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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 1, 2018
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


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

 
95134
(Zip Code)


(408) 240-5500
(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  T    No  o

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

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

The total number of outstanding shares of the registrant’s common stock as of July 23, 2018 was 140,992,510.
 
 
 
 
 
d


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TABLE OF CONTENTS
 
 
Page

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SunPower Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
July 1, 2018

December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
256,689

 
$
435,097

Restricted cash and cash equivalents, current portion
36,941

 
43,709

Accounts receivable, net1
205,795

 
204,966

Contract assets1
70,449

 
35,074

Inventories
368,407

 
352,829

Advances to suppliers, current portion
83,771

 
30,689

Project assets - plants and land, current portion1
76,347

 
103,063

Prepaid expenses and other current assets1
121,348

 
146,209

Total current assets
1,219,747

 
1,351,636

 
 
 
 
Restricted cash and cash equivalents, net of current portion
70,970

 
65,531

Restricted long-term marketable securities
5,838

 
6,238

Property, plant and equipment, net
757,071

 
1,147,845

Solar power systems leased and to be leased, net
359,095

 
369,218

Advances to suppliers, net of current portion
117,096

 
185,299

Long-term financing receivables, net
379,076

 
330,672

Other intangible assets, net
20,878

 
25,519

Other long-term assets1
140,039

 
546,698

Total assets
$
3,069,810

 
$
4,028,656

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable1
$
349,819

 
$
406,902

Accrued liabilities1
196,405

 
229,208

Contract liabilities, current portion1
91,794

 
104,286

Short-term debt
58,194

 
58,131

Convertible debt, current portion1
—


299,685

Total current liabilities
696,212

 
1,098,212

 
 
 
 
Long-term debt
463,696

 
430,634

Convertible debt, net of current portion1
817,405

 
816,454

Contract liabilities, net of current portion1
148,182

 
171,610

Other long-term liabilities1
799,339

 
804,122

Total liabilities
2,924,834

 
3,321,032

Commitments and contingencies (Note 9)
 
 
 
Redeemable noncontrolling interests in subsidiaries
14,335

 
15,236

Equity:
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding as of both July 1, 2018 and December 31, 2017
—

 
—

Common stock, $0.001 par value, 367,500,000 shares authorized; 151,829,011 shares issued, and 140,985,344 outstanding as of July 1, 2018; 149,818,442 shares issued, and 139,660,635 outstanding as of December 31, 2017
141

 
140

Additional paid-in capital
2,455,813

 
2,442,513

Accumulated deficit
(2,232,988
)
 
(1,669,897
)
Accumulated other comprehensive loss
(1,676
)
 
(3,008
)
Treasury stock, at cost; 10,843,667 shares of common stock as of July 1, 2018; 10,157,807 shares of common stock as of December 31, 2017
(186,439
)
 
(181,539
)
Total stockholders' equity
34,851

 
588,209

Noncontrolling interests in subsidiaries
95,790

 
104,179

Total equity
130,641

 
692,388

Total liabilities and equity
$
3,069,810

 
$
4,028,656

1The 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," "Contract assets," "Project assets - plants and land, current portion," "Prepaid expenses and other current assets," "Other long-term assets," "Accounts payable," "Accrued liabilities," "Contract liabilities, current portion," "Convertible debt, current portion," "Convertible debt, net of current portion," "Contract liabilities, net of current portion," and "Other long-term liabilities" financial statement line items in the Consolidated Balance Sheets (see Note 2, Note 7, Note 9, Note 10, Note 11, and Note 12).



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 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017
Revenue1
 
 
 
 
 
 
 
 
Solar power systems, components, and other
 
$
353,780

 
$
278,578


$
682,640

 
$
559,783

Residential leasing
 
95,317

 
49,403


158,345

 
97,293


 
$
449,097

 
$
327,981


$
840,985

 
$
657,076

Cost of revenue1
 


 





 


Solar power systems, components, and other2
 
692,894

 
278,469


1,031,824

 
621,068

Residential leasing
 
66,418

 
33,345


109,128

 
65,425


 
759,312

 
311,814


1,140,952

 
686,493

Gross profit (loss)
 
(310,215
)
 
16,167


(299,967
)
 
(29,417
)
Operating expenses:
 


 





 


Research and development1
 
31,210

 
19,754


50,101

 
40,269

Sales, general and administrative1
 
64,719

 
68,703


129,849

 
136,106

Restructuring charges
 
3,504

 
4,969


14,681

 
14,759

Impairment of residential lease assets
 
68,269

 
—


117,361

 
—

Total operating expenses
 
167,702

 
93,426


311,992

 
191,134

Operating loss
 
(477,917
)
 
(77,259
)

(611,959
)
 
(220,551
)
Other income (expense), net:
 

 



 

Interest income
 
664

 
387


1,193

 
1,325

Interest expense1
 
(26,718
)
 
(22,505
)

(51,824
)
 
(43,407
)
Other, net3
 
36,624

 
(14,684
)
 
52,418

 
(88,772
)
Other income (expense), net
 
10,570

 
(36,802
)
 
1,787

 
(130,854
)
Loss before income taxes and equity in earnings (losses) of unconsolidated investees
 
(467,347
)
 
(114,061
)
 
(610,172
)
 
(351,405
)
Provision for income taxes
 
(3,081
)
 
(2,353
)
 
(5,709
)
 
(4,384
)
Equity in earnings (losses) of unconsolidated investees
 
(13,415
)
 
6,837

 
(15,559
)
 
9,325

Net loss
 
(483,843
)
 
(109,577
)
 
(631,440
)
 
(346,464
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
36,726

 
19,062

 
68,349

 
36,223

Net loss attributable to stockholders
 
$
(447,117
)
 
$
(90,515
)
 
$
(563,091
)
 
$
(310,241
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
(3.17
)
 
$
(0.65
)
 
$
(4.01
)
 
$
(2.23
)
Diluted
 
$
(3.17
)
 
$
(0.65
)
 
$
(4.01
)
 
$
(2.23
)
Weighted-average shares:
 


 


 


 


Basic
 
140,926

 
139,448

 
140,569

 
139,175

Diluted
 
140,926

 
139,448

 
140,569

 
139,175


1The Company has related-party transactions with Total S.A. and its affiliates as well as unconsolidated entities in which the Company has a direct equity investment. These related-party transactions are recorded within the "Revenue: Solar power systems, components, and other," "Cost of revenue: Solar power systems, components, and other," "Operating expenses: Research and development," "Operating expenses: Sales, general and administrative," and "Other income (expense), net: Interest expense" financial statement line items in the Consolidated Statements of Operations (see Note 2 and Note 10).

2During the three and six months ended July 1, 2018, the Company recognized impairment of property, plant and equipment of $369.2 million of which $355.1 million is reported in cost of revenue (see Note 5. "Balance Sheet Components-Impairment of Property, Plant and Equipment")

3During the three and six months ended July 1, 2018, the Company recognized profit that had previously been deferred related to historical projects sold to 8point3 Energy Partners along with a gain on the sale of its equity interest in 8point3 Energy Partners within "Other, net" (see Note 10. "Equity Method Investments").

