SUNPOWER CORPORATION Cautionary Statement Regarding Forward-Looking Statements
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 filed with theSecurities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not represent historical facts or the assumptions underlying such statements. We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "potential," "seek," "should," "will," "would," and similar expressions to identify forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, the sufficiency of our cash and our liquidity, projected costs and cost reduction measures, development of new products and improvements to our existing products, the impact of recently adopted accounting pronouncements, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, our ability to monetize our solar projects, legislative actions and regulatory compliance, competitive positions, management's plans and objectives for future operations, our ability to obtain financing, our ability to comply with debt covenants or cure any defaults, our ability to repay our obligations as they come due, our ability to continue as a going concern, our ability to complete certain divestiture transactions such as the Spin-Off or other strategic transactions, trends in average selling prices, the success of our joint ventures and acquisitions, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, expected restructuring charges, risks related to privacy and data security, statements regarding the anticipated impact on our business of the COVID-19 pandemic and related public health measures, macroeconomic trends and uncertainties, and the likelihood of any impairment of project assets, long-lived assets, and investments. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks and uncertainties include a variety of factors, some of which are beyond our control. Factors that could cause or contribute to such differences include, but are not limited to, those identified above, those discussed in the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 , and our other filings with theSEC . These forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we are under no obligation to, and expressly disclaim any responsibility to, update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. Our fiscal year ends on the Sunday closest to the end of the applicable calendar year. All references to fiscal periods apply to our fiscal quarter or year, which end on the Sunday closest to the calendar month end. Unless the context otherwise requires, all references to "SunPower ," "we," "us," or "our" refer toSunPower Corporation and its subsidiaries, includingMaxeon Solar Technologies, Ltd.
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Table of Contents OverviewSunPower Corporation (together with its subsidiaries, "SunPower ," "we," "us," or "our") is a leading global energy company that delivers solar solutions to customers worldwide through an array of hardware, software, and financing options, operations and maintenance ("O&M") services, and "Smart Energy" solutions. Our Smart Energy initiative is designed to add layers of intelligent control to homes, buildings and grids-all personalized through easy-to-use customer interfaces. Of all the solar cells commercially available to the mass market, we believe our solar cells have the highest conversion efficiency, a measurement of the amount of sunlight converted by the solar cell into electricity. For more information about our business, please refer to the section titled "Part I. Item 1. Business" in our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 .
Maxeon Solar Separation Transaction
As previously announced,SunPower intends to contribute certain non-U.S. operations and assets of its SunPower Technologies segment toMaxeon Solar Technologies, Ltd. , a company organized under the laws ofSingapore ("Maxeon Solar"), and then to spin-off (the "Spin-Off") Maxeon Solar into a separate publicly traded company through a pro rata distribution ofSunPower's interest in Maxeon Solar toSunPower's stockholders pursuant to the Separation and Distribution Agreement, dated as ofNovember 8, 2019 , betweenSunPower and Maxeon Solar. Pursuant to the Investment Agreement, dated as ofNovember 8, 2019 (as amended, the "Investment Agreement"), betweenSunPower , Tianjin Zhonghuan Semiconductor Co., Ltd. ("TZS") and, for limited purposes set forth therein, Total SolarINTL SAS , an affiliate ofTotal SE (collectively, "Total"), TZS will purchase from Maxeon Solar ordinary shares that will represent 28.848% of the outstanding ordinary shares of Maxeon Solar after giving effect to the Spin-Off and TZS investment. The Separation and Distribution Agreement and Investment Agreement contemplate certain additional agreements be entered into between us, Maxeon Solar and other parties in connection with the Spin-Off and related investment by TZS, including a tax matters agreement, employee matters agreement, transition services agreement, brand framework agreement, cross license agreement, collaboration agreement and supply agreement (collectively, the "Ancillary Agreements"), each as we previously noted described in our announcement of the contemplated transaction. We expect to incur total costs associated with the separation activities of approximately$60.0 million through the completion of the separation. Furthermore, we have also concluded on the legal form of the separation and determined that Maxeon Solar will be the spinnee in theU.S. Accordingly, during the first half of fiscal 2020, we had certain internal reorganizations of, and transactions among, our wholly owned subsidiaries and operating activities in preparation for the separation. As a condition precedent to completing the Spin-Off under the Investment Agreement, Maxeon Solar must obtain certain debt financing (the "Debt Financing Condition"). The$125.0 million of borrowing capacity under the Bank Facilities (as defined below) and the$200.0 million aggregate principal amount of the Notes (as defined below) will satisfy the Debt Financing Condition in the Investment Agreement. OnJuly 9, 2020 Maxeon Solar announced that it had priced an offering of$185.0 million aggregate principal amount of its 6.50% green convertible senior notes due 2025 (the "Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). Maxeon Solar also granted the initial purchasers of the Notes an option to purchase up to an additional$15.0 million principal amount of Notes and such option was exercised in full onJuly 14, 2020 . OnJuly 17, 2020 , Maxeon Solar issued$200.0 million aggregate principal amount of Notes pursuant to an indenture (the "Indenture"), datedJuly 17, 2020 between Maxeon Solar andDeutsche Bank Trust Company Americas , as trustee. The Notes are senior, unsecured obligations of Maxeon Solar and will accrue regular interest at a rate of 6.50% per annum, payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2021 . Additional interest may accrue on the Notes in certain circumstances. The Notes will mature onJuly 15, 2025 , unless earlier repurchased, redeemed or converted, and are subject to the terms and conditions set forth in the Indenture.
