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Table of Contents


 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-34166


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

_________________________________________

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

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

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

The total number of outstanding shares of the registrant’s common stock as of August 5, 2016 was 138,150,656.

 
 
 
 
 
d


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

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SunPower Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
July 3, 2016
 
January 3, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
590,091

 
$
954,528

Restricted cash and cash equivalents, current portion
23,091

 
24,488

Accounts receivable, net1
211,753

 
190,448

Costs and estimated earnings in excess of billings1
32,677

 
38,685

Inventories
467,914

 
382,390

Advances to suppliers, current portion
72,061

 
85,012

Project assets - plants and land, current portion1
904,429

 
479,452

Prepaid expenses and other current assets1
306,616

 
359,517

Total current assets
2,608,632

 
2,514,520

 
 
 
 
Restricted cash and cash equivalents, net of current portion
45,891

 
41,748

Restricted long-term marketable securities
6,362

 
6,475

Property, plant and equipment, net
818,711

 
731,230

Solar power systems leased and to be leased, net
594,266

 
531,520

Project assets - plants and land, net of current portion
26,282

 
5,072

Advances to suppliers, net of current portion
246,468

 
274,085

Long-term financing receivables, net
429,910

 
334,791

Goodwill and other intangible assets, net
107,547

 
119,577

Other long-term assets1
317,095

 
297,975

Total assets
$
5,201,164

 
$
4,856,993

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable1
$
518,598

 
$
514,654

Accrued liabilities1
373,874

 
313,497

Billings in excess of costs and estimated earnings
92,295

 
115,739

Short-term debt
350,764

 
21,041

Customer advances, current portion1
41,544

 
33,671

Total current liabilities
1,377,075

 
998,602

 
 
 
 
Long-term debt
578,231

 
478,948

Convertible debt1
1,112,127

 
1,110,960

Customer advances, net of current portion1
112,663

 
126,183

Other long-term liabilities1
578,917

 
564,557

Total liabilities
3,759,013

 
3,279,250

Commitments and contingencies (Note 8)


 


Redeemable noncontrolling interests in subsidiaries
90,551

 
69,104

Equity:
 

 
 

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

 
—

Common stock, $0.001 par value, 367,500,000 shares authorized; 147,509,133 shares issued, and 138,134,648 outstanding as of July 3, 2016; 145,242,705 shares issued, and 136,712,339 outstanding as of January 3, 2016
138


137

Additional paid-in capital
2,391,912

 
2,359,917

Accumulated deficit
(903,018
)
 
(747,617
)
Accumulated other comprehensive loss
(12,601
)
 
(8,023
)
Treasury stock, at cost; 9,374,485 shares of common stock as of July 3, 2016; 8,530,366 shares of common stock as of January 3, 2016
(174,937
)
 
(155,265
)
Total stockholders' equity
1,301,494

 
1,449,149

Noncontrolling interests in subsidiaries
50,106

 
59,490

Total equity
1,351,600

 
1,508,639

Total liabilities and equity
$
5,201,164

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

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

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SunPower Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
July 3, 2016

June 28, 2015
 
July 3, 2016
 
June 28, 2015

 
 
 
 
 
 
 
 
Revenue1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
$
356,011

 
$
330,552

 
$
684,711

 
$
731,765

Residential leasing
 
64,441

 
50,468

 
120,616

 
90,126


 
$
420,452

 
$
381,020

 
$
805,327

 
$
821,891

Cost of revenue1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
331,194

 
274,148

 
621,435

 
593,796

Residential leasing
 
47,964

 
35,991

 
91,061

 
66,396


 
379,158

 
310,139

 
712,496

 
660,192

Gross margin
 
41,294

 
70,881

 
92,831

 
161,699

Operating expenses:
 
 
 
 
 
 
 
 
Research and development1
 
31,411

 
20,560

 
64,117

 
41,728

Sales, general and administrative1
 
84,683

 
81,520

 
182,474

 
158,734

Restructuring charges
 
117

 
1,749

 
213

 
5,330

Total operating expenses
 
116,211

 
103,829

 
246,804

 
205,792

Operating loss
 
(74,917
)
 
(32,948
)
 
(153,973
)
 
(44,093
)
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
806

 
494

 
1,503

 
1,050

Interest expense1
 
(13,950
)
 
(8,517
)
 
(26,831
)
 
(24,198
)
Other, net
 
(5,822
)
 
14,982

 
(12,054
)
 
12,362

Other income (expense), net
 
(18,966
)
 
6,959

 
(37,382
)
 
(10,786
)
Loss before income taxes and equity in earnings of unconsolidated investees
 
(93,883
)
 
(25,989
)
 
(191,355
)
 
(54,879
)
Benefit from (provision for) income taxes
 
(6,648
)
 
659

 
(9,829
)
 
(1,692
)
Equity in earnings of unconsolidated investees
 
8,350

 
1,864

 
7,586

 
4,055

Net loss
 
(92,181
)
 
(23,466
)
 
(193,598
)
 
(52,516
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
22,189

 
29,975

 
38,197

 
49,444

Net income (loss) attributable to stockholders
 
$
(69,992
)
 
$
6,509

 
$
(155,401
)
 
$
(3,072
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.51
)
 
$
0.05

 
$
(1.13
)
 
$
(0.02
)
Diluted
 
$
(0.51
)
 
$
0.04

 
$
(1.13
)
 
$
(0.02
)
Weighted-average shares:
 
 
 
 
 
 
 
 
Basic
 
138,084

 
134,376

 
137,644

 
133,205

Diluted
 
138,084

 
156,995

 
137,644

 
133,205

1 
The Company has related-party transactions with Total S.A. and its affiliates as well as unconsolidated entities in which the Company has a direct equity investment. These related-party transactions are recorded within "Revenue: Solar power systems and components," "Cost of revenue: Solar power systems and components," "Operating expenses: Research and development," "Operating expenses: Sales, general and administrative," and "Other income (expense), net: Interest expense" financial statement line items in the Consolidated Statements of Operations (see Note 2 and Note 9).