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

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SunPower Corporation
Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
July 1, 2018
 
July 2, 2017
 
July 1, 2018
 
July 2, 2017
Net loss
 
$
(483,843
)
 
$
(109,577
)
 
$
(631,440
)
 
$
(346,464
)
Components of other comprehensive income (loss):
 
 
 
 
 
 
 
 
Translation adjustment
 
(1,073
)
 
3,412

 
(325
)
 
1,424

Net change in derivatives (Note 12)
 
436

 
(16
)
 
2,042

 
(1,278
)
Income taxes
 
(142
)
 
114

 
(385
)
 
457

Total other comprehensive income (loss)
 
(779
)
 
3,510

 
1,332

 
603

Total comprehensive loss
 
(484,622
)
 
(106,067
)
 
(630,108
)
 
(345,861
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
36,726

 
19,062

 
68,349

 
36,223

Comprehensive loss attributable to stockholders
 
$
(447,896
)
 
$
(87,005
)
 
$
(561,759
)
 
$
(309,638
)

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 1, 2018
 
July 2, 2017
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(631,440
)

$
(346,464
)
Adjustments to reconcile net loss to net cash used in operating activities:
 



Depreciation and amortization
 
78,401


85,671

Stock-based compensation
 
13,697


15,981

Non-cash interest expense
 
8,262


7,735

Dividend from equity method investees
 
3,947


14,601

Equity in (earnings) losses of unconsolidated investees
 
15,559


(9,325
)
Gain on sale of equity method investment
 
(50,025
)

—

Deferred income taxes
 
1,431


1,285

Impairment of equity method investment
 
—


81,571

Impairment of property, plant and equipment
 
369,168

 
—

Impairment of residential lease assets
 
117,361


—

Other, net
 
(2,443
)

4,160

Changes in operating assets and liabilities:
 

 
 
Accounts receivable
 
(4,033
)

27,482

Contract assets
 
(35,375
)

10,181

Inventories
 
(75,849
)

(76,444
)
Project assets
 
11,086


(73,697
)
Prepaid expenses and other assets
 
34,308


85,365

Long-term financing receivables, net
 
(109,156
)

(62,405
)
Advances to suppliers
 
15,122


32,782

Accounts payable and other accrued liabilities
 
(79,444
)

(193,612
)
Contract liabilities
 
(35,919
)

106,441

Net cash used in operating activities
 
(355,342
)

(288,692
)
Cash flows from investing activities:
 

 
 
Purchases of property, plant and equipment
 
(25,362
)

(45,123
)
Cash paid for solar power systems, leased and to be leased
 
(38,688
)

(41,028
)
Cash paid for solar power systems
 
(3,436
)

(8,012
)
Dividend from equity method investees
 
12,952


1,421

Proceeds from sale of equity method investments

 
417,766


—

Cash paid for investments in unconsolidated investees
 
(14,061
)

(11,603
)
Net cash provided by (used in) investing activities
 
349,171


(104,345
)
Cash flows from financing activities:
 
 
 
 
Proceeds from bank loans and other debt
 
116,459


201,400

Repayment of 0.75% debentures due 2018, bank loans and other debt
 
(419,527
)

(228,940
)
Proceeds from issuance of non-recourse residential financing, net of issuance costs
 
67,109


30,642

Repayment of non-recourse residential financing
 
(9,899
)

(3,024
)
Contributions from noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
73,290


96,625

Distributions to noncontrolling interests and redeemable noncontrolling interests attributable to residential projects
 
(12,582
)

(8,454
)
Proceeds from issuance of non-recourse power plant and commercial financing, net of issuance costs
 
22,286


226,661

Repayment of non-recourse power plant and commercial financing
 
(4,678
)

(32,021
)
Purchases of stock for tax withholding obligations on vested restricted stock
 
(4,900
)

(4,215
)
Net cash (used in) provided by financing activities
 
(172,442
)

278,674

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
 
(1,124
)

1,174

Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
 
(179,737
)

(113,189
)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period1
 
544,337


514,212

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period1
 
$
364,600


$
401,023

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Transaction fees funded by liability related to the sale of equity method investees
 
$
3,911

 
$
—

Costs of solar power systems, leased and to be leased, sourced from existing inventory
 
$
21,640


$
27,467

Costs of solar power systems, leased and to be leased, funded by liabilities
 
$
5,166


$
7,016

Costs of solar power systems under sale-leaseback financing arrangements, sourced from project assets
 
$
15,580


$
55,619

Property, plant and equipment acquisitions funded by liabilities
 
$
15,954


$
40,669

Contractual obligations satisfied with inventory
 
$
40,881


$
6,668

Assumption of debt by buyer upon sale of equity interest
 
$
27,321


$
—

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


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

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Notes to the Consolidated Financial Statements

Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Liquidity

The Company continues to face challenging industry conditions and a competitive environment. While the Company continues to focus on improving overall operating performance and liquidity, including managing cash flow and working capital, notably with cash savings resulting from restructuring actions and cost reduction initiatives put in place in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2018, as well as additional cost reduction initiatives put in place in the second quarter of fiscal 2018, the Company's net losses continued through the second quarter of fiscal 2018 and are expected to continue through fiscal 2019. The Company has the ability to enhance its available cash by borrowing up to $95.0 million under its revolving credit facility (the "Revolver") with Credit Agricole Corporate and Investment Bank ("Credit Agricole") pursuant to the Letter Agreement executed by the Company and Total S.A. on May 8, 2017 (the "Letter Agreement") (see "Note 2. Transactions with Total and Total S.A."). The Letter Agreement and any guarantees issued under it will expire on August 26, 2019. In consideration for the commitments of Total S.A. pursuant to the Letter Agreement, the Company is required to pay Total S.A. certain commitment and guarantee fees. On May 22, 2018, the Company entered into a Term Credit Agreement with Credit Agricole (the "Term Credit Agreement"), under which the Company borrowed $300.0 million on May 29, 2018. The Company's $300.0 million 0.75% senior convertible debentures due 2018 (the “0.75% debentures due 2018”), $200.0 million of which were held by Total, matured on June 1, 2018, and were redeemed at maturity with the proceeds from the Term Credit Agreement. On June 19, 2018, the Company completed the divestiture of its equity interest in 8point3 Energy Partners LP ("8point3 Energy Partners" and, with certain affiliates, collectively, the "8point3 Group," and such transaction, "Divestiture Transaction"; see "Note 10. Equity Method Investments"). The proceeds of the Divestiture Transaction were used to repay the amounts due under the Term Credit Agreement immediately after closing, with the Company retaining the excess proceeds.

During the quarter ended July 1, 2018, tariffs imposed pursuant to Section 201 of the Trade Act of 1974 and uncertainty surrounding whether specific products may be excluded continue to significantly and adversely affect the Company’s business, results of operations and cash flows. These events and conditions indicate that the Company may not have the liquid funds necessary to satisfy its estimated liquidity needs within the 12 months from the date of issuance of the interim financial statements contained herein. In connection with its short-term liquidity needs, the Company decided to divest certain assets. On June 12, 2018, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Enphase Energy, Inc.