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The Notes are not initially convertible. If the Spin-Off occurs within three months afterJuly 17, 2020 , and certain conditions relating to the physical delivery forward transaction described below are satisfied, then noteholders will have the right to convert their Notes into ordinary shares of Maxeon Solar in certain circumstances and during specified periods. The initial conversion price will be established following the Spin-Off, if it occurs, and will represent a premium of approximately 15.00% over the average of the volume-weighted average price per ordinary share of Maxeon Solar over the period (the "Note Valuation Period") of 15 consecutive trading days beginning on, and including, the fifth trading day after the date on which Maxeon Solar's ordinary shares are distributed toSunPower's common stockholders in the Spin-Off and such ordinary shares begin to trade "regular way". However, the initial conversion price will not be less than approximately$4.60 per ordinary share of Maxeon Solar. Maxeon Solar will settle conversions by paying or delivering, as applicable, cash, ordinary shares of Maxeon Solar or a combination of cash and ordinary shares of Maxeon Solar, at Maxeon Solar's election. If the Spin-Off does not occur within three months after the Notes are first issued, if Maxeon Solar determines on any earlier date that it will not consummate the Spin-Off, or if certain conditions relating to the physical delivery forward transaction described below are not satisfied byNovember 16, 2020 , then Maxeon Solar will be required to redeem all outstanding Notes at a cash redemption price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. The Notes will be also redeemable, in whole or in part, at a cash redemption price equal to their principal amount, plus accrued and unpaid interest, if any, at Maxeon Solar's option at any time, and from time to time, on or afterJuly 17, 2023 and on or before the 60th scheduled trading day immediately before the maturity date, but only if the last reported sale price per ordinary share of Maxeon Solar exceeds 130% of the conversion price for a specified period of time. In addition, the Notes will be redeemable, in whole and not in part, at a cash redemption price equal to their principal amount, plus accrued and unpaid interest, if any, at Maxeon Solar's option in connection with certain changes in tax law. Upon the occurrence of a fundamental change (as defined in the Indenture), noteholders may require Maxeon Solar to repurchase their Notes for cash. The repurchase price will be equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The Indenture sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving Maxeon Solar after which the Notes become automatically due and payable. The Indenture provides that Maxeon Solar shall not consolidate with or merge with or into, or (directly, or indirectly through one or more of its subsidiaries) sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the consolidated assets of Maxeon Solar and its subsidiaries, taken as a whole, to another person, unless: (i) the resulting, surviving or transferee person (if not Maxeon Solar) is a corporation organized and existing under the laws ofthe United States of America , any State thereof or theDistrict of Columbia orSingapore , and such corporation (if not Maxeon Solar) expressly assumes by supplemental indenture all of Maxeon Solar's obligations under the Notes and the Indenture; and (ii) immediately after giving effect to such transaction, no default or event of default has occurred and is continuing under the Indenture. OnJuly 17, 2020 and in connection with the issuance of the Notes, Maxeon Solar entered into a privately negotiated forward-starting forward share purchase transaction (the "Prepaid Forward Transaction") withMerrill Lynch International (the "Prepaid Forward Counterparty"), pursuant to which Maxeon Solar will repurchase approximately$40 million worth of ordinary shares of Maxeon Solar, subject to the conditions set forth therein, including receipt of required shareholder approvals on an annual basis. The Prepaid Forward Transaction will become effective on the first day of the Note Valuation Period. The number of ordinary shares of Maxeon Solar to be repurchased under the Prepaid Forward Transaction will be determined based on the arithmetic average of the volume-weighted average prices per ordinary share of Maxeon Solar over the Note Valuation Period, subject to a floor price and subject underSingapore law to a limit in aggregate of no more than 20% of the total number of ordinary shares in Maxeon Solar's capital as of the date of the annual shareholder repurchase approval (calculated together with the number of ordinary shares to be repurchased in connection with the Physical Delivery Forward Transaction (as described below)), and Maxeon Solar will prepay the forward purchase price in cash using a portion of the net proceeds from the sale of the Notes. Under the terms of the Prepaid Forward Transaction, the Prepaid Forward Counterparty will be obligated to deliver the number of ordinary shares of Maxeon Solar underlying the transaction to Maxeon Solar, or pay cash to the extent Maxeon Solar fails to provide to Prepaid Forward Counterparty evidence of a valid shareholder authorization, on or shortly after the maturity date of the Notes, subject to the ability of the Prepaid Forward Counterparty to elect to settle all or a portion of the transaction early.
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OnJuly 17, 2020 and in connection with the issuance of the Notes, Maxeon Solar entered into a privately negotiated forward-starting physical delivery forward transaction (the "Physical Delivery Forward Transaction" and, together with the Prepaid Forward Transaction, the "Forward Transactions"), withMerrill Lynch International (the "Physical Delivery Forward Counterparty," together with the Prepaid Forward Counterparty, the "Forward Counterparties"), with respect to approximately$60 million worth of ordinary shares of Maxeon Solar (the "Physical Delivery Maxeon Shares"), pursuant to which the Physical Delivery Forward Counterparty agreed to deliver the Physical Delivery Maxeon Shares to Maxeon Solar or a third party-trustee designated by Maxeon Solar for no consideration at or around the maturity of the Notes subject to the conditions set forth in the agreements governing the Physical Delivery Forward Transaction. The Physical Delivery Forward Transaction will become effective on the first day of the Note Valuation Period. The number of ordinary shares of Maxeon Solar underlying the Physical Delivery Forward Transaction is approximately$60 million worth of ordinary shares of Maxeon Solar to be issued and sold by Maxeon Solar to one or more of the initial purchasers or their affiliates (the "Underwriters"), to be sold during the Note Valuation Period in a registered offering off of Maxeon Solar's registration statement on Form F-3 to be filed with theSecurities and Exchange Commission at prevailing market prices at the time of sale or at negotiated prices. The Underwriters will receive all of the proceeds from the sale of such ordinary shares of Maxeon Solar. Maxeon Solar will not receive any proceeds from the sale of such ordinary shares of Maxeon Solar. The Forward Transactions are generally expected to facilitate privately negotiated derivative transactions, including swaps, between the Forward Counterparties and investors in the Notes relating to ordinary shares of Maxeon Solar by which investors in the Notes will establish short positions relating to ordinary shares of Maxeon Solar and otherwise hedge their investments in the Notes concurrently with the Note Valuation Period. While the sales of ordinary shares of Maxeon Solar during the Note Valuation Period in a registered offering in connection with the Physical Delivery Forward Transaction could cause the market price of ordinary shares of Maxeon Solar to be lower, the entry into the Forward Transactions and the entry by the Forward Counterparties into derivative transactions in respect of ordinary shares of Maxeon Solar with the purchasers of the Notes could have the effect of increasing, or reducing the size of any decrease in, the price of ordinary shares of Maxeon Solar during and/or shortly after, the Note Valuation Period. Neither Maxeon Solar nor the Forward Counterparties will control how such purchasers of the Notes may use such derivative transactions. In addition, such purchasers may enter into other transactions relating to ordinary shares of Maxeon Solar or the Notes in connection with or in addition to such derivative transactions, including the purchase or sale of ordinary shares of Maxeon Solar. As a result, the existence of the Forward Transactions, such derivative transactions and any related market activity could cause more purchases or sales of ordinary shares of Maxeon Solar over the term of the Forward Transactions than there otherwise would have been had Maxeon Solar not entered into the Forward Transactions, and such purchases or sales could potentially increase (or reduce the size of any decrease in) or decrease (or reduce the size of any increase in) the market price of ordinary shares of Maxeon Solar and/or the trading prices of the Notes. In addition, in connection with the settlement or unwind of the Forward Transactions, the Forward Counterparties may purchase ordinary shares of Maxeon Solar, and such purchases may have the effect of increasing, or preventing a decline in, the market price of ordinary shares of Maxeon Solar. OnJuly 14, 2020 , Maxeon Solar and certain of its subsidiaries (collectively, the "Maxeon Solar Group ") entered into the following debt facilities with a syndicate of lenders (the "Bank Facilities"): •a$55.0 million term loan facility available toSunPower Philippines Manufacturing Ltd. (the "Philippines Term Loan"), which is a subsidiary of Maxeon Solar; •a$50.0 million working capital facility available to Maxeon Solar (the "Singapore Working Capital Facility"); and •a$20.0 million term loan facility available to Maxeon Solar (the "Singapore Term Loan" and, together with the Philippines Term Loan, the "Term Loans"). Each of the Bank Facilities mature and are repayable in full onJuly 14, 2023 (the "Termination Date"). The Singapore Working Capital Facility is available to be drawn during the period from the date on which all conditions under the relevant finance documents are satisfied to and including the date falling one month prior to the Termination Date. The Term Loans are available to be drawn by the relevant borrowers for a period of twelve months after the date on which all conditions under the relevant finance documents are satisfied and will be repayable, in equal quarterly installments over the 18-month period preceding the applicable maturity date.