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

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

 
 
Three Months Ended
 
Six Months Ended
 
 
July 3, 2016
 
June 28, 2015
 
July 3, 2016
 
June 28, 2015
Net loss
 
$
(92,181
)
 
$
(23,466
)
 
$
(193,598
)
 
$
(52,516
)
Components of comprehensive loss:
 
 
 
 
 
 
 
 
Translation adjustment
 
138

 
242

 
1,557

 
(1,761
)
Net change in derivatives (Note 11)
 
(136
)
 
4,996

 
(6,881
)
 
808

Income taxes
 
(4
)
 
346

 
746

 
457

Net change in accumulated other comprehensive income (loss)
 
(2
)
 
5,584

 
(4,578
)
 
(496
)
Total comprehensive loss
 
(92,183
)
 
(17,882
)
 
(198,176
)
 
(53,012
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
22,189

 
29,975

 
38,197

 
49,444

Comprehensive income (loss) attributable to stockholders
 
$
(69,994
)
 
$
12,093

 
$
(159,979
)
 
$
(3,568
)

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


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

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

 
136,711

 
$
137

 
$
2,359,917

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

 
$
59,490

 
$
1,508,639

Net loss
 
(35,497
)
 
—

 
—

 
—

 
—

 
—

 
(155,401
)
 
(155,401
)
 
(2,700
)
 
(158,101
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(4,578
)
 
—

 
(4,578
)
 
—

 
(4,578
)
Issuance of restricted stock to employees, net of cancellations
 
—

 
2,266

 
2

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Stock-based compensation expense
 
—

 
—

 
—

 
31,995

 
—

 
—

 
—

 
31,995

 
—

 
31,995

Contributions from noncontrolling interests
 
59,366

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,201
)
 
(2,201
)
Distributions to noncontrolling interests
 
(2,422
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,483
)
 
(4,483
)
Purchases of treasury stock
 
—

 
(845
)
 
(1
)
 
—

 
(19,672
)
 
—

 
—

 
(19,673
)
 
—

 
(19,673
)
Balances at July 3, 2016
 
$
90,551

 
138,132

 
$
138

 
$
2,391,912

 
$
(174,937
)
 
$
(12,601
)
 
$
(903,018
)
 
$
1,301,494

 
$
50,106

 
$
1,351,600


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

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SunPower Corporation
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
Six Months Ended
 
 
July 3, 2016
 
June 28, 2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(193,598
)
 
$
(52,516
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
83,015

 
60,005

Stock-based compensation
 
32,995

 
27,586

Non-cash interest expense
 
655

 
5,251

Equity in earnings of unconsolidated investees
 
(7,586
)
 
(4,055
)
Excess tax benefit from stock-based compensation
 
—

 
(6,727
)
Deferred income taxes
 
849

 
(367
)
Gain on sale of residential lease portfolio to 8point3 Energy Partners LP
 
—

 
(27,915
)
Other, net
 
1,799

 
1,377

Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
 
Accounts receivable
 
(23,295
)
 
65,202

Costs and estimated earnings in excess of billings
 
6,301

 
138,638

Inventories
 
(115,047
)
 
(130,726
)
Project assets
 
(433,383
)
 
(311,774
)
Prepaid expenses and other assets
 
48,709

 
29,425

Long-term financing receivables, net
 
(95,119
)
 
(69,258
)
Advances to suppliers
 
40,569

 
25,094

Accounts payable and other accrued liabilities
 
12,077

 
(71,529
)
Billings in excess of costs and estimated earnings
 
(23,049
)
 
9,330

Customer advances
 
(5,884
)
 
(12,482
)
Net cash used in operating activities
 
(669,992
)
 
(325,441
)
Cash flows from investing activities:
 
 
 
 
Increase in restricted cash and cash equivalents
 
(2,747
)
 
(28,407
)
Purchases of property, plant and equipment
 
(93,324
)
 
(68,778
)
Cash paid for solar power systems, leased and to be leased
 
(46,156
)
 
(41,832
)
Cash paid for solar power systems
 
(2,282
)
 
(10,007
)
Proceeds from (payments to) 8point3 Energy Partners LP
 
(9,838
)
 
341,174

Cash paid for investments in unconsolidated investees
 
(10,309
)
 
(7,092
)
Cash paid for intangibles
 
—

 
(526
)
Net cash used in investing activities
 
(164,656
)
 
184,532

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

 
(324,273
)
Proceeds from settlement of 4.50% Bond Hedge
 
—

 
74,628

Payments to settle 4.50% Warrants
 
—

 
(574
)
Repayment of bank loans and other debt
 
(7,887
)
 
(15,819
)
Proceeds from issuance of non-recourse residential financing, net of issuance costs
 
53,228

 
54,830

Repayment of non-recourse residential financing
 
(2,166
)
 
(40,802
)
Contributions from noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
57,165

 
91,936

Distributions to noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
(6,905
)
 
(4,567
)
Proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs
 
433,492

 
207,710

Repayment of non-recourse power plant and commercial financing
 
(37,352
)
 
(226,578
)
Proceeds from 8point3 Energy Partners LP attributable to operating leases and unguaranteed sales-type lease residual values
 
—

 
29,300

Proceeds from exercise of stock options
 
—

 
178

Excess tax benefit from stock-based compensation
 
—

 
6,727

Purchases of stock for tax withholding obligations on vested restricted stock
 
(19,671
)
 