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(“Enphase”) pursuant to which the Company will sell and Enphase will purchase certain assets and intellectual property related to the production of microinverters for the following consideration: (i) $15.0 million payable in cash at the closing under the Purchase Agreement (the “Closing”); (ii) 7.5 million shares of Enphase common stock issuable to the Company at the Closing; and (iii) an additional cash payment of $10.0 million payable to the Company on the earlier of the four month anniversary of the Closing and December 28, 2018. The Closing is subject to the satisfaction of certain customary closing conditions. Additionally, in connection with the Company's previously announced decision to sell or refinance its interest in its residential lease portfolio, which is comprised of assets under operating leases and financing receivables related to sales-type leases, the Company is in the process of securing a source of financing in the form of a subordinated mezzanine loan of at least $93.0 million. Subject to execution of definitive documentation and closing of the proposed mezzanine loan, the Company will be required to pay interest quarterly on outstanding borrowings in an amount equal to 12.0% per annum. The Company's interest in the residential lease portfolio will serve as collateral securing the loan and the loan will be repaid pursuant to an amortization schedule over the term of the loan. The closing of the mezzanine loan is subject to certain closing conditions, including obtaining consent from the lenders and tax equity investors who invested in the residential lease portfolio and finalization of the financial model which determines the loan proceeds. The Company believes it has sufficiently evaluated the closing conditions in concluding that the Purchase Agreement with Enphase and the mezzanine loan are probable of occurring and will generate sufficient proceeds to satisfy the Company’s working capital needs and fund its committed capital expenditures over the next 12 months from the date of the issuance of the interim financial statements. However, the Company cannot predict, with certainty, the outcome of its actions to generate liquidity as planned.
 
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 such accounting principles, "U.S. GAAP") 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. In the first quarter of fiscal 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASC 606") as well as Accounting Standards Update No. 2017-05, Other income - Gain and Losses from the Derecognition of Nonfinancial Assets (Subtopic ASC 610-20, "ASU 2017-05"), such reclassifications are discussed in this Note 1.

Fiscal Years

The Company has a 52-to-53-week fiscal year that ends on the Sunday closest to December 31. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Both fiscal 2018 and 2017 are 52-week fiscal years. The second quarter of fiscal 2018 ended on July 1, 2018, while the second quarter of fiscal 2017 ended on July 2, 2017. The second quarters of fiscal 2018 and 2017 were both 13-week quarters. The first halves of fiscal 2018 and 2017 were both 26-week periods.

Management Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates in these consolidated financial statements include revenue recognition, specifically the nature and timing of satisfaction of performance obligations, standalone selling price of performance obligations and variable consideration; allowances for doubtful accounts receivable; recoverability of financing receivables related to residential leases, inventory and project asset write-downs; stock-based compensation; long-lived asset impairment, specifically estimates for valuation assumptions including discount rates and future cash flows, economic useful lives of property, plant and equipment, intangible assets, and investments; fair value and residual value of solar power systems, including those subject to residential operating leases; fair value of financial instruments; valuation of contingencies such as accrued warranty; the fair value of indemnities provided to customers and other parties, and income taxes and tax valuation allowances. Actual results could materially differ from those estimates.


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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 arise, including consideration of technology obsolescence, that may indicate that the carrying value of such assets may not be recoverable, and these assessments require significant judgment in determining whether such events or changes have occurred. Factors considered important that could result in an impairment review include significant changes in the manner of use of a long-lived asset or in its physical condition, a significant adverse change in the business climate or economic trends that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset, significant under-performance relative to expected historical or projected future operating results, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

For purposes of the impairment evaluation, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and the Company must exercise judgment in assessing such groupings and levels. The Company then compares the estimated future undiscounted net cash flows expected to be generated by the asset group, including the eventual disposition of the asset group at residual value, to the asset group’s carrying value to determine if the asset group is recoverable. If the Company's estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the asset group, the Company records an impairment loss in the amount by which the carrying value of the asset group exceeds the fair value. Fair value is generally measured based on (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, as well as (iii) quoted market prices, if available. If the fair value of an asset group is determined to be less than its carrying value, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized. For additional information on the impairment charge recorded in the three and six months ended July 1, 2018, see "Note 5. Balance Sheet Components-Impairment of Property, Plant and Equipment" and "Note 6. Leasing-Impairment of Residential Lease Assets."

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606. For additional information on the new standard and the impact to the Company's financial results, refer to Impacts to Previously Reported Results below.

Module and Component Sales

The Company sells its solar panels and balance of system components primarily to dealers, system integrators and distributors, and recognizes revenue at a point in time when control of such products transfers to the customer, which generally occurs upon shipment or delivery depending on the terms of the contracts with the customer. There are no rights of return, and other than standard warranty obligations, there are no significant post-shipment obligations, including installation, training or customer acceptance clauses with any of the Company's customers that could have an impact on revenue recognition. The Company's revenue recognition policy is consistent across all geographic areas.

Solar Power System Sales and Engineering, Procurement, and Construction Services

The Company designs, manufactures, and sells rooftop and ground-mounted solar power systems under construction and development agreements. EPC projects governed by customer contracts that require the Company to deliver functioning solar power systems are generally completed within three to twelve months from commencement of construction. Construction on large projects may be completed within eighteen to thirty-six months, depending on the size and location. The Company recognizes revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. The Company uses an input method based on cost incurred as it faithfully depicts the Company’s progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.

Incurred costs 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 the Company to make estimates of net contract

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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, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated.

For sales of solar power systems in which the Company sells a controlling interest in the project to a customer, the Company recognizes all of the revenue for the consideration received, including the fair value of the noncontrolling interest obtained or retained, and defers any profit associated with the Company’s retained equity stake through “Equity in earnings of unconsolidated investees.” The deferred profit is subsequently recognized on a straight-line basis over the useful life of the underlying system. The Company estimates the fair value of the noncontrolling interest using an income approach based on the valuation of the entire solar project. Further, in situations where the Company sells membership interests in its project entities to third-party tax equity investors in return for tax benefits, such as investment tax credits and accelerated depreciation, the Company views the sale of tax credits as a distinct performance obligation which is recognized at a point in time when the customers are eligible to claim the benefits, generally at substantial completion of the solar power projects. The fair value of the tax attributes generally begins with an independent third-party appraisal which supports the eligible cost basis for the qualifying solar energy property. 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 reduction in tax benefits received under the investment tax credit and U.S. Treasury Department cash grant programs. Refer to "Note 9. Commitments and Contingencies" for further details.

The Company's arrangements may 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. The Company estimates variable consideration at which the Company expects to be entitled and it is probable that a significant reversal of cumulative revenue recognized will not occur.
 
Operations and Maintenance

The Company offers its 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 Company determines if the post-installation systems monitoring and maintenance qualifies as separate performance obligation. Such post-installation monitoring and maintenance are deferred at the time the contract is executed based on the estimate of selling price on a standalone basis and are recognized to revenue over time as customers receive and consume benefits of such services. The non-cancellable term of the O&M contracts are typically 90 days for commercial and residential customers and 180 days for power plant customers.

The Company typically provides a system output performance warranty, separate from its standard solar panel product warranty, to customers that have subscribed to its post-installation O&M services. In connection with system output performance warranties, the Company agrees 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. Such liquidated damages represent a form of variable consideration and are estimated at contract inception and recognized over time as customers receive and consume the benefits of the O&M services.

Shipping and Handling Costs

The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer goods and, accordingly, records such costs in cost of revenue.

Taxes Collected from Customers and Remitted to Governmental Authorities

The Company excludes from its 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.


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Financing Receivables

Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines. Financing receivables are generated by solar power systems leased to residential customers under sales-type leases. Financing receivables are initially recorded based on the expected gross minimum lease payments to be received from customers over a period commensurate with the remaining lease term of up to 20 years and the systems estimated residual value, net of unearned income and allowance for estimated losses. Initial direct costs for sales-type leases are recognized as cost of sales when the solar power systems are placed in service.