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Further, Maxeon Solar filed Amendment No. 1 to its Form 20-F with theSEC onJuly 2, 2020 , an Amendment No. 2 to its Form 20-F describing the above convertible notes and debt facilities onJuly 15, 2020 , and an Amendment No. 3 to its Form 20-F onJuly 31, 2020 , seeking effectiveness. As of the date of filing of this Form 10-Q, theSEC has declared Maxeon Solar's Form 20-F effective, and we have satisfied all of the substantive closing conditions in the Investment Agreement with TZS. We expect to complete the Maxeon Solar separation transaction during the third fiscal quarter of 2020.
Impact of COVID-19 to our Business
InDecember 2019 , a novel strain of coronavirus ("COVID-19"), was reported to have surfaced inWuhan, China , resulting in shutdowns of manufacturing and commerce in the months that followed. Since then, the COVID-19 pandemic has spread to multiple countries worldwide, includingthe United States and has resulted in authorities implementing numerous measures to try to contain the disease or slow its spread, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns The result of the measures have negatively impacted our business, especially in the second quarter of fiscal 2020. The health and safety of our employees, contractors, and customers are a top priority for us. In an effort to protect our employees and contractors, we took and continue to take proactive and aggressive actions, starting with the earliest signs of the outbreak to adopt social distancing policies at our locations around the world, including working from home and suspending employee travel. As the installation of solar systems is considered an essential business in many jurisdictions, employees and contractors who are working onsite are required to adhere to strict safety measures, including the use of masks and sanitizer, wellness screenings prior to accessing work sites, staggered break times to prevent congregation, prohibitions on physical contact with co-workers or customers, restrictions on access through only a single point of entry and exit, eliminating carpooling, and utilizing video conferencing, where possible. We have also incorporated other rules such as restricting visitors to any of our facilities that remain open and proactively providing employees with hand sanitizer and disinfectant wipes. Also, we developed aCOVID-19 Response Team that meets regularly to develop tailored action plans and protocols to protect our employees and publishes these actions, guidelines, and rules on our intranet that available to all employees. At the onset of the pandemic, across the organization, we have taken specific measures to both sustain our business and operations as well as protect our employees in light of the COVID-19 pandemic. These measures include reducing the salaries of executive officers, fees payable to our independent directors, and temporarily implementing a four-day work week for majority of our employees to address reduced demand and workloads. From a downstream perspective, we have implemented proactive and aggressive measures to protect customers and mitigate operational and financial risk from COVID-19, even after many local governments eased restrictions and resumed normal economic activities. Many of the same measures we have implemented to protect our employees noted above can also be utilized to protect our customers. Additional measures implemented to protect our customers include instituting additional training and awareness of COVID-19 for our employees and limiting tool sharing at all construction and installation sites. Depending on state and local government regulations, installation of our solar systems can be deemed as essential business activity in the midst of government lockdowns. We have and will continue to adhere to government guidelines and regulations designed to protect our customers. Consistent with actions recommended by local governments, our factories inOregon ,France ,Malaysia ,Mexico , andthe Philippines were temporarily idled in March andApril 2020 in an effort to proactively address financial and operational impacts of COVID-19 pandemic and position our company well for when the solar industry returns to strong growth. During the last week ofJune 2020 , the majority of our employees reverted back to a typical five-day work week and returned full salaries during the last week of July. Our factories have resumed production as ofMay 2020 in accordance with the relevant local restrictions and with additional safety measures to protect our employees. As ofJuly 2020 , COVID-19 cases are rebounding and increasing in theU.S. and many other jurisdictions worldwide. As a result, to curtail the spread, many jurisdictions are beginning to shut down or are planning to shut down many businesses and economic activities again. It is not clear what the potential effects any such alterations or modifications including any new government sanctions may have on our business, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of fiscal 2020 and beyond. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.
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Regulatory Changes related to COVID-19
OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act permits Net Operating Losses ("NOLs") carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Furthermore, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. We are currently evaluating the impact of the CARES Act, but at present do not expect that the NOL carryback provision and Section 163(j) modification of the CARES Act would result in a material cash benefit to us. In addition to any tax refunds available under the CARES Act, we intend to take advantage of the opportunity to defer payroll taxes under the CARES Act which allows payments of the employer share ofSocial Security payroll taxes that would otherwise be due from the date of enactment throughDecember 31, 2020 , to be paid over the following two years. We are also exploring the availability of the employee retention credit provided for under the CARES Act. OnJune 29, 2020 , California Assembly Bill ("AB 85") was signed. AB 85 suspends the use ofCalifornia net operating loss deductions and limits maximum business incentive tax credit utilization to$5.0 million annually starting with tax years beginning on or afterJanuary 1, 2020 throughDecember 31, 2022 . As ofJune 28, 2020 , we continue to forecast aU.S. taxable loss for the year, without the taxable gain from the spin-off (the "Spin-Off") Maxeon Solar into a separate publicly traded company, because we consider the transaction as a discrete event that has not occurred as ofJune 28, 2020 . Accordingly, we did not recognize any tax related to AB 85 since the Spin-Off has not occurred as of the second quarter of fiscal 2020. The financing requirements for the Spin-Off were met inJuly 2020 , and we expect to consummate the Spin-Off in the third quarter of fiscal 2020. The estimated additionalCalifornia income taxes payable following the Spin-Off transaction is completed are approximately$10 million to$15 million .
Segments Overview
Consistent with fiscal 2019, our segment reporting consists of upstream and
downstream structure. Under this segmentation, the SunPower Energy Services
Segment ("SunPower Energy Services" or "Downstream") refers to sales of solar
energy solutions in the North America region (collectively previously referred
to as "Distributed Generation" or "DG") including direct sales of turn-key
engineering, procurement and construction ("EPC") services, sales to our
third-party dealer network, sales of energy under power purchase agreements
("PPAs"), storage solutions, cash sales and long-term leases directly to end
customers, and sales to resellers. The SunPower Energy Services Segment also
includes sales of our global Operations and Maintenance ("O&M") services. The
SunPower Technologies Segment ("SunPower Technologies" or "Upstream") refers to
our technology development, worldwide solar panel manufacturing operations,
equipment supply to resellers, commercial and residential end-customers outside
of North America ("International DG"), and worldwide power plant project
development and project sales. Some support functions and responsibilities have
been shifted to each segment, including financial planning and analysis, legal,
treasury, tax and accounting support and services, among others.