(40,326
)
Net cash provided by (used in) financing activities
 
469,904

 
(187,630
)
Effect of exchange rate changes on cash and cash equivalents
 
307

 
(4,593
)
Net decrease in cash and cash equivalents
 
(364,437
)
 
(333,132
)
Cash and cash equivalents, beginning of period
 
954,528

 
956,175

Cash and cash equivalents, end of period
 
$
590,091

 
$
623,043

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Assignment of residential lease receivables to third parties
 
$
2,476

 
$
1,689

Costs of solar power systems, leased and to be leased, sourced from existing inventory
 
$
29,891

 
$
30,428

Costs of solar power systems, leased and to be leased, funded by liabilities
 
$
6,282

 
$
3,971

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

 
$
6,076

Property, plant and equipment acquisitions funded by liabilities
 
$
73,247

 
$
37,017

Net reclassification of cash proceeds offset by project assets in connection with the deconsolidation of assets sold to the 8point3 Group
 
$
8,726

 
$
—

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

 
$
—

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

 
$
68,273


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

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Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Basis of Presentation and Preparation
    
Principles of Consolidation

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

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the Company's consolidated financial statements and the accompanying notes. Such reclassifications had no effect on previously reported results of operations or accumulated deficit.

Fiscal Years

The Company has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. The current fiscal year, fiscal 2016, is a 52-week fiscal year, while fiscal year 2015 was a 53-week fiscal year and had a 14-week fourth fiscal quarter. The second quarter of fiscal 2016 ended on July 3, 2016, while the second quarter of fiscal 2015 ended on June 28, 2015. The second quarters of fiscal 2016 and fiscal 2015 were both 13-week quarters.

Management Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates in these consolidated financial statements

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include percentage-of-completion for construction projects; allowances for doubtful accounts receivable and sales returns; inventory and project asset write-downs; stock-based compensation; estimates for future cash flows and economic useful lives of property, plant and equipment, goodwill, valuations for business combinations, other intangible assets, investments, and other long-term assets; the fair value and residual value of solar power systems; fair value of financial instruments; valuation of contingencies and certain accrued liabilities such as accrued warranty; and income taxes and tax valuation allowances and indemnities. Actual results could materially differ from those estimates.

Summary of Significant Accounting Policies

Long-Lived Assets

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

Project Assets - Plant and Land

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

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

Inventories

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

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The Company evaluates the terms of its long-term inventory purchase agreements with suppliers, including joint ventures, for the procurement of polysilicon, ingots, wafers, and solar cells and establishes accruals for estimated losses on adverse purchase commitments as necessary, such as lower of cost or market value adjustments, forfeiture of advanced deposits and liquidated damages. Obligations related to non-cancellable purchase orders for inventories match current and forecasted sales orders that will consume these ordered materials and actual consumption of these ordered materials are compared to expected demand regularly. The Company anticipates total obligations related to long-term supply agreements for inventories will be realized because quantities are less than management's expected demand for its solar power products. Other market conditions that could affect the realizable value of the Company's inventories and are periodically evaluated by management include historical inventory turnover ratio, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, the current market price of polysilicon as compared to the price in the Company's fixed-price arrangements, and product merchantability, among other factors. If, based on assumptions about expected demand and market conditions, the Company determines that the cost of inventories exceeds its net realizable value or inventory is excess or obsolete, the Company records 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 more favorable, the Company may have higher gross margin when products that have been previously written down are sold in the normal course of business.

Recent Accounting Pronouncements

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

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

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

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

In July 2015, the FASB issued an update to the standards to simplify the measurement of inventory.  The updated standard more closely aligns the measurement of inventory with that of International Financial Reporting Standards (“IFRS”) and amends the measurement standard from lower of cost or market to lower of cost or net realizable value.  The new guidance is effective for the Company no later than the first quarter of fiscal 2017 and requires a prospective approach to adoption.  The Company elected early adoption of the updated accounting standard, effective in the second quarter of fiscal 2016. The adoption of this updated accounting standard did not result in a significant impact to the Company’s consolidated financial statements.

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

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quarter of fiscal 2015, and measured its defined benefit plan assets and obligations as of December 31, 2015, the calendar month-end closest to the Company’s fiscal year-end. The adoption of this updated accounting standard did not have a significant impact to the Company’s consolidated financial statements.

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

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

In May 2014, the FASB issued a new revenue recognition standard based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  The FASB has issued several updates to the standard which i) clarify the application of the principal versus agent guidance; ii) clarify the guidance relating to performance obligations and licensing; and iii) clarify assessment of the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transaction. The new revenue recognition standard, amended by the updates, becomes effective for the Company in the first quarter of fiscal 2018 and is to be applied retrospectively using one of two prescribed methods. Early adoption is permitted. The Company is evaluating the available methods and the potential impact of this standard on its consolidated financial statements and disclosures.

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

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

In June 2011, Total completed a cash tender offer to acquire 60% of the Company's then outstanding shares of common stock at a price of $23.25 per share, for a total cost of approximately $1.4 billion. In December 2011, the Company entered into a Private Placement Agreement with Total, under which Total purchased, and the Company issued and sold, 18.6 million shares of the Company's common stock for a purchase price of $8.80 per share, thereby increasing Total's ownership to approximately 66% of the Company's outstanding common stock as of that date. As of July 3, 2016, through the increase of the Company's total outstanding common stock due to the exercise of warrants and issuance of restricted and performance stock units, Total's ownership of the Company's outstanding common stock has decreased to approximately 57%.