Due to the homogeneous nature of its leasing transactions, SunPower manages its financing receivables on an aggregate basis when assessing credit risk. SunPower also considers the credit risk profile for its lease customers to be homogeneous due to the criteria the Company uses to approve customers for its residential leasing program, which among other things, requires a minimum "fair" FICO credit quality. Accordingly, the Company does not regularly categorize its financing receivables by credit risk.

The Company recognizes an allowance for losses on financing receivables in an amount equal to the probable losses net of recoveries. SunPower maintains reserve percentages on past-due receivable aging buckets and bases such percentages on several factors, including consideration of historical credit losses and information derived from industry benchmarking. The Company also places doubtful financing receivables on nonaccrual status and discontinues recognition of interest revenue.  

For the six months ended July 1, 2018, events and circumstances continued to indicate that the Company might not be able to collect all amounts due according to the contractual terms of the underlying lease agreements given its decision to sell or refinance its interest in its residential lease portfolio. The Company determined it was necessary to evaluate the potential for allowances in its ability to collect these receivables. Estimates and judgments about future cash flows were made 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 lease income, expenses, default rates, residual value of these lease assets and long-term discount rates, all of which require significant judgment by the Company. In accordance with such evaluation, the Company recognized an allowance for losses on the consolidated statement of operations. For additional information on the related impairment charge, see "Note 6. Leasing—Impairment of Residential Lease Assets."

See "Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 1. The Company and Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for a summary of our other significant accounting policies.

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815) to target improvements to accounting for hedging activities. The improvements include (i) alignment of risk management activities and financial reporting, and (ii) other simplifications in the application of hedge accounting guidance. The new guidance is effective for the Company no later than the first quarter of fiscal 2019 and requires a modified retrospective approach to adoption. The Company elected early adoption of the updated accounting standard on a modified retrospective basis in the first quarter of fiscal 2018. The adoption of this updated accounting standard did not result in a significant impact to the Company’s consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718) to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted the updated accounting standard in the first quarter of fiscal 2018 which did not result in a significant impact to the Company's consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715) to provide final guidance on the presentation of net periodic pension and postretirement benefit cost. The amendment requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income or capitalized in assets. The other components will be recorded separately outside of operations and will not be eligible for capitalization. The guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost and on a prospective basis for the capitalization of only the service cost component of net benefit cost. The Company adopted the updated accounting standard in the first quarter of fiscal 2018 which did not result in a significant impact to the Company's consolidated financial statements.


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In February 2017, the FASB issued ASU 2017-05 to clarify the scope and application of the sale or transfer of nonfinancial assets to noncustomers, including partial sales and also to define what constitutes an “in substance nonfinancial asset” which can include financial assets. The new guidance eliminates several accounting differences between transactions involving assets and transactions involving businesses. Further, the guidance aligns the accounting for derecognition of a nonfinancial asset with that of a business. The Company adopted the updated accounting standard in the first quarter of fiscal 2018 which did not result in a significant impact to the Company's consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805) to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for the Company no later than the first quarter of fiscal 2018 and requires a prospective approach to adoption. The Company adopted the updated accounting standard in the first quarter of fiscal 2018 which did not result in a significant impact to the Company’s consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) ("ASU 2016-01") 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). In February 2018, the FASB issued Accounting Standards Update No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10), which provided clarifications to ASU 2016-01. The Company adopted the updated accounting standard in the first quarter of fiscal 2018 by electing the allowed measurement alternative to use cost, impairment (if any), and observable price changes in orderly transactions for the identical or similar investment of the same issuer (referred to as the measurement alternative method). The adoption did not result in a significant impact to the Company's consolidated financial statements.

In May 2014, the FASB issued ASC 606. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
 
The Company adopted ASC 606 on January 1, 2018, using the full retrospective method, which required the Company to restate each prior period presented. The Company implemented key system functionality and internal controls to enable the preparation of financial information upon adoption.

The most significant impact of the standard relates to the sales of solar power systems that include the sale or lease of related real estate previously accounted for under the guidance for real estate sales ASC 360-20 "Property, Plant, and Equipment." ASC 360-20 required the Company to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement requiring the Company to reduce the potential profit on a project sale by its maximum exposure to loss. The adoption of ASC 606, which supersedes the real estate sales guidance under ASC 360-20, generally results in the earlier recognition of revenue and profit than the Company's historical practice under ASC 360-20. For sales arrangements in which the Company obtains or retains an interest in the project sold to the customer, the Company recognizes all the revenue for the consideration received, including the fair value of the noncontrolling interests obtained or retained, and defers any profits associated with the interest retained through "Equity in earnings (loss) of unconsolidated investees." The Company then recognizes any deferred profit on a straight-line basis over the useful life of the underlying system, with any remaining amount recognized upon the sale of the noncontrolling interest to a third party. Following the adoption of ASC 606, the revenue recognition for the Company's other sales arrangements, including the sales of components, sales and construction of solar systems, and O&M services, remained materially consistent. The revenue recognition for residential leasing and sale-leaseback arrangements remained consistent as they follow other U.S. GAAP guidance.

As part of the Company's adoption of ASC 606 in the first quarter of fiscal 2018, the Company elected to apply the following practical expedients:

•
The Company has not restated contracts that begin and are completed within the same annual reporting period;
•
For completed contracts that have variable consideration, the Company used the transaction price at the date upon which the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods;
•
The Company has excluded disclosures of transaction prices allocated to remaining performance obligations and when the Company expects to recognize such revenue for all periods prior to the date of initial application;
•
The Company has not retrospectively restated its contracts to account for those modifications that were entered into before January 3, 2016, the earliest reporting period impacted by ASC 606;

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•
The Company has expensed costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs are included in selling, general, and administrative expenses; and
•
The Company has not assessed a contract asset or contract liability for a significant financing component if the period between the customer's payment and the Company's transfer of goods or services is one year or less.

Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on the condensed consolidated financial statements as of December 31, 2017 and for the three and six months ended July 2, 2017.

Impact to Previously Reported Results

Adoption of ASC 606 impacted our previously reported results as follows:
 
 
December 31, 2017
(In thousands)
 
As Reported
 
Adoption of ASC 606
 
As Adjusted
Accounts receivable, net
 
$
215,479

 
$
(10,513
)
 
$
204,966

Costs and estimated earnings in excess of billings
 
18,203

 
(18,203
)
 
—

Contract assets
 
—

 
35,074

 
35,074

Prepaid expenses and other current assets
 
152,444

 
(6,235
)
 
146,209

Property, plant and equipment, net
 
1,148,042

 
(197
)
 
1,147,845

Solar power systems leased and to be leased, net
 
428,149

 
(58,931
)
 
369,218

Long-term financing receivables, net
 
338,877

 
(8,205
)
 
330,672

Other long-term assets
 
80,146

 
466,552

 
546,698

Accrued liabilities
 
267,760

 
(38,552
)
 
229,208

Billings in excess of costs and estimated earnings
 
8,708

 
(8,708
)
 
—

Contract liabilities, current portion
 
—

 
104,286

 
104,286

Customer advances, current portion
 
54,999

 
(54,999
)
 
—

Customer advances, net of current portion
 
69,062

 
(69,062
)
 
—

Contract liabilities, net of current portion
 
—

 
171,610

 
171,610

Other long-term liabilities
 
954,646

 
(150,524
)
 
804,122

Accumulated deficit
 
(2,115,188
)
 
445,291

 
(1,669,897
)


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Three Months Ended July 2, 2017
(In thousands)
 
As Reported
 
Adoption of ASC 606
 
As Adjusted
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
Solar power systems, components, and other
 