Our operating structure provides our management with a comprehensive financial
overview of our key businesses. The application of this structure permits us to
align our strategic business initiatives and corporate goals in a manner that
best focuses our businesses and support operations for success.
Our Chief Executive Officer, as the chief operating decision maker ("CODM"),
reviews our business, manages resource allocations and measures performance of
our activities between the SunPower Energy Services Segment and SunPower
Technologies Segment.
For more information about our business segments, see the section titled "Part
I. Item 1. Business" of our Annual Report on Form 10-K for the fiscal year ended
December 29, 2019 . For more segment information, see "Item 1. Financial
Statements-Note 16. Segment Information and Geographical Information" in the
Notes to the condensed consolidated financial statements in this Quarterly
Report on Form 10-Q.
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Table of Contents Outlook We believe the execution of our strategy will provide attractive opportunities for profitable growth over the long term. We expect the COVID-19 pandemic to continue to impact our business and may have a material adverse effect on our business, and thus, we are aggressively managing our response to the pandemic. We believe the most significant elements of uncertainty are the intensity and duration of the impact on project installation and commercial and consumer spending as well as the ability of our sales channels, supply chain, manufacturing, and distribution to operate with minimal disruption for the remainder of fiscal 2020 and beyond, especially if local governments impose new measures and restrictions in jurisdictions in which we operate. The disruptions noted above could negatively impact our financial position, results of operations, cash flows, and outlook.
Demand
Throughout fiscal 2018 and 2019, we faced market challenges, including competitive solar product pricing pressure and the impact of tariffs imposed pursuant to Section 201 and Section 301 of the Trade Act of 1974. OnFebruary 7, 2018 , tariffs went into effect pursuant to Proclamation 9693, which approved recommendations to provide relief toU.S. manufacturers and imposed safeguard tariffs on imported solar cells and modules, based on the investigations, findings, and recommendations of theInternational Trade Commission . While solar cells and modules based on interdigitated back contact ("IBC") technology, like our E-Series (Maxeon 2), X-Series (Maxeon 3), and A-Series (Maxeon 5) panels and related products, were granted exclusion from these safeguard tariffs onSeptember 19, 2018 , our solar products based on other technologies continue to be subject to the safeguard tariffs. OnJune 13, 2019 , theOffice of the United States Trade Representative ("USTR") published a notice describing its grant of exclusion requests for three additional categories of solar products. Beginning onJune 13, 2019 , the following categories of solar products are not subject to the Section 201 safeguard tariffs: (i) bifacial solar panels that absorb light and generate electricity on each side of the panel and that consist of only bifacial solar cells that absorb light and generate electricity on each side of the cells; (ii) flexible fiberglass solar panels without glass components other than fiberglass, such panels having power outputs ranging from 250 to 900 watts; and (iii) solar panels consisting of solar cells arranged in rows that are laminated in the panel and that are separated by more than 10 mm, with an optical film spanning the gaps between all rows that is designed to direct sunlight onto the solar cells, and not including panels that lack said optical film or only have a white or other backing layer that absorbs or scatters sunlight. The first of these 2019 exclusions, for bifacial solar panels, was revoked by the USTR inOctober 2019 . That revocation was stayed by theU.S. Court of International Trade inNovember 2019 . The USTR then revoked the exclusion again inApril 2020 , with the second revocation effectiveMay 18, 2020 . Because bifacial solar panels are rarely used in the distributed solar markets we serve, and because the other excluded technologies represent an inconsequential share of the global solar market, these exclusions are not expected to have a significant impact on our operations. Additionally, the USTR initiated an investigation under Section 301 of the Trade Act of 1974 into the government ofChina's acts, policies, and practices related to technology transfer, intellectual property, and innovation. Starting in 2018, the USTR imposed additional import duties of up to 25% on certain Chinese products covered by the Section 301 remedy. These tariffs include certain solar power system components and finished products, including those purchased from our suppliers for use in our products and used in our business. OnJanuary 15, 2020 ,the United States andChina entered into a "Phase One" trade agreement, and the two governments have indicated that they may seek to negotiate additional trade agreements. Nonetheless, the Phase One agreement does not contain specific provisions committingthe United States to reduce the Section 301 or Proclamation 9693 tariffs, and no fixed timetable for their removal has been announced. Additionally,the United States andChina continue to signal the possibility of taking additional retaliatory measures in response to actions taken by the other country, including in connection with the COVID-19 pandemic and the introduction of new laws and political measures inHong Kong . Such retaliatory measures could result in changes to existing trade agreements and terms, potentially including additional tariffs on imports fromChina or other countries, additional technology controls or controls on exports or imports and economic sanctions on Chinese or other persons. In the near term, imposition of these tariffs. In the near term, imposition of these tariffs - on top of anti-dumping and countervailing duties on Chinese solar cells and modules, imposed under the prior administration - is likely to result in a wide range of impacts to theU.S. solar industry, global manufacturing market and our business. Such tariffs could cause market volatility, price fluctuations, and demand reduction. During the three months and six months endedJune 28, 2020 , we incurred total tariffs charges of approximately$1.1 million and$2.2 million , respectively. Furthermore, certain actions taken under the Tariff Act of 1930, as amended, have resulted in the imposition of anti-dumping and countervailing duty trade remedies on certain solar power system components, including those used in our business for the manufacture of solar panels and solar power systems. During the three months and six months endedJune 28, 2020 , we incurred total AD/CVD charges of less than$0.1 million .
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In fiscal 2020, we expect to continue to offer the best opportunities for growth including our industry-leading A-Series (Maxeon 5) cell and panel technology, solar-plus-storage solutions and digital platform to improve customer service and satisfaction in our SunPower Energy Services offerings. We also continue to invest in our storage and digital initiatives and other research and development initiatives, including for development of our next generation Maxeon Solar technology. As the solar industry and many of our customers have been severely affected by the COVID-19 pandemic, our business activity and demand have been negatively impacted as well, especially early in the second quarter of fiscal 2020. Considering that the solar industry is an essential business activity in many jurisdictions, we continue to promote, offer, and sell our products and solutions mentioned above to meet the needs of our customers. To mitigate the impacts of COVID-19 and protect our employees and customers, we have implemented proactive and aggressive measures such as video sales consultations. We will continue to monitor the impacts of the COVID-19 pandemic on our demand and product offerings.