Amended and Restated Credit Support Agreement

In June 2016, the Company and Total S.A. entered into an Amended and Restated Credit Support Agreement (the "Credit Support Agreement") which amended and restated the Credit Support Agreement dated April 28, 2011 by and between the Company and Total S.A., as amended. Under the Credit Support Agreement, Total S.A. agreed to enter into one or more guarantee agreements (each a "Guaranty") with banks providing letter of credit facilities to the Company. At any time until December 31, 2018, Total S.A. will, at the Company's request, guarantee the payment to the applicable issuing bank of the Company's obligation to reimburse a draw on a letter of credit and pay interest thereon in accordance with the letter of credit facility between such bank and the Company. Such letters of credit must be issued no later than December 31, 2018 and expire no later than March 31, 2020. Total is required to issue and enter into the Guaranty requested by the Company, subject to certain terms and conditions. In addition, Total will not be required to enter into the Guaranty if, after giving effect to the Company’s request for a Guaranty, the sum of (a) the aggregate amount available to be drawn under all guaranteed letter of credit facilities, (b) the amount of letters of credit available to be issued under any guaranteed facility, and (c) the aggregate amount of draws (including accrued but unpaid interest) on any letters of credit issued under any guaranteed facility that have not yet been reimbursed by the Company, would exceed $500 million in the aggregate. Such maximum amounts of credit support available to the Company can be reduced upon the occurrence of specified events.

In consideration for the commitments of Total S.A. pursuant to the Credit Support Agreement, the Company is required to pay Total S.A. a guaranty fee for each letter of credit that is the subject of a Guaranty under the Credit Support Agreement and was outstanding for all or part of the preceding calendar quarter. The Credit Support Agreement will terminate following

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December 31, 2018, after the later of the satisfaction of all obligations thereunder and the termination or expiration of each Guaranty provided thereunder.

Affiliation Agreement

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

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

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

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

Research & Collaboration Agreement

Total and the Company have entered into a Research & Collaboration Agreement (the "R&D Agreement") that establishes a framework under which the parties engage in long-term research and development collaboration ("R&D Collaboration"). The R&D Collaboration encompasses a number of different projects, with a focus on advancing the Company's technology position in the crystalline silicon domain, as well as ensuring the Company's industrial competitiveness. The R&D Agreement enables a joint committee to identify, plan and manage the R&D Collaboration.

Upfront Warrant

In February 2012, the Company issued a warrant (the "Upfront Warrant") to Total S.A. to purchase 9,531,677 shares of the Company's common stock with an exercise price of $7.8685, subject to adjustment for customary anti-dilution and other events. The Upfront Warrant, which is governed by the Private Placement Agreement and a Compensation and Funding Agreement, is exercisable at any time for seven years after its issuance, provided that, so long as at least $25.0 million in aggregate of the Company's convertible debt remains outstanding, such exercise will not cause "any person," including Total S.A., to, directly or indirectly, including through one or more wholly-owned subsidiaries, become the "beneficial owner" (as such terms are defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended), of more than 74.99% of the voting power of the Company's common stock at such time, a circumstance which would trigger the repurchase or conversion of the Company's existing convertible debt.

0.75% Debentures Due 2018

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

0.875% Debentures Due 2021


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

4.00% Debentures Due 2023

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

Joint Projects with Total and its Affiliates:

The Company enters into various EPC and O&M agreements relating to solar projects, including EPC and O&M services agreements relating to projects owned or partially owned by Total and its affiliates. As of July 3, 2016, the Company had $13.3 million of "Costs and estimated earnings in excess of billings" and $1.4 million of "Accounts receivable, net" on its Consolidated Balance Sheets related to projects in which Total and its affiliates have a direct or indirect material interest.

Related-Party Transactions with Total and its Affiliates:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
July 3, 2016
 
June 28, 2015
 
July 3, 2016
 
June 28, 2015
Revenue:
 
 
 
 
 
 
 
 
EPC, O&M, and components revenue under joint projects
 
$
20,613

 
$
2,208

 
$
61,529

 
$
2,963

Research and development expense:
 
 
 
 
 
 
 
 
Offsetting contributions received under the R&D Agreement
 
$
(421
)
 
$
(395
)
 
$
(421
)
 
$
(817
)
Interest expense:
 
 
 
 
 
 
 
 
Guarantee fees incurred under the Credit Support Agreement
 
$
1,622

 
$
2,272

 
$
3,268

 
$
4,998

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

 
$
375

 
$
750

 
$
750

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

 
$
547

 
$
1,094

 
$
1,094

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

 
n/a

 
$
2,000

 
n/a


Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the changes in the carrying amount of goodwill under the Company's reportable business segments:
(In thousands)
 
Residential
 
Commercial
 
Power Plant
 
Total
As of January 3, 2016
 
$
32,180

 
$
10,314

 
$
15,641

 
$
58,135

Adjustments to goodwill
 
—

 
(570
)
 
—

 
(570
)
As of July 3, 2016
 
$
32,180

 
$
9,744

 
$
15,641

 
$
57,565


Other Intangible Assets


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The following tables present details of the Company's acquired other intangible assets:
(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of July 3, 2016
 
 
 
 
 
 
Patents and purchased technology
 
$
48,619

 
$
(10,645
)
 
$
37,974

Project pipeline assets
 
9,446

 
(902
)
 
8,544

Purchased in-process research and development
 
3,700

 
(236
)
 
3,464

Other
 
500

 
(500
)
 
—

 
 
$
62,265

 
$
(12,283
)
 
$
49,982

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

 
$
(5,328
)
 
$
48,171

Project pipeline assets
 
9,446

 
—

 
9,446

Purchased in-process research and development
 
3,700

 
—

 
3,700

Other
 
500

 
(375
)
 
125

 
 
$
67,145

 
$
(5,703
)
 
$
61,442


During the three and six months ended July 3, 2016, aggregate amortization expense for intangible assets totaled $3.2 million and $11.5 million, respectively. During the three and six months ended June 28, 2015, aggregate amortization expense for intangible assets totaled $0.6 million and $1.1 million, respectively.

As of July 3, 2016, the estimated future amortization expense related to intangible assets with finite useful lives is as follows:
(In thousands)
 
Amount
Fiscal Year
 
 
2016 (remaining six months)
 
$
9,676

2017
 
11,854

2018
 
12,014

2019
 
8,902

2020
 
6,317

 
 
$
48,763


Note 4. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross1,2
 
$
232,688

 
$
207,860

Less: allowance for doubtful accounts
 
(19,274
)
 
(15,505
)
Less: allowance for sales returns
 
(1,661
)
 
(1,907
)
 
 
$
211,753

 
$
190,448

1 
Includes short-term financing receivables associated with solar power systems leased of $16.3 million and $12.5 million as of July 3, 2016 and January 3, 2016, respectively (see Note 5).

2 
Includes short-term retainage of $14.5 million and $11.8 million as of July 3, 2016 and January 3, 2016, respectively. Retainage refers to the earned, but unbilled, portion of a construction and development project for which payment is deferred by the customer until certain contractual milestones are met.


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As of
(In thousands)

July 3, 2016

January 3, 2016
Inventories:




Raw materials

$
164,244


$
124,297

Work-in-process

139,022


131,258

Finished goods

164,648


126,835

 

$
467,914


$
382,390


 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Prepaid expenses and other current assets:
 
 
 
 
Deferred project costs
 
$
78,149

 
$
67,479

VAT receivables, current portion
 
10,574

 
14,697

Deferred costs for solar power systems to be leased
 
38,522

 
40,988

Derivative financial instruments
 
5,172

 
8,734

Prepaid inventory
 
—

 
50,615

Other receivables
 
69,862

 
78,824

Prepaid taxes
 
70,116

 
71,529

Other prepaid expenses
 
34,141

 
26,651

Other current assets
 
80

 
—

 
 
$
306,616

 
$
359,517


 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
926,263

 
$
479,108

Project assets — land
 
4,448

 
5,416

 
 
$
930,711

 
$
484,524

Project assets - plants and land, current portion
 
$
904,429

 
$
479,452

Project assets - plants and land, net of current portion
 
$
26,282

 
$
5,072


 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Property, plant and equipment, net:
 
 
 
 
Manufacturing equipment1
 
$
665,567

 
$
556,963

Land and buildings
 
32,134

 
32,090

Leasehold improvements
 
394,447

 
244,098

Solar power systems2
 
151,735

 
141,075

Computer equipment
 
115,443

 
103,443

Furniture and fixtures
 
11,414

 
10,640

Construction-in-process
 
90,963

 
247,511

 
 
1,461,703

 
1,335,820

Less: accumulated depreciation
 
(642,992
)
 
(604,590
)
 
 
$
818,711

 
$
731,230

1 
The Company's mortgage loan agreement with International Finance Corporation ("IFC") is collateralized by certain manufacturing equipment with a net book value of $70.1 million and $85.1 million as of July 3, 2016 and January 3, 2016, respectively.


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2 
Includes $120.1 million and $110.4 million of solar power systems associated with sale-leaseback transactions under the financing method as of July 3, 2016 and January 3, 2016, respectively, which are depreciated using the straight-line method to their estimated residual values over the lease terms of up to 20 years (see Note 5).
 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Property, plant and equipment, net by geography1:
 
 
 
 
Philippines
 
$
516,961

 
$
460,420

United States
 
219,312

 
201,419

Mexico
 
58,783

 
44,164

Europe
 
22,588

 
22,962

Other
 
1,067

 
2,265

 
 
$
818,711

 
$
731,230

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

 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Other long-term assets:
 
 
 
 
Equity method investments
 
$
186,172

 
$
186,405

Cost method investments
 
48,485

 
36,369

Other
 
82,438

 
75,201

 
 
$
317,095

 
$
297,975



 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Accrued liabilities:
 
 
 
 
Employee compensation and employee benefits
 
$
57,974

 
$
59,476

Deferred revenue
 
25,389

 
19,887

Short-term residential lease financing
 
19,783

 
7,395

Interest payable
 
15,318

 
8,165

Short-term warranty reserves
 
7,522

 
16,639

Restructuring reserve
 
1,065

 
1,823

VAT payables
 
6,243

 
4,225

Derivative financial instruments
 
10,522

 
2,316

Inventory payable
 
—

 
50,615

Liability due to 8point3 Energy Partners
 
—

 
9,952

Proceeds from 8point3 Energy Partners attributable to pre-COD projects
 
11,239

 
—

Contributions from noncontrolling interests attributable to pre-COD projects
 
52,494

 
—

Taxes payable
 
38,370

 
36,824

Other
 
127,955

 
96,180

 
 
$
373,874

 
$
313,497



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

Deferred revenue
 
$
179,321

 
$
179,779

Long-term warranty reserves
 
157,262

 
147,488

Long-term sale-leaseback financing
 
138,871

 
125,286

Long-term residential lease financing with 8point3 Energy Partners
 
29,407

 
29,389

Unrecognized tax benefits
 
44,131

 
43,297

Long-term pension liability
 
13,703

 
12,014

Derivative financial instruments
 
1,962

 
1,033

Other
 
14,260

 
26,271

 
 
$
578,917

 
$
564,557


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

Cumulative translation adjustment
 
$
(9,607
)
 
$
(11,164
)
Net unrealized gain (loss) on derivatives
 
(939
)
 
5,942

Net loss on long-term pension liability adjustment
 
(2,055
)
 
(2,055
)
Deferred taxes
 
—

 
(746
)
 
 
$
(12,601
)
 
$
(8,023
)

Note 5. LEASING

Residential Lease Program

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

Operating Leases

The following table summarizes "Solar power systems leased and to be leased, net" under operating leases on the Company's Consolidated Balance Sheets as of July 3, 2016 and January 3, 2016:
 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Solar power systems leased and to be leased, net1,2:
 
 
 
 
Solar power systems leased
 
$
619,311

 
$
543,358

Solar power systems to be leased
 
32,936

 
34,319

 
 
652,247

 
577,677

Less: accumulated depreciation
 
(57,981
)
 
(46,157
)
 
 
$
594,266

 
$
531,520

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

2 
As of July 3, 2016 and January 3, 2016, the Company had pledged solar assets with an aggregate book value of $95.3 million and zero, respectively, to third-party investors as security for the Company's contractual obligations.