$
286,724

 
$
(8,146
)
 
$
278,578

Residential leasing
 
50,722

 
(1,319
)
 
49,403

Cost of revenue
 
 
 
 
 
 
Solar power systems, components, and other
 
288,022

 
(9,553
)
 
278,469

Residential leasing
 
34,189

 
(844
)
 
33,345

Gross margin
 
15,235

 
932

 
16,167

Interest expense
 
(22,370
)
 
(135
)
 
(22,505
)
Other, net
 
(15,744
)
 
1,060

 
(14,684
)
Other expense, net
 
(37,727
)
 
925

 
(36,802
)
Loss before income taxes and equity in earnings of unconsolidated investees
 
(115,918
)
 
1,857

 
(114,061
)
 Provision for income taxes
 
(2,353
)
 
—

 
(2,353
)
Equity in earnings of unconsolidated investees
 
5,449

 
1,388

 
6,837

Net loss
 
(112,822
)
 
3,245

 
(109,577
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
19,062

 
—

 
19,062

Net loss attributable to stockholders
 
$
(93,760
)
 
$
3,245

 
$
(90,515
)
 
 
 
 
 
 
 
Net loss per share attributable to stockholders:
 
 
 
 
 
 
Basic
 
$
(0.67
)
 
$
0.02

 
$
(0.65
)
Diluted
 
$
(0.67
)
 
$
0.02

 
$
(0.65
)

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Six Months Ended July 2, 2017
(In thousands)
 
As Reported
 
Adoption of ASC 606
 
As Adjusted
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
Solar power systems, components, and other
 
$
636,573

 
$
(76,790
)
 
$
559,783

Residential leasing
 
99,949

 
(2,656
)
 
97,293

Cost of revenue
 
 
 
 
 
 
Solar power systems, components, and other
 
685,113

 
(64,045
)
 
621,068

Residential leasing
 
67,106

 
(1,681
)
 
65,425

Gross margin
 
(15,697
)
 
(13,720
)
 
(29,417
)
Interest expense
 
(43,139
)
 
(268
)
 
(43,407
)
Other, net
 
(17,934
)
 
(70,838
)
 
(88,772
)
Other expense, net
 
(59,748
)
 
(71,106
)
 
(130,854
)
Loss before income taxes and equity in earnings of unconsolidated investees
 
(266,579
)
 
(84,826
)
 
(351,405
)
 Provision for income taxes
 
(4,384
)
 
—

 
(4,384
)
Equity in earnings of unconsolidated investees
 
6,501

 
2,824

 
9,325

Net loss
 
(264,462
)
 
(82,002
)
 
(346,464
)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
36,223

 
—

 
36,223

Net loss attributable to stockholders
 
$
(228,239
)
 
$
(82,002
)
 
$
(310,241
)
 
 
 
 
 
 
 
Net loss per share attributable to stockholders:
 
 
 
 
 
 
Basic
 
$
(1.64
)
 
$
(0.59
)
 
$
(2.23
)
Diluted
 
$
(1.64
)
 
$
(0.59
)
 
$
(2.23
)


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Six Months Ended July 2, 2017
(In thousands)
 
As Reported
 
Adoption of ASC 606
 
As Adjusted
 
 
 
 
 
 
 
Net loss
 
$
(264,462
)
 
$
(82,002
)
 
$
(346,464
)
Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisitions:
 
 
 
 
 
 
Depreciation and amortization
 
87,353

 
(1,682
)
 
85,671

Impairment of equity method investment
 
8,607

 
72,964

 
81,571

Equity in earnings of unconsolidated investees
 
(6,501
)
 
(2,824
)
 
(9,325
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 
 
 
 
 
 
Accounts receivable
 
24,445

 
3,037

 
27,482

Costs and estimated earnings in excess of billings
 
13,157

 
(13,157
)
 
—

Contract assets
 
—

 
10,181

 
10,181

Project assets
 
(59,830
)
 
(13,867
)
 
(73,697
)
Prepaid expenses and other assets
 
139,103

 
(53,738
)
 
85,365

Long-term financing receivables, net
 
(62,515
)
 
110

 
(62,405
)
Accounts payable and other accrued liabilities
 
(207,873
)
 
14,261

 
(193,612
)
Billings in excess of costs and estimated earnings
 
(65,433
)
 
65,433

 
—

Customer advances
 
105,157

 
(105,157
)
 
—

Contract liabilities
 
—

 
106,441

 
106,441

Net cash used in operating activities
 
(288,692
)
 
—

 
(288,692
)
Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
 
(113,189
)
 
—

 
(113,189
)
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period
 
514,212

 
—

 
514,212

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period
 
$
401,023

 
$
—

 
$
401,023


Recent Accounting Pronouncements Not Yet Adopted

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) to permit companies to reclassify disproportionate tax effects in accumulated other comprehensive income ("AOCI") caused by the Tax Cuts and Jobs Act of 2017 (the "Tax Cuts and Jobs Act") to retained earnings. Companies may adopt the new guidance using one of two transition methods: retrospective to each period in which the income tax effects of the Tax Cuts and Jobs Act related to items remaining in AOCI are recognized or at the beginning of the period of adoption. The new guidance is effective for the Company no later than the first quarter of fiscal 2019 with early adoption permitted. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350) to simplify the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment loss is now measured at the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. 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 2017. The Company is evaluating the potential impact of this standard on its consolidated financial statements and disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02") to require all lessees to recognize a right-of-use asset and a liability for the obligation to make payments for all leases (except for short-term leases) on their balance sheet. All leases in scope will be classified as either operating or financing. Operating and financing leases will require the recognition of an asset and liability to be measured at the present value of the lease payments. ASU 2016-02 also makes a distinction between operating and financing leases for purposes of reporting expenses on the income statement. This guidance will be effective for the Company in the first quarter of 2019 on a modified retrospective basis

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and early adoption is permitted. The Company will adopt the new standard effective January 1, 2019. The Company is currently assessing the impact of adopting this standard and the effect on the consolidated financial statements will depend on the volume and nature of the Company's lease portfolio and transactions that are impacted by ASU 2016-02 as of the adoption date.

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

In June 2011, Total completed a cash tender offer to acquire 60% of the Company's then outstanding shares of common stock at a price of $23.25 per share, for a total cost of approximately $1.4 billion. In December 2011, the Company entered into a Private Placement Agreement with Total (the "Private Placement Agreement"), under which Total purchased, and the Company issued and sold, 18.6 million shares of the Company's common stock for a purchase price of $8.80 per share, thereby increasing Total's ownership to approximately 66% of the Company's outstanding common stock as of that date. As of July 1, 2018, through the increase of the Company's total outstanding common stock due to the exercise of warrants and issuance of restricted and performance stock units, Total's ownership of the Company's outstanding common stock has decreased to approximately 56%.

Supply Agreements

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

The Company recognizes revenue for the solar panels consistent with its revenue recognition policy for solar power components at a point in time when control of such products transfers to the customer, which generally occurs upon shipment or delivery depending on the terms of the contracts. In the second quarter of fiscal 2017, the Company started to supply Total with panels under the supply agreement and as of July 1, 2018, the Company had $14.3 million of "Contract liabilities, current portion" and $54.4 million of "Contract liabilities, net of current portion" on its Consolidated Balance Sheets related to the aforementioned supply agreement (see Note 9. Commitments and Contingencies").