Supply
We are focused on delivering complete solar power generation solutions to our customers. As part of our solutions-based approach, we focus on SunPower Helix products for our commercial business customers and our SunPower Equinox product for our residential business customers. The Equinox and Helix systems are pre-engineered modular solutions for residential and commercial applications, respectively, that combine our high-efficiency solar module technology with integrated plug-and-play power stations, cable management systems, and mounting hardware that enable our customers to quickly and easily complete system installations and manage their energy production. Our Equinox systems utilize our latest Maxeon 5 cell and ACPV technology for residential applications, where we are also expanding our initiatives on storage and Smart Energy solutions. Additionally, we continue to focus on producing our lower cost, high efficiency Performance Line and our A-Series (Maxeon 5) product line, which will enhance our ability to rapidly expand our global footprint with minimal capital cost. We continue to see significant and increasing opportunities in technologies and capabilities adjacent to our core product offerings that can significantly reduce our customers' CCOE, including the integration of energy storage and energy management functionality into our systems, and have made investments to realize those opportunities, enabling our customers to make intelligent energy choices by addressing how they buy energy, how they use energy, and when they use it. We have added advanced module-level control electronics to our portfolio of technology designed to enable longer series strings and significant balance of system components cost reductions in large arrays. We currently offer solar panels that use microinverters designed to eliminate the need to mount or assemble additional components on the roof or the side of a building and enable optimization and monitoring at the solar panel level to ensure maximum energy production by the solar system. We continue to improve our unique, differentiated solar cell and panel technology. We emphasize improvement of our solar cell efficiency and LCOE and CCOE performance through enhancement of our existing products, development of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies. We are now producing our solar cells with over 25% efficiency in the lab and have reached production panel efficiencies over 24%. We monitor and change our overall solar cell manufacturing output in an ongoing effort to match profitable demand levels, with increasing bias toward our highest efficiency A-Series (Maxeon 5) product platform, which utilizes our latest solar cell technology, and our Performance Line product, which utilizes conventional cell technology that we purchase from third parties in low-cost supply chain ecosystems such asChina . We use our solar cells to manufacture our X-Series (Maxeon 3) and E-Series (Maxeon 2) solar panels at our solar panel assembly facilities located inMexico andFrance . We are also increasing production of our Performance Line technology at ourU.S. manufacturing facility. We are focused on reducing the cost of our solar panels and systems, including working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies and expanding economies of scale and reducing manufacturing cost and complexity in conjunction with our overall cost-control strategies. We believe that the global demand for solar systems is highly elastic and that our aggressive, but achievable, cost reduction roadmap will reduce installed costs for our customers across both of our business segments and drive increased demand for our solar solutions. We also work with our suppliers and partners to ensure the reliability of our supply chain. We have contracted with some of our suppliers for multi-year supply agreements, under which we have annual minimum purchase obligations. For more information about our purchase commitments and obligations, see "Liquidity and Capital Resources-Contractual Obligations" and "Note 9. Commitments and Contingencies" in the Notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
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Table of Contents We currently believe our supplier relationships and various short- and long-term contracts will afford us the volume of material and services required to meet our planned output; however, we face the risk that the pricing of our long-term supply contracts may exceed market value. For example, we purchase our polysilicon under fixed-price long-term supply agreements. The pricing under these agreements from prior years have resulted in above current market pricing for purchasing polysilicon, resulting in inventory losses we have realized. For several years now, we have elected to sell polysilicon inventory in excess of short-term needs to third parties at a loss, and may enter into further similar transactions in future periods. Due to the impacts of the COVID-19 pandemic, our operations and supply chain have been adversely affected as we temporarily idled our factories inFrance ,Malaysia ,Mexico ,the Philippines , and theU.S. in March andApril 2020 . To mitigate the impacts, we implemented cost-cutting measures to protect and maintain our supply chain relationships and manufacturing facilities that will position us for growth as soon as the solar industry stabilizes. These actions include temporary salary reductions and reduced work weeks. Beginning inJune 2020 , the majority of our employees resumed a normal five-day work week, returned to full salary, and we continued to ramp up production in our manufacturing facilities. We will continue to monitor the impacts of the COVID-19 pandemic on our supply chain relationships, manufacturing facilities, and long-term supply agreements moving forward. For more information and discussion on the risks and impact of the COVID-19 pandemic on our supply chain specifically, see "Part 1. Item 1A. Risk Factors-Risks Related to the Novel Coronavirus ("COVID-19") Pandemic" and "Part 1. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Impact of COVID-19 to our Business" herein. For additional information about these risks in general, see the risk factors set forth under the caption "Part 1. Item 1A. Risk Factors-Risks Related to Our Supply Chain," including "-Our long-term, firm commitment supply agreements could result in excess or insufficient inventory, place us at a competitive disadvantage on pricing, or lead to disputes, each of which could impair our ability to meet our cost reduction roadmap, and in some circumstances may force us to take a significant accounting charge" and "-We will continue to be dependent on a limited number of third-party suppliers for certain raw materials and components for our products, which could prevent us from delivering our products to our customers within required timeframes and could in turn result in sales and installation delays, cancellations, penalty payments and loss of market share" of our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 .
Results of Operations
Results of operations in dollars and as a percentage of net revenue were as
follows:
Three Months Ended
June 28, 2020 June 30, 2019
in thousands % of Revenue in thousands % of Revenue
Total revenue $ 352,914 100 $ 436,281 100
Total cost of revenue 331,316 94 416,481 95
Gross profit 21,598 6 19,800 5
Research and development 12,335 3 18,159 4
Sales, general and administrative 55,967 16 61,978 14
Restructuring charges 1,259 - 2,453 1
Gain on sale and impairment of residential lease
assets 141 - 8,301 2
Gain on business divestitures (10,458) (3) (137,286) (31)
Operating income (loss) (37,646) (10) 66,195 15
Other income, net 60,001 17 51,910 12Income before income taxes and equity in losses of unconsolidated investees
22,355 7 118,105 27
Provision for income taxes (3,068) (1) (6,068) (1)
Equity in losses of unconsolidated investees (889) - (1,963) -
Net income 18,398 6 110,074 26
Net income attributable to noncontrolling interests and redeemable noncontrolling interests
980 - 11,385 3
Net income attributable to stockholders $ 19,378 6 $ 121,459 29
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Six Months Ended
June 28, 2020 June 30, 2019
in thousands % of Revenue in thousands % of Revenue
Total revenue $ 802,104 100 $ 784,506 100
Total cost of revenue 743,058 93 801,991 102
Gross profit (loss) 59,046 7 (17,485) (2)
Research and development 27,973 3 33,152 4
Sales, general and administrative 121,925 15 124,835 16
Restructuring charges 2,835 - 1,788 -
(Gain) loss on sale and impairment of residential
lease assets (133) - 17,527 2
Gain on business divestitures (10,458) (1) (143,400) (18)
Operating loss (83,096) (10) (51,387) (6)
Other income, net 104,937 13 69,044 9Income before income taxes and equity in losses of unconsolidated investees
21,841 3 17,657 3
Provision for income taxes (4,937) (1) (11,865) (2)
Equity in losses of unconsolidated investees (644) - (283) -
Net income 16,260 2 5,509 1
Net income attributable to noncontrolling interests and redeemable noncontrolling interests
1,687 - 26,226 3
Net income attributable to stockholders $ 17,947 2 $ 31,735 4
Total Revenue:
Our total revenue during the three months ended June 28, 2020 decreased by 19%,
as compared to the three months ended on June 30, 2019 , primarily due to
decreases in revenue of our SunPower Energy Services Segment and our SunPower
Technologies Segment. Our total revenue during the six months ended June 28,
2020 increased by 2%, as compared to the six months ended on June 30, 2019 ,
primarily due to increases in revenue of our SunPower Energy Services Segment,
partially offset by declines in our SunPower Technologies Segment. Our
commercial backlog in SunPower Energy Services Segment is less susceptible to
the adverse impact as a result of COVID-19 since the commercial backlog is
booked months in advance. However, our SunPower Technologies Segment has been
significantly adversely impacted as a result of COVID-19 as we experienced a
significant decrease in volume.
We did not have significant customers that accounted for greater than 10% of
total revenue in the three months and six months ended
There is significant uncertainty with respect to the impact of the COVID-19
outbreak on our business. The impact of COVID-19 to our revenue during the three
months and six months ended
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Table of Contents Revenue - by Segment:
A description of our segments, along with other required information can be found in Note 16, "Segment and Geographical Information" of the consolidated financial statements in Item 1 Financial Statements. Below, we have further discussed increase and decrease in revenue for each segment.
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
SunPower Energy Services $ 217,885 $ 257,340 (15) % $ 513,146 $ 499,065 3 %
SunPower Technologies 170,435 314,948 (46) % 418,424 545,582 (23) %
Intersegment eliminations
and other (35,406) (136,007) (74) % (129,466) (260,141) (50) %
Total revenue $ 352,914 $ 436,281 (19) % $ 802,104 $ 784,506 2 %
SunPower Energy Services
Revenue for the segment decreased 15% during the three months ended June 28,
2020 as compared to the three months ended June 30, 2019 primarily as a result
of adverse impacts from the COVID-19 pandemic on our residential customers,
partially offset by an increase of revenue from commercial customers.
Revenue for the segment increased by 3% during the six months ended June 28,
2020 as compared to the six months ended June 30, 2019 due to increase in sales
to our residential and commercial customers. A majority of the increase in sales
occurred in first quarter of fiscal 2020, when we had not yet experienced a full
quarter of impact from COVID-19, on our business.
Revenue from residential customers decreased 20% during the three months ended
June 28, 2020 as compared to the three months ended June 30, 2019 , primarily due
to a lower volume of cash sales directly to end customers, residential leases,
and residential loans. Revenue from residential customers increased 1% during
the six months ended June 28, 2020 as compared to the six months ended June 30,
2019 , primarily due to a higher volume of cash sales directly to end customers,
residential leases, and residential loans during the first quarter of fiscal
2020, offset by a decrease of volume in second quarter.
Revenue from commercial customers increased 9% and 8%, respectively, during the
three months and six months ended June 28, 2020 as compared to the three months
and six months ended June 30, 2019 primarily due to an increase in our
commercial EPC contracts, offset by a reduction in power generation revenue due
to sale of our commercial sale-leaseback portfolio in the first and second
quarters of fiscal 2019.
SunPower Technologies
Revenue for the segment decreased 46% and 23% during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 primarily due to significantly lower volume of module sales for projects inAsia , as a result of adverse impacts from COVID-19.
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Table of Contents Total Cost of Revenue: Our total cost of revenue decreased 20% and 7% during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to decreases in cost of revenue in bothSunPower Energy Services segment and SunPower Technology segment. Changes by segments are discussed below in detail. Three Months Ended Six Months Ended (In thousands, except percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change SunPower Energy Services$ 179,359 $ 233,226 (23) %$ 439,346 $ 457,079 (4) % SunPower Technologies 175,136 290,479 (40) % 410,198 521,970 (21) % Intersegment eliminations and other (23,179) (107,224) (78) % (106,486) (177,058) (40) % Total cost of revenue$ 331,316 $ 416,481 (20) %$ 743,058 $ 801,991 (7) % Total cost of revenue as a percentage of total revenue 94 % 95 % 93 % 102 % Total gross margin percentage 6 % 23 % 7 % (2) % Cost of Revenue - by Segment:
Below, we have further discussed changes in cost of revenue for each segment.
SunPower Energy Services
Cost of revenue for the segment decreased by 23% and 4% during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to a lower sales from residential and commercial, as a result of adverse impacts from COVID-19, as well as product mix. Cost of revenue from residential customers decreased 25% and 4% during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to a lower volume of cash sales directly to end customers, residential leases, and residential loans as a result of adverse impacts from COVID-19. Cost of revenue from commercial customers increased 7% and 7% during each of the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 primarily due to an increase in volume of our commercial EPC contracts, offset by a reduction in power generation revenue due to sale of our commercial sale-leaseback portfolio in the first and second quarters of fiscal 2019.
SunPower Technologies
Cost of revenue for the segment decreased by 40% and 21% during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to significantly lower volume of module sales inEurope andAsia , as COVID-19 impacted the near term demand of our products. We also recorded excess capacity costs of$22.0 million and$31.7 million , respectively, during the three months and six months endedJune 28, 2020 , a majority of which was attributable to the idling of our manufacturing facilities inFrance ,Malaysia ,Mexico ,the Philippines , and theU.S. to comply with local government authorities' public health measures following the outbreak of the COVID-19 pandemic. All of our factories have resumed production as ofMay 2020 , in compliance with the applicable local guidelines.
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Gross Margin - by Segment:
Three Months Ended Six Months Ended
June 28, 2020
18 % 6 % 14 % 5 %
SunPower Technologies (3) % 6 % 2 % 3 %
SunPower Energy Services
Gross margin for the segment increased by 12 percentage points and 9 percentage points, for the three months and six months endedJune 28, 2020 , as compared to the three months and six months endedJune 30, 2019 , primarily as a result of product mix with higher cash channel sales and commercial EPC projects, partially offset by lower sales volume.
SunPower Technologies
Gross margin for the segment decreased by 9 percentage points and 1 percentage point, during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to significantly decreased sales volume, as well as excess capacity charges due to the idling of our manufacturing facilities from March toMay 2020 , as a result of the COVID-19 pandemic.
Research and Development ("R&D")
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
R&D 12,335 18,159 (32) % 27,973 33,152 (16) %As a percentage of revenue 3 % 4 % 3 % 4 % R&D expense decreased by$5.8 million and$5.2 million during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to lower labor expense, and lower travel expenditures following the implementation of travel restrictions as a result of the COVID-19 pandemic.
Sales, General and Administrative ("SG&A")
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
SG&A 55,967 61,978 (10) % 121,925 124,835 (2) %
As a percentage of revenue 16 % 14 % 15 % 16 %
SG&A expense decreased by $6.0 million and $2.9 million during the three months
and six months ended June 28, 2020 as compared to the three months and six
months ended June 30, 2019 , primarily due to our previously announced cost
actions to reduce the salaries of certain of our executive officers and to
temporarily implement a four-day work week for a portion of our employees to
address reduced demand and workloads related to the pandemic. .
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Restructuring Charges
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Restructuring charges 1,259 2,453 (49) % 2,835 1,788 59 %
As a percentage of revenue - % - % - % - %
Restructuring charges decreased $1.2 million during the three months ended
June 28, 2020 as compared to the three months ended June 30, 2019 , primarily due
to the non-cash restructuring charges we incurred during the three months ended
June 30, 2019 associated with lease termination, which did not reoccur during
the three months ended June 28, 2020 .
Restructuring charges increased $1.0 million during the six months ended
June 28, 2020 as compared to the six months ended June 30, 2019 , primarily due
to restructuring charges in connection with the December 2019 restructuring
plan. See "Item 1. Financial Statements-Note 8. Restructuring" in the Notes to
the condensed consolidated financial statements in this Quarterly Report on Form
10-Q for further information regarding our restructuring plans.
(Gain) loss on sale and impairment of residential lease assets
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
(Gain) loss on sale and
impairment of residential
lease assets 141 8,301 (98) % (133) 17,527 (101) %
As a percentage of revenue - % 2 % - % 2 %
(Gain) loss on sale and impairment of residential lease assets decreased by
$8.2 million and $17.7 million during the three months and six months ended
June 28, 2020 as compared to the three months and six months ended June 30,
2019 , primarily due to non-cash impairment charges of $26.0 million recorded
during the first quarter of fiscal 2019, for the remaining assets in the
residential lease portfolio that have yet to be sold. Also, during the three
months ended June 30, 2019 , we recognized a gain of $10.3 million primarily from
additional consideration received relating to the sale of residential lease
assets completed in the fourth quarter of fiscal 2018.
Gain on business divestiture
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Gain on business
divestiture $ (10,458) (137,286) (92) % $ (10,458) (143,400) (93) %As a percentage of revenue (3) % (31) % (1) % (18) % Gain on business divestiture decreased by$126.8 million and$132.9 million during the three months and six months endedJune 28, 2020 as compared to the three months and six months endedJune 30, 2019 , primarily due to the gain on sale of$143.4 million of the commercial sale-leaseback portfolio recorded in the quarter endedJune 30, 2019 that did not recur. During the three months endedJune 28, 2020 , we recorded a gain on sale of our O&M business of$10.5 million .
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Other Income (Expense), Net
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Interest income $ 174 $ 566 (69) % $ 578 $ 1,418 (59) %
Interest expense (10,205) (16,424) (38) % (20,742) (33,215) (38) %
Other Income:
Other, net 70,032 67,768 3 % 125,101 100,841 24 %
Other income, net $ 60,001 $ 51,910 16 % $ 104,937 $ 69,044 52 %
As a percentage of
revenue 17 % 12 % 13 % 9 %
Interest expense decreased $6.2 million and $12.5 million during the three
months and six months ended June 28, 2020 as compared to the three months and
six months ended June 30, 2019 primarily due to deconsolidation of the
sales-leaseback financing obligations in connection with the sale of the
commercial sale-leaseback portfolio during the first quarter of fiscal 2019 as
well as the repurchase of our convertible debt during the first quarter of
fiscal 2020.
Other income increased by $2.3 million and $24.3 million in the three months and
six months ended June 28, 2020 as compared to the three months and six months
ended June 30, 2019 , primarily due to a $71.1 million and $119.0 million gain on
an equity investment with a readily determinable fair value in the three months
and six months ended June 28, 2020 , as compared to a gain of $67.5 million and
$100.5 million in the three months and six months ended June 30, 2019 .
Additionally, we recorded a gain of $3.0 million as a result of early repurchase
of our 0.875% debentures due 2021 in the six months ended June 28, 2020 , and a
gain of $1.3 million related to an increase in the fair value of our equity
investment without readily determinable fair value, based on observable market
transactions with a third-party investor.
Income Taxes
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Provision for income taxes (3,068) (6,068) (49) % (4,937) (11,865) (58) %
As a percentage of revenue (1) % (1) % (1) % (2) %
In the three months ended June 28, 2020 , our income tax provision of $3.1
million on a profit before income taxes and equity in earnings of unconsolidated
investees of $22.4 million was primarily due to projected tax expense in foreign
jurisdictions that are profitable. Our income tax provision of $6.1 million in
the three months ended June 30, 2019 on a profit before income taxes and equity
in earnings of unconsolidated investees of $118.1 million was primarily due to
tax expense in foreign jurisdictions that were profitable.
In the six months ended June 28, 2020 , our income tax provision of $4.9 million
on a profit before income taxes and equity in earnings of unconsolidated
investees of $21.8 million was primarily due to projected tax expense in foreign
jurisdictions that are profitable, offset by a tax benefit related to release of
tax reserves in foreign jurisdictions due to lapse of the statute of
limitations. Our income tax provision of $11.9 million in the six months ended
June 30, 2019 on a profit before income taxes and equity in earnings of
unconsolidated investees of $17.7 million was primarily due to the projected tax
expense in foreign jurisdictions that were profitable, and a net change in
valuation allowance from a foreign jurisdiction.
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A material amount of our total revenue is generated from customers located outside ofthe United States , and a substantial portion of our assets and employees are located outside ofthe United States . Because of the one-time transition tax related to the Tax Cuts and Jobs Act enacted in 2017, the accumulated foreign earnings were deemed to have been taxed and were no longer subject to theU.S. federal deferred tax liability. Foreign withholding taxes have not been provided on the existing undistributed earnings of our non-U.S. subsidiaries as ofJune 28, 2020 as these are intended to be indefinitely reinvested in operations outsidethe United States . In the first half of fiscal 2020, we distributed or intended to distribute earnings from certain countries because of business and cash needs, and we have appropriately accrued withholding tax of$0.7M . Subsequent to the close of the second quarter of fiscal 2020, the financing requirements for the Spin-Off were met, and we now expect to consummate the Spin-Off in the third quarter of fiscal 2020. The estimated tax related to the distribution of non-US subsidiaries earnings from the reorganization steps to execute the Spin-Off is approximately$5.5 million to 6.5 million. We record a valuation allowance to reduce our deferred tax assets in theU.S. ,Malta ,South Africa ,Spain , andMexico to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with the estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount, or if we subsequently determine that realization of an amount previously recorded is unlikely, we would record an adjustment to the deferred tax asset valuation allowance, which would change income tax in the period of adjustment. InJune 2019 , theU.S. Court of Appeals for the Ninth Circuit overturned the 2015 U.S. tax court decision in Altera Co v. Commissioner, regarding the inclusion of stock-based compensation costs under cost sharing agreements.SunPower previously quantified and recorded the impact of including such compensation costs, as described in the Ninth Circuit decision, of$5.8 million in the fourth quarter of fiscal 2019, as a reduction to deferred tax asset, fully offset by a reduction to valuation allowance of the same amount, without any income tax expense impact. We will reevaluate the deferred tax disclosure at the end of the fiscal year 2020. OnJune 29, 2020 , California Assembly Bill ("AB 85") was signed. AB 85 suspends the use ofCalifornia net operating loss deductions and limits maximum business incentive tax credit utilization to$5.0 million annually starting with tax years beginning on or afterJanuary 1, 2020 throughDecember 31, 2022 . As ofJune 28, 2020 , we continue to forecast aU.S. taxable loss for the year, without the taxable gain from the spin-off (the "Spin-Off") Maxeon Solar into a separate publicly traded company, because we consider the transaction as a discrete event that has not occurred as ofJune 28, 2020 . Accordingly, we did not recognize any tax related to AB 85 since the Spin-Off has not occurred as of the second quarter of fiscal 2020. The financing requirements for the Spin-Off were met inJuly 2020 , and we expect to consummate the Spin-Off in the third quarter of fiscal 2020. The estimated additionalCalifornia income taxes payable following the Spin-Off transaction is completed are approximately$10 million to$15 million .
Equity in Losses of Unconsolidated Investees
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Equity in losses of
unconsolidated investees $ (889) $ (1,963) (55) % $ (644) $ (283) 128 %
As a percentage of revenue - % - % - % - %
Our equity in losses of unconsolidated investees decreased by $1.1 million in
the three months ended June 28, 2020 as compared to the three months ended
June 30, 2019 was driven by a decrease in our share of losses of unconsolidated
investees.
Our equity in losses of unconsolidated investees increased by $0.4 million in
the six months ended June 28, 2020 , as compared to the six months ended June 30,
2019 was driven by a slight increase in our share of losses of unconsolidated
investees.
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Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Three Months Ended Six Months Ended
(In thousands, except
percentages) June 28, 2020 June 30, 2019 % Change June 28, 2020 June 30, 2019 % Change
Net loss attributable to
noncontrolling interests and
redeemable noncontrolling
interests $ 980 11,385 (91) % $ 1,687 26,226 (94) %
We have entered into facilities with third-party tax equity investors under
which the investors invest in a structure known as a partnership flip. We
determined that we hold controlling interests in these less-than-wholly-owned
entities and therefore we have fully consolidated these entities. We apply the
hypothetical liquidation at book value method ("HLBV") method in allocating
recorded net income (loss) to each investor based on the change in the reporting
period, of the amount of net assets of the entity to which each investor would
be entitled to under the governing contractual arrangements in a liquidation
scenario.
The decrease in net loss attributable to noncontrolling interests and redeemable
noncontrolling interests of $10.4 million and $24.5 million during the three
months and six months ended June 28, 2020 as compared to the three months and
six months ended June 30, 2019 , is primarily due to the deconsolidation of a
majority of our residential lease assets during the quarter ended September 29,
2019 .
Critical Accounting Estimates
We prepare our condensed consolidated financial statements in conformity with
U.S. generally accepted accounting principles, which requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
revenues, and expenses recorded in our financial statements. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the
global economy and financial markets. We are not aware of any specific event or
circumstance that would require updates to our estimates or judgments or require
us to revise the carrying value of our assets and liabilities as of August 5th,
2020 , the date of issuance of this Quarterly Report on Form 10-Q. These
estimates may change as new events occur and additional information is obtained.
Actual results may differ from these estimates under different assumptions and
conditions.
There were no other significant changes in our critical accounting estimates
during the fiscal quarter ended June 28, 2020 compared to those previously
disclosed in "Critical Accounting Estimates" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in
the 2019 Annual Report on Form 10-K.
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Liquidity and Capital Resources
Cash Flows
A summary of the sources and uses of cash, cash equivalents, restricted cash and restricted cash equivalents is as follows:
Six Months Ended
(In thousands) June 28, 2020 June 30, 2019
Net cash used in operating activities $ (158,842) $ (230,091)
Net cash provided by (used in) investing activities $ 55,838 $ (30,808)
Net cash (used in) provided by financing activities $ (81,409) $ 96,629
Operating Activities
Net cash used in operating activities for the six months ended June 28, 2020 was
$158.8 million and was primarily the result of: (i) $126.2 million decrease in
accounts payable and other accrued liabilities, primarily attributable to timing
of invoice payments; (ii) $120.2 million gain on equity investments; (iii)
$50.5 million decrease in contract liabilities primarily due to the attainment
of milestones billings for a variety of projects; (iv) $11.9 million increase in
project assets; (v) $10.5 million gain on sale of our O&M business; (vi)
$6.7 million increase in inventories to support the construction of our solar
energy projects; (vii) $6.0 million decrease in operating lease liabilities;
(viii) $3.0 million gain on sale of convertible debt; (ix) $2.9 million increase
in contract assets. This was partially offset by: (i) $58.8 million decrease in
accounts receivable due to timing of billings and payments; (ii) net non-cash
charges of $53.9 million related to depreciation, stock-based compensation, bad
debt expense, and other non-cash charges; (iii) $28.0 million decrease in
prepaid expenses and other assets, primarily related to the movements of prepaid
inventory; (iv) $16.3 million in net income; (v) $12.0 million decrease in
advance payments made to suppliers; (vi) $7.8 million decrease in right of use
assets; (vii) $1.0 million increase from deferred income taxes; (viii)
$0.6 million increase from equity in losses of unconsolidated investees; and
(ix) $0.4 million increase from impairment of residential lease.
Net cash used in operating activities for the six months ended June 30, 2019 was
$230.1 million and was primarily the result of: (i) $143.4 million gain on
business divestiture; (ii) $100.5 million unrealized gain on equity investments
with readily determinable fair value; (iii) $62.1 million increase in
inventories to support the construction of our solar energy projects; (iv) $48.6
million increase in accounts receivable, primarily driven by billings; (v) $8.8
million increase in operating lease right-of-use assets; (vi) $6.2 million
increase in project assets, primarily related to the construction of our
Commercial solar energy projects; (vii) $15.5 million increase in prepaid
expenses and other assets, primarily related to movements in prepaid inventory;
and (viii) $0.9 million increase in long-term financing receivables related to
our net investment in sales-type leases. This was partially offset by: (i) net
non-cash charges of $65.9 million related to depreciation, stock-based
compensation and other non-cash charges; (ii) gain on sale and impairment of
residential lease assets of $26.0 million ; (iii) $24.8 million decrease in
advance payments made to suppliers; (iv) $7.4 million decrease in contract
assets driven by construction activities; (v) $11.2 million increase in accounts
payable and other accrued liabilities, primarily attributable to timing of
payments for accrued expenses; (vi) $8.7 million increase in operating lease
liabilities; (vii) net income of $5.5 million ; (viii) $3.4 million increase in
contract liabilities driven by construction activities; (ix) $2.0 million net
change in deferred income taxes; (x) impairment of long-lived assets of $0.8
million ; and (xi) $0.3 million loss in equity in earnings of unconsolidated
investees.
Investing Activities
Net cash provided by investing activities in the six months endedJune 28, 2020 was$55.8 million , which included proceeