |
| | 449 |
| Other, net | | 174,734 | | | 55,314 | | | (87,645) | |
| Other expense, net | | (102,181 | ) | | (36,017 | ) | | (66,626 | ) | |
| Income (loss) before income taxes and equity in earnings of unconsolidated investees | | (564,595 | ) | | (242,311 | ) | | 184,614 |
| |
| Provision for income taxes | | (7,319 | ) | | (66,694 | ) | | (8,760 | ) | |
| Equity in earnings of unconsolidated investees | | 28,070 |
| | 9,569 |
| | 7,241 |
| |
| Net income (loss) | | (543,844 | ) | | (299,436 | ) | | 183,095 |
| |
| Other income (expense), net | | Other income (expense), net | | 124,083 | | | (49,640) | | | (175,833) | |
| Income (loss) before income taxes and equity in losses of unconsolidated investees | | Income (loss) before income taxes and equity in losses of unconsolidated investees | | 25,968 | | | (898,671) | | | (1,200,750) | |
| (Provision) benefit for income taxes | | (Provision) benefit for income taxes | | (26,631) | | | (1,010) | | | 3,944 | |
| Equity in earnings (losses) of unconsolidated investees | | Equity in earnings (losses) of unconsolidated investees | | (7,058) | | | (17,815) | | | 25,938 | |
| Net loss | | Net loss | | (7,721) | | | (917,496) | | | (1,170,868) | |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | 72,780 |
| | 112,417 |
| | 62,799 |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | 29,880 | | | 106,405 | | | 241,747 | |
| Net income (loss) attributable to stockholders | | $ | (471,064 | ) | | $ | (187,019 | ) | | $ | 245,894 |
| Net income (loss) attributable to stockholders | | $ | 22,159 | | | $ | (811,091) | | | $ | (929,121) | |
| | | | | | | | |
| Net income (loss) per share attributable to stockholders: | | | | | | | Net income (loss) per share attributable to stockholders: | | | | | | |
| Basic | | $ | (3.41 | ) | | $ | (1.39 | ) | | $ | 1.91 |
| Basic | | $ | 0.15 | | | $ | (5.76) | | | $ | (6.67) | |
| Diluted | | $ | (3.41 | ) | | $ | (1.39 | ) | | $ | 1.55 |
| Diluted | | $ | 0.15 | | | $ | (5.76) | | | $ | (6.67) | |
| Weighted-average shares: | | | | | | | Weighted-average shares: | |
| Basic | | 137,985 |
| | 134,884 |
| | 128,635 |
| Basic | | 144,796 | | | 140,825 | | | 139,370 | |
| Diluted | | 137,985 |
| | 134,884 |
| | 162,751 |
| Diluted | | 147,525 | | | 140,825 | | | 139,370 | |