In March 2018, the Company and Total, each through certain affiliates, entered into an agreement whereby the Company agreed to sell 3.42 MW of photovoltaic modules to Total for a development project in Chile. This agreement provided for payment from Total in the amount of approximately $1.3 million, 10% of which was paid upon execution of the agreement.

Amended and Restated Credit Support Agreement

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

In consideration for the commitments of Total S.A. pursuant to the Credit Support Agreement, the Company is required to pay Total S.A. a guaranty fee for each letter of credit that is the subject of a Guaranty under the Credit Support Agreement and was outstanding for all or part of the preceding calendar quarter. The Credit Support Agreement will terminate following December 31, 2018, after the later of the satisfaction of all obligations thereunder and the termination or expiration of each Guaranty provided thereunder.


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In addition to the Credit Support Agreement, the Company and Total S.A. entered into the Letter Agreement in May 2017 to facilitate the issuance by Total S.A. of one or more guaranties of the Company's payment obligations of up to $100.0 million (the "Support Amount") under the Revolver with Credit Agricole, as "administrative agent," and the other lenders party thereto; See "Note 11. Debt and Credit Sources" for additional information on the Revolver with Credit Agricole. In consideration for the commitments of Total S.A. pursuant to the Letter Agreement, the Company is required to pay a guarantor commitment fee of 0.50% per annum for the unutilized Support Amount and a guaranty fee of 2.35% per annum of the Guaranty outstanding. The maturity date of the Letter Agreement is August 26, 2019.

Affiliation Agreement

The Company and Total have entered into an Affiliation Agreement that governs the relationship between Total and the Company (the "Affiliation Agreement"). Until the expiration of a standstill period specified in the Affiliation Agreement (the "Standstill Period"), and subject to certain exceptions, Total, Total S.A., any of their respective affiliates and certain other related parties (collectively, the "Total Group") may not effect, seek, or enter into discussions with any third party regarding any transaction that would result in the Total Group beneficially owning shares of the Company in excess of certain thresholds, or request the Company or the Company's independent directors, officers or employees, to amend or waive any of the standstill restrictions applicable to the Total Group. The Standstill Period ends when Total holds less than 15% ownership of the Company.

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

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

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

Research & Collaboration Agreement

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

Upfront Warrant

In February 2012, the Company issued a warrant (the "Upfront Warrant") to Total S.A. to purchase 9,531,677 shares of the Company's common stock with an exercise price of $7.8685, subject to adjustment for customary anti-dilution and other events. The Upfront Warrant, which is governed by the Private Placement Agreement and a Compensation and Funding Agreement, dated February 28, 2012, as amended, is exercisable at any time for seven years after its issuance, provided that, so long as at least $25.0 million in aggregate of the Company's convertible debt remains outstanding, such exercise will not cause any "person," including Total S.A., to, directly or indirectly, including through one or more wholly-owned subsidiaries, become the "beneficial owner" (as such terms are defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended) (the "Exchange Act"), of more than 74.99% of the voting power of the Company's common stock at such time, a circumstance which would trigger the repurchase or conversion of the Company's existing convertible debt.

0.75% Debentures Due 2018

In May 2013, the Company issued $300.0 million in principal amount of the 0.75% debentures due 2018. An aggregate principal amount of $200.0 million of the 0.75% debentures due 2018 were acquired by Total. The 0.75% debentures due 2018 were convertible into shares of the Company's common stock at any time based on an initial conversion price equal to $24.95

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per share, which provided Total the right to acquire up to 8,017,420 shares of the Company's common stock. The applicable conversion rate could adjust in certain circumstances, including a fundamental change, as described in the indenture governing the 0.75% debentures due 2018. On June 1, 2018, the Company redeemed the 0.75% debentures due 2018 at maturity in full with proceeds from the Term Credit Agreement.

0.875% Debentures Due 2021

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 1, 2018, the Company had $0.2 million of "Contract assets" and $5.4 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.

During the first quarter of fiscal 2017, in connection with a co-development project between the Company and Total, Total paid $0.5 million to the Company in exchange for the Company's ownership interest in the co-development project.

During the first quarter of fiscal 2018, in connection with a co-development project between the Company and Total, the Company paid $0.5 million to Total for development fees for the co-development project.

Related-Party Transactions with Total and its Affiliates:

The following related party balances and amounts are associated with transactions entered into with Total and its Affiliates:
 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Accounts receivable
 
$
5,362

 
$
2,366

Contract assets
 
$
215

 
$
154

Contract liabilities, current portion1 
 
$
14,337

 
$
12,744

Contract liabilities, net of current portion1 
 
$
54,407

 
$
68,880

1 Refer to Note 9. Commitments and Contingencies - Advances from Customers.

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Three Months Ended
 
Six Months Ended
(In thousands)
July 1, 2018
 
July 2, 2017
 
July 1, 2018
 
July 2, 2017
Revenue:
 
 
 
 
 
 
 
EPC, O&M, and components revenue
$
5,369

 
$
3,051

 
$
18,099

 
$
7,183

Cost of revenue:
 
 
 
 
 
 
 
EPC, O&M, and components cost of revenue
$
5,638

 
$
3,370

 
$
9,188

 
$
4,405

Research and development expense:
 
 
 
 
 
 
 
Offsetting contributions received under the R&D Agreement
$
(50
)
 
$
(37
)
 
$
(87
)
 
$
(104
)
Interest expense:
 
 
 
 
 
 
 
Guarantee fees incurred under the Credit Support Agreement
$
1,376

 
$
1,580

 
$
2,783

 
$
3,379

Interest expense incurred on the 0.75% debentures due 2018
$
172

 
$
375

 
$
547

 
$
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

 
$
1,000

 
$
2,000

 
$
2,000


Note 3. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following tables represent a disaggregation of revenue from contracts with customers for the three and six months ended July 1, 2018 and July 2, 2017 along with the reportable segment for each category:

 
 
Three Months Ended
(In thousands)
 
Residential
 
Commercial
 
Power Plant
Category
 
July 1, 2018

 
July 2, 2017

 
July 1, 2018

 
July 2, 2017

 
July 1, 2018

 
July 2, 2017

Module and component sales
 
$
107,278

 
$
103,902

 
$
68,846

 
$
38,213

 
$
66,877

 
$
52,330

Solar power systems sales and EPC services
 
610

 
790

 
44,669

 
43,760

 
39,094

 
18,715

Operations and maintenance
 
1,976

 
1,711

 
1,627

 
1,254

 
9,217

 
8,157

Leasing1
 
95,317

 
49,403

 
12,730

 
8,599

 
856

 
1,147

Net Revenue
 
$
205,181

 
$
155,806

 
$
127,872

 
$
91,826

 
$
116,044

 
$
80,349

1Leasing revenue is accounted for in accordance with the lease accounting guidance.

 

Six Months Ended
(In thousands)

Residential

Commercial

Power Plant
Category
 
July 1, 2018
 
July 2, 2017

July 1, 2018
 
July 2, 2017
 
July 1, 2018
 
July 2, 2017
Module and component sales
 
$
212,848


$
190,513


$
126,131


$
67,156

 
$
119,090


$
65,505

Solar power systems sales and EPC services
 
925


820


101,394


112,750

 
76,220


85,858

Operations and maintenance

2,495


1,874


2,884


2,002


18,643


16,291

Leasing1

158,345


97,293


20,799


15,364


1,211


1,650

Net Revenue
 
$
374,613


$
290,500


$
251,208


$
197,272

 
$
215,164


$
169,304

1Leasing revenue is accounted for in accordance with the lease accounting guidance.