The following table presents the Company's minimum future rental receipts on operating leases placed in service as of July 3, 2016:

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(In thousands)
 
Fiscal 2016 (remaining six months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Minimum future rentals on operating leases placed in service1
 
$
9,508

 
20,425

 
20,465

 
20,505

 
20,546

 
292,630

 
$
384,079

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

Sales-Type Leases

As of July 3, 2016 and January 3, 2016, the Company's net investment in sales-type leases presented in "Accounts receivable, net" and "Long-term financing receivables, net" on the Company's Consolidated Balance Sheets was as follows:
 
 
As of
(In thousands)
 
July 3, 2016
 
January 3, 2016
Financing receivables1:
 
 
 
 
Minimum lease payments receivable2
 
$
474,023

 
$
366,759

Unguaranteed residual value
 
61,516

 
50,722

Unearned income
 
(89,362
)
 
(70,155
)
Net financing receivables
 
$
446,177

 
$
347,326

Current
 
$
16,267

 
$
12,535

Long-term
 
$
429,910

 
$
334,791

1 
As of July 3, 2016 and January 3, 2016, the Company had pledged financing receivables of $99.2 million and zero, respectively, to third-party investors as security for the Company's contractual obligations.

2 
Net of allowance for doubtful accounts.


As of July 3, 2016, future maturities of net financing receivables for sales-type leases are as follows:
(In thousands)
 
Fiscal 2016 (remaining six months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Scheduled maturities of minimum lease payments receivable1
 
$
11,956

 
23,599

 
23,794

 
23,997

 
24,205

 
366,472

 
$
474,023

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

Sale-Leaseback Arrangements

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

The Company has classified its sale-leaseback arrangements of solar power systems not involving integral equipment as operating leases. The deferred profit on the sale of these systems is recognized over the term of the lease. As of July 3, 2016, future minimum lease obligations associated with these systems were $82.2 million, which will be recognized over the minimum lease terms. Future minimum payments to be received from customers under PPAs associated with the solar power systems under sale-leaseback arrangements classified as operating leases will be recognized over the lease terms of up to 20 years and are contingent upon the amounts of energy produced by the solar power systems.

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The Company enters into certain sale-leaseback arrangements under which the systems subject to the sale-leaseback arrangements have been determined to be integral equipment as defined under the accounting guidance for such transactions. The Company has continuing involvement with the solar power systems throughout the lease due to purchase option rights in the arrangements. As a result of such continuing involvement, the Company accounts for each of these transactions as a financing. Under the financing method, the proceeds received from the sale of the solar power systems are recorded by the Company as financing liabilities. The financing liabilities are subsequently reduced by the Company's payments to lease back the solar power systems, less interest expense calculated based on the Company's incremental borrowing rate adjusted to the rate required to prevent negative amortization. The solar power systems under the sale-leaseback arrangements remain on the Company's balance sheet and are classified within "Property, plant and equipment, net" (see Note 4). As of July 3, 2016, future minimum lease obligations for the sale-leaseback arrangements accounted for under the financing method were $116.7 million, which will be recognized over the lease terms of up to 25 years. During both the three and six months ended July 3, 2016, the Company had net financing proceeds of $15.7 million, in connection with these sale-leaseback arrangements. During the three and six months ended June 28, 2015 the Company had net financing proceeds of $14.3 million and $15.0 million, respectively, in connection with these sale-leaseback arrangements. As of July 3, 2016 and January 3, 2016 the carrying amount of the sale-leaseback financing liabilities, presented in "Other long-term liabilities" on the Company's Consolidated Balance Sheets, was $138.9 million and $125.3 million, respectively (see Note 4).

Note 6. FAIR VALUE MEASUREMENTS

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during any presented period. The Company did not have any assets or liabilities measured at fair value on a recurring basis requiring Level 3 inputs as of July 3, 2016 or January 3, 2016.


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The following table summarizes the Company's assets and liabilities measured and recorded at fair value on a recurring basis as of July 3, 2016 and January 3, 2016:
 
 
July 3, 2016
 
January 3, 2016
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
112,624

 
$
112,624

 
$
—

 
$
540,000

 
$
540,000

 
$
—

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
5,172

 
—

 
5,172

 
8,734

 
—

 
8,734

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
474

 
—

 
474

 
—

 
—

 
—

Total assets
 
$
118,270

 
$
112,624

 
$
5,646

 
$
548,734

 
$
540,000


$
8,734

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
10,522

 
—

 
10,522

 
2,316

 
—

 
2,316

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
 
1,962

 
—

 
1,962

 
1,033

 
—

 
1,033

Total liabilities
 
$
12,484

 
$
—

 
$
12,484

 
$
3,349

 
$
—

 
$
3,349

1 
The Company's cash equivalents consist of money market fund instruments and commercial paper that are classified as available-for-sale and are highly liquid investments with original maturities of 90 days or less. The Company's money market fund instruments are categorized within Level 1 of the fair value hierarchy because they are valued using quoted market prices for identical instruments in active markets.

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

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

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

Held-to-Maturity Debt Securities

The Company's debt securities, classified as held-to-maturity, are Philippine government bonds that the Company maintains as collateral for business transactions within the Philippines. These bonds have various maturity dates and are classified as "Restricted long-term marketable securities" on the Company's Consolidated Balance Sheets. As of July 3, 2016 and January 3, 2016 these bonds had a carrying value of $6.4 million and $6.5 million, respectively. The Company records such held-to-maturity investments at amortized cost based on its ability and intent to hold the securities until maturity. The Company monitors for changes in circumstances and events that would affect its ability and intent to hold such securities until the recorded amortized costs are recovered. No other-than-temporary impairment loss was incurred during any presented period. The held-to-maturity debt securities were categorized in Level 2 of the fair value hierarchy.

Equity and Cost Method Investments

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

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As of July 3, 2016 and January 3, 2016, the Company had $186.2 million and $186.4 million, respectively, in investments accounted for under the equity method (see Note 9). As of July 3, 2016 and January 3, 2016, the Company had $48.5 million and $36.4 million respectively, in investments accounted for under the cost method.

Note 7. RESTRUCTURING

During fiscal 2011, 2012 and 2014, the Company implemented approved restructuring plans, related to all segments, to align with changes in the global solar market which included the consolidation of the Company's Philippine manufacturing operations as well as actions to accelerate operating cost reduction and improve overall operating efficiency. These restructuring activities were substantially complete as of July 3, 2016; however, the Company expects to continue to incur costs as it finalizes previous estimates and actions in connection with these plans, primarily due to other costs, such as legal services.

The following table summarizes the restructuring charges recognized in the Company's Consolidated Statements of Operations:
 
 
Six Months Ended
(In thousands)
 
July 3, 2016
 
June 28, 2015
 
Cumulative To Date
Non-cash impairment charges
 
$
—

 
$
5

 
$
61,320

Severance and benefits
 
350

 
3,178

 
61,949

Lease and related termination costs
 
(280
)
 
—

 
6,704

Other costs1
 
143

 
2,147

 
13,680

Total restructuring charges
 
$
213

 
$
5,330

 
$
143,653

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

The following table summarizes the restructuring reserve activity during the six months ended July 3, 2016:
 
 
Six Months Ended
(In thousands)
 
January 3, 2016
 
Charges (Benefits)
 
Payments
 
July 3, 2016
Severance and benefits
 
$
395

 
$
350

 
$
(157
)
 
$
588

Lease and related termination costs
 
743

 
(280
)
 
(203
)
 
260

Other costs1
 
685

 
143

 
(611
)
 
217

Total restructuring liability
 
$
1,823

 
$
213

 
$
(971
)
 
$
1,065

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

Note 8. COMMITMENTS AND CONTINGENCIES

Facility and Equipment Lease Commitments

The Company leases certain facilities under non-cancellable operating leases from unaffiliated third parties. As of July 3, 2016, future minimum lease payments for facilities under operating leases were $44.9 million, to be paid over the remaining contractual terms of up to 8 years. The Company also leases certain buildings, machinery and equipment under non-cancellable capital leases. As of July 3, 2016, future minimum lease payments for assets under capital leases were $5.3 million, to be paid over the remaining contractual terms of up to 7 years.

Purchase Commitments
 
The Company purchases raw materials for inventory and manufacturing equipment from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequate supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure goods and services based on specifications defined by the Company, or that establish parameters defining the Company's requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company's requirements based on its

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business needs before firm orders are placed. Consequently, not all of the Company's disclosed purchase commitments arising from these agreements are firm, non-cancellable, and unconditional commitments.

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

Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of July 3, 2016 are as follows:
(In thousands)
 
Fiscal 2016 (remaining six months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total1,2
Future purchase obligations
 
$
763,595

 
354,224

 
200,165

 
175,730

 
161,847

 
3,000

 
$
1,658,561

1 
Total future purchase obligations as of July 3, 2016 include $206.3 million to related parties.
2 
Total future purchase obligations were composed of $244.9 million related to non-cancellable purchase orders and $1.4 billion related to long-term supply agreements.

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

Advances to Suppliers

As noted above, the Company has entered into agreements with various vendors, some of which are structured as "take or pay" contracts, that specify future quantities and pricing of products to be supplied. Certain agreements also provide for penalties or forfeiture of advanced deposits in the event the Company terminates the arrangements. Under certain agreements, the Company was required to make prepayments to the vendors over the terms of the arrangements. As of July 3, 2016 and January 3, 2016, advances to suppliers totaled $318.5 million and $359.1 million, respectively, of which $72.1 million and $85.0 million, respectively, is classified as short-term in the Company's Consolidated Balance Sheets. Two suppliers accounted for 85% and 15% of total advances to suppliers, respectively, as of July 3, 2016, and 82% and 16%, respectively, as of January 3, 2016.

Advances from Customers

The Company has entered into other agreements with customers who have made advance payments for solar power products and systems. These advances will be applied as shipments of product occur or upon completion of certain project milestones. The estimated utilization of advances from customers as of July 3, 2016 is as follows:
(In thousands)
 
Fiscal 2016 (remaining six months)
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
 
Total
Estimated utilization of advances from customers
 
$
13,621

 
41,442

 
27,039

 
28,842

 
43,263

 
—

 
$
154,207



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In fiscal 2010, the Company and its joint venture, AUO SunPower Sdn. Bhd. ("AUOSP"), entered into an agreement under which the Company resells to AUOSP polysilicon purchased from a third-party supplier. Advance payments provided by AUOSP related to such polysilicon are then made by the Company to the third-party supplier. These advance payments are applied as a credit against AUOSP’s polysilicon purchases from the Company. Such polysilicon is used by AUOSP to manufacture solar cells that are sold to the Company on a "cost-plus" basis. The outstanding advance payments received from AUOSP are included in the table above and as of July 3, 2016 and January 3, 2016, totaled $137.5 million and $148.9 million, respectively, of which $24.8 million and $22.7 million, respectively, was classified as short-term in the Company's Consolidated Balance Sheets, based on projected product shipment dates.

Product Warranties

The following table summarizes accrued warranty activity for the three and six months ended July 3, 2016 and June 28, 2015, respectively:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
July 3, 2016
 
June 28, 2015
 
July 3, 2016
 
June 28, 2015
Balance at the beginning of the period
 
$
166,440

 
$
154,098

 
$
164,127

 
$
154,648

Accruals for warranties issued during the period
 
3,235

 
4,181

 
9,114

 
12,342

Settlements and adjustments during the period
 
(4,891
)
 
(1,748
)
 
(8,457
)
 
(10,459
)
Balance at the end of the period
 
$
164,784

 
$
156,531

 
$
164,784

 
$
156,531


Contingent Obligations

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

Future Financing Commitments

The Company is required to provide certain funding under the joint venture agreement with AU Optronics Singapore Pte. Ltd. ("AUO") and other unconsolidated investees, subject to certain conditions (see Note 9). As of July 3, 2016, the Company's financing obligations related to these agreements are as follows:
(In thousands)
 
Amount
Year
 
 
  2016 (remaining six months)
 
$
176,742

  2017
 
2,366

 
 
$
179,108


Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $44.1 million and $43.3 million as of July 3, 2016 and January 3, 2016, respectively. These amounts are included in "Other long-term liabilities" in the Company's Consolidated Balance Sheets in their respective periods as they are not expected to be paid within the next 12 months. Due to the complexity and uncertainty associated with its tax positions, the Company cannot make a reasonably reliable estimate of the period in which cash settlement, if any, would be made for its liabilities associated with uncertain tax positions in other long-term liabilities.

Indemnifications
 
The Company is a party to a variety of agreements under which it may be obligated to indemnify the counterparty with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of

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warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights, and certain tax related matters including indemnification to customers under §48(c) solar commercial investment tax credit ("ITC") and U.S. Treasury Department ("Treasury Department") grant payments under Section 1603 of the American Recovery and Reinvestment Act (each a "Cash Grant"). In each of these circumstances, payment by the Company is typically subject to the other party making a claim to the Company that is contemplated by and valid under the indemnification provisions of the particular contract, which provisions are typically contract-specific, as well as bringing the claim under the procedures specified in the particular contract. These procedures usually allow the Company to challenge the other party's claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third party claims brought against the other party. Further, the Company's obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.

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

Defined Benefit Pension Plans

The Company maintains defined benefit pension plans for the majority of its non-U.S. employees. Benefits under these plans are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. The funded status of the pension plans, which represents the difference between the benefit obligation and fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each fiscal year. The Company recognizes the overfunded or underfunded status of its pension plans as an asset or liability on its Consolidated Balance Sheets. As of July 3, 2016 and January 3, 2016, the underfunded status of the Company’s pension plans, presented in "Other long-term liabilities" on the Company’s Consolidated Balance Sheets, was $13.7 million and $12.0 million, respectively. The impact of transition assets and obligations and actuarial gains and losses are recorded in "Accumulated other comprehensive loss", and are generally amortized as a component of net periodic cost over the average remaining service period of participating employees. Total other comprehensive gain related to the Company’s benefit plans was zero for the three and six months ended July 3, 2016.

Legal Matters

Tax Benefit Indemnification Litigation

On March 19, 2014, a lawsuit was filed by NRG Solar LLC, now known as NRG Renew LLC (“NRG”), against SunPower Corporation, Systems, a wholly-owned subsidiary of the Company (“SunPower Systems”), in the Superior Court of Contra Costa County, California.  The complaint asserts that, according to the indemnification provisions in the contract pertaining to SunPower Systems’ sale of a large California solar project to NRG, SunPower Systems owes NRG $75.0 million in connection with certain tax benefits associated with the project that were approved by the Treasury Department for an amount that was less than expected. The Company does not believe that the facts support NRG’s claim under the operative

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indemnification provisions and is vigorously contesting the claim.  Additionally, SunPower Systems filed a cross-complaint against NRG seeking damages in excess of $7.5 million for breach of contract and related claims arising from NRG’s failure to fulfill its obligations under the contract, including its obligation to take “reasonable, available steps” to engage the Treasury Department.  The Company is currently unable to determine if the resolution of this matter will have a material effect on the Company's consolidated financial statements. 

First Philec Arbitration

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

SPML had filed a challenge to both the first and second partial awards, as well as the final award, with the High Court in Hong Kong. SPML had also filed applications to the Court in the Philippines to: (i) prevent FPSC or FPEC from enforcing the awards pending the outcome of the challenge in Hong Kong; and (ii) gain access to FPSC’s books and records. The application for access was granted, and the application to prevent enforcement of the award had not been ruled on as of July 3, 2016.

On July 22, 2016, SPML entered into an agreement (the “Compromise Agreement”) with FPEC and FPSC to settle all claims, counterclaims, disputes, and proceedings between FPEC and FPSC on the one hand, and SPML on the other hand. The parties have filed the appropriate Consent Orders and motions in order to discontinue, terminate, or dismiss (as the case may be) all the legal proceedings that are pending between them in Hong Kong and in the Philippines. Pursuant to the terms of the Compromise Agreement, on July 22, 2016, SPML paid a total of $50.5 million