The Company recognizes revenue for sales of modules and components at the point that control transfers to the customer, which typically occurs upon shipment or delivery to the customer, depending on the terms of the contract. For EPC revenue and solar power systems sales, the Company commences recognizing revenue when control of the underlying system transfers to the customer and continues recognizing revenue over time as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.

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Judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine our progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenues, the Company recognizes the entire estimated loss in the period the loss becomes known. For contracts with post-installation systems monitoring and maintenance, the Company recognizes revenue related to systems monitoring and maintenance over the contract term on a straight-line basis.

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) cost related change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect on the Company's consolidated statements of operations. The table below outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three and six months ended July 1, 2018 and July 2, 2017 as well as the number of projects that comprise such changes. For purposes of the following table, only projects with changes in estimates that have a net impact on revenue of at least $1.0 million during the periods were presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
July 1, 2018
 
July 2, 2017
 
July 1, 2018
 
July 2, 2017
Decrease in revenue from net changes in transaction prices
 
$
(4,639
)
 
$
—

 
$
(4,639
)
 
$
—

Increase (decrease) in revenue from net changes in input cost estimates
 
(10,876
)
 
7,381

 
(9,165
)
 
9,599

Net increase (decrease) in revenue from net changes in estimates
 
$
(15,515
)
 
$
7,381

 
$
(13,804
)
 
$
9,599

 
 
 
 
 
 
 
 
 

Number of projects
 
3

 
2

 
4

 
3

 
 
 
 
 
 
 
 
 
Net change in estimate as a percentage of aggregate revenue for associated projects
 
(17.9
)%
 
2.6
%
 
(4.2
)%
 
2.0
%

For the three and six months ended July 1, 2018, revenue decreased $15.5 million and $13.8 million, respectively, from net changes in transaction prices and input cost estimates. The changes were primarily due to product cost forecast changes related to the redesign of certain project materials. For the three and six months ended July 2, 2017, revenue increased $7.4 million and $9.6 million, respectively, from net changes in input cost estimates. The changes in input cost estimates were primarily due to product cost forecast changes as PV installation related to certain project has been completed.

Contract Assets and Liabilities

Contract assets consist of (i) retainage which represents 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; and (ii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for long-term construction contracts. Contract liabilities consist of deferred revenue and customer advances, which represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of a sales contract. Contract liabilities exclude deferred revenue related to the Company's residential lease program which are accounted for under the lease accounting guidance. Refer to "Note 5. Balance Sheet Components" for further details.

During the six months ended July 1, 2018, the increase in contract assets of $35.4 million was primarily driven by unbilled receivables for commercial projects where certain milestones had not yet been reached, but the criteria to recognize revenue had been met. During the six months ended July 1, 2018, the decrease in contract liabilities of $35.9 million was primarily due to the attainment of milestones billings for a variety of projects. During the three months ended July 1, 2018, the Company recognized revenue of $53.0 million that was included in contract liabilities as of April 1, 2018. During the six months ended July 1, 2018, the Company recognized revenue of $91.6 million that was included in contract liabilities as of December 31, 2017.

The following table represents the Company's remaining performance obligations as of July 1, 2018 for sales of solar power systems, including projects under sales contracts subject to conditions precedent, and EPC agreements for developed projects that the Company is constructing or expects to construct. The Company expects to recognize $172.5 million of revenue for such contracts upon transfer of control of the projects.

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Project
 
Revenue Category
 
EPC Contract/Partner Developed Project
 
Expected Year Revenue Recognition Will Be Completed
 
Percentage of Revenue Recognized
Joint Base Anacostia Bolling (JBAB)
 
EPC revenue and solar power systems
 
Constellation
 
2018
 
83.8%
Distribution Generation
 
EPC revenue and solar power systems
 
Various
 
2020
 
72.1%*
*denotes average percentage of revenue recognized

As of July 1, 2018, the Company entered into contracts with customers for the future sale of modules and components for an aggregate transaction price of $330.9 million, the substantial majority of which the Company expects to recognize as revenue through 2019. As of July 1, 2018, the Company had entered into O&M contracts of utility-scale PV solar power systems. The Company expects to recognize $10.4 million of revenue during the non-cancellable term of these O&M contracts over an average period of three months.

Note 4. OTHER INTANGIBLE ASSETS

Other Intangible Assets

The following tables present details of the Company's acquired other intangible assets:
(In thousands)
 
Gross
 
Accumulated
Amortization
 
Net
As of July 1, 2018
 
 
 
 
 
 
Patents and purchased technology
 
$
52,944

 
$
(32,066
)
 
$
20,878

 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
Patents and purchased technology
 
$
52,313

 
$
(26,794
)
 
$
25,519


During the three and six months ended July 1, 2018, aggregate amortization expense for intangible assets totaled $2.6 million and $5.3 million, respectively. During the three and six months ended July 2, 2017, aggregate amortization expense for intangible assets totaled $4.4 million and $7.5 million, respectively.

As of July 1, 2018, the estimated future amortization expense related to intangible assets with finite useful lives is as follows:
(In thousands)
 
Amount
Fiscal Year
 
 
2018 (remaining six months)
 
$
5,081

2019
 
9,247

2020
 
6,515

Thereafter
 
35

 
 
$
20,878


Note 5. BALANCE SHEET COMPONENTS
 
 
As of
(In thousands)
 
July 1, 2018

December 31, 2017
Accounts receivable, net:
 
 
 
 
Accounts receivable, gross1,2
 
$
255,068

 
$
242,327

Less: allowance for doubtful accounts3
 
(45,626
)
 
(35,387
)
Less: allowance for sales returns
 
(3,647
)
 
(1,974
)
 
 
$
205,795

 
$
204,966


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1Includes short-term financing receivables associated with solar power systems leased of $22.7 million and $19.1 million as of July 1, 2018 and December 31, 2017, respectively (see "Note 6. Leasing").

2The Company pledged accounts receivable of $1.5 million and $1.7 million as of July 1, 2018 and December 31, 2017, respectively, to third-party investors as security for the Company's contractual obligations.

3Includes allowance for losses of $8.5 million on the short-term financing receivables associated with solar power systems leased, out of which $1.8 million and $2.7 million were recognized during the three and six months ended July 1, 2018, respectively.



As of
(In thousands)

July 1, 2018
 
December 31, 2017
Inventories:


 

Raw materials

$
55,353

 
$
59,288

Work-in-process

90,120

 
111,164

Finished goods

222,934

 
182,377

 

$
368,407

 
$
352,829


 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Prepaid expenses and other current assets:
 
 
 
 
Deferred project costs1
 
$
23,218

 
$
33,534

VAT receivables, current portion
 
9,441

 
11,561

Deferred costs for solar power systems to be leased
 
31,599

 
25,076

Derivative financial instruments
 
532

 
2,612

Other receivables
 
35,583

 
49,015

Prepaid taxes
 
18

 
426

Other prepaid expenses
 
20,519

 
23,434

Other current assets
 
438

 
551

 
 
$
121,348

 
$
146,209

1As of July 1, 2018 and December 31, 2017, the Company had pledged deferred project costs of $1.0 million, and $2.9 million, respectively, to third-party investors as security for the Company's contractual obligations.

 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Project assets - plants and land:
 
 
 
 
Project assets — plants
 
$
72,386

 
$
90,879

Project assets — land
 
4,011

 
12,184

 
 
$
76,397

 
$
103,063

Project assets — plants and land, current portion
 
$
76,347

 
$
103,063


As a result of the Company's evaluation of its ability to recover the costs incurred to date for its solar development assets, management determined that $24.7 million of costs should be written off. Such charges were recorded as a component of cost of goods sold for the six months ended July 1, 2018. While the Company considered all reasonably available information, the estimate includes significant risks and uncertainties as the pricing environment in the solar industry is currently volatile with increased uncertainty brought about by the tariffs imposed pursuant to the Section 201 trade case. As more information becomes available, it is reasonably possible that the Company's estimate of fair value may change resulting in the need to further write down the solar development assets, or resulting in the recognition of gains in the future if industry conditions have improved at the time of sale.


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As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Property, plant and equipment, net2:
 
 
 
 
Manufacturing equipment
 
$
92,399

 
$
406,026

Land and buildings
 
133,808

 
197,084

Leasehold improvements
 
118,958

 
297,522

Solar power systems1
 
470,390

 
451,678

Computer equipment
 
102,132

 
111,183

Furniture and fixtures
 
10,435

 
12,621

Construction-in-process
 
15,345

 
14,166

 
 
943,467

 
1,490,280

Less: accumulated depreciation
 
(186,396
)
 
(342,435
)
 
 
$
757,071

 
$
1,147,845

1Includes $438.2 million and $419.0 million of solar power systems associated with sale-leaseback transactions under the financing method as of July 1, 2018 and December 31, 2017, respectively, which are depreciated using the straight-line method to their estimated residual values over the lease terms of up to 25 years (see "Note 6. Leasing").

2Includes a non-cash impairment charge of $369.2 million recorded during the second quarter of fiscal 2018 associated with upstream asset group, which excludes all solar power systems as these are part of the downstream asset group. Impairment and accumulated depreciation are included in each asset category, representing the new cost basis in accordance with ASC 360.

 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Property, plant and equipment, net by geography1:
 
 
 
 
United States
 
$
480,289

 
$
488,970

Philippines
 
109,951

 
325,601

Malaysia
 
130,452

 
233,824

Mexico
 
23,527

 
80,560

Europe
 
12,701

 
18,767

Other
 
151

 
123

 
 
$
757,071

 
$
1,147,845

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

Impairment of Property, Plant and Equipment

In the second quarter of fiscal 2018, the Company announced its proposed plan to change its corporate structure into upstream and downstream business units, and long-term strategy to upgrade its interdigitated back contact (“IBC”) technology to new generation technology (“NGT”). Accordingly, the Company expects to upgrade the equipment associated with its manufacturing operations for the production of NGT over the next several years. In connection with these planned changes that will impact the utilization of its manufacturing assets, continued pricing challenges in the industry, as well as the ongoing uncertainties associated with the Section 201 trade case, the Company determined indicators of impairment existed and therefore performed a recoverability test by estimating future undiscounted net cash flows expected to be generated from the use of these asset groups. Based on the test performed, the Company determined that its estimate of future undiscounted net cash flows was insufficient to recover the carrying value of the upstream business unit’s assets and consequently performed an impairment analysis by comparing the carrying value of the asset group to its estimated fair value.

In estimating the fair value of the long-lived assets, the Company made estimates and judgments that it believes reasonable market participants would make, using Level 3 inputs under ASC 820. The impairment evaluation utilized a discounted cash flow analysis inclusive of assumptions for forecasted profit, operating expenses, capital expenditures, remaining useful life of the Company's manufacturing assets, a discount rate, as well as market and cost approach valuations performed by a third-party valuation specialist, all of which require significant judgment by management.

In accordance with such evaluation, the Company recognized a non-cash impairment charge of $369.2 million for the three and six months ended July 1, 2018. The total impairment loss was allocated to the long-lived assets of the group on a pro

24
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rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group did not reduce the carrying amount of that asset below its determined fair value. As a result, non-cash impairment charges of $355.1 million, $12.8 million and $1.2 million were allocated to "Cost of revenue", "Research and development" and "Sales, general and administrative", respectively, on the consolidated statement of operations for the three and six months ended July 1, 2018 based on the departments such assets are servicing. Further, the $355.1 million non-cash impairment charge in "Cost of revenue" was allocated among the Company’s three end-customer segments based on megawatts deployed in the second quarter of fiscal 2018. As a result, non-cash impairment charges of $92.5 million, $103.8 million and $158.8 million were allocated to the Residential Segment, Commercial Segment and Power Plant Segment, respectively, for the three and six months ended July 1, 2018.

 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Other long-term assets:
 
 
 
 
Equity method investments1
 
$
41,921

 
$
450,000

Equity investments without readily determinable fair value
 
35,832

 
35,840

Other2
 
62,286

 
60,858

 
 
$
140,039

 
$
546,698


1On June 19, 2018, the Company completed its previously announced Divestiture Transaction. As of July 1, 2018 and December 31, 2017, the Company's investment in the 8point3 Group had a carrying value of zero and $382.7 million, respectively (see "Note 10. Equity Method Investments").

2As of July 1, 2018 and December 31, 2017, the Company had pledged deferred project costs of $6.3 million and $6.4 million, respectively, to third-party investors as security for the Company's contractual obligations.
 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Accrued liabilities:
 
 
 
 
Employee compensation and employee benefits
 
$
44,152

 
$
53,225

Deferred revenue1
 
2,182

 
3,242

Interest payable
 
14,598

 
15,396

Short-term warranty reserves
 
20,959

 
25,222

Restructuring reserve
 
9,526

 
3,886

VAT payables
 
10,174

 
8,691

Derivative financial instruments
 
998

 
1,452

Legal expenses
 
27,183

 
48,503

Taxes payable
 
17,299

 
21,307

Liability due to AU Optronics
 
28,234

 
21,389

Other
 
21,100

 
26,895

 
 
$
196,405

 
$
229,208

1 Consists of advance consideration received from customers under the residential lease program which is accounted for in accordance with the lease accounting guidance.


25
Table of Contents


 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Other long-term liabilities:
 
 
 
 

Deferred revenue1
 
$
60,475

 
$
67,001

Long-term warranty reserves
 
155,826

 
156,082

Long-term sale-leaseback financing
 
500,309

 
479,597

Unrecognized tax benefits
 
19,997

 
19,399

Long-term pension liability
 
4,914

 
4,465

Derivative financial instruments
 
102

 
1,175

Long-term liability due to AU Optronics
 
38,599

 
57,611

Other
 
19,117

 
18,792

 
 
$
799,339

 
$
804,122

1 Consists of advance consideration received from customers under the residential lease program which is accounted for in accordance with the lease accounting guidance.

 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Accumulated other comprehensive loss:
 
 
 
 

Cumulative translation adjustment
 
$
(6,955
)
 
$
(6,631
)
Net unrealized gain (loss) on derivatives
 
1,501

 
(541
)
Net gain on long-term pension liability adjustment
 
4,164

 
4,164

Deferred taxes
 
(386
)
 
—

 
 
$
(1,676
)
 
$
(3,008
)

Note 6. 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 1, 2018 and December 31, 2017:
 
 
As of
(In thousands)
 
July 1, 2018
 
December 31, 2017
Solar power systems leased and to be leased, net1,2:
 
 
 
 
Solar power systems leased
 
$
786,121

 
$
749,697

Solar power systems to be leased
 
20,515

 
26,830

 
 
806,636

 
776,527

Less: accumulated depreciation and impairment3
 
(447,541
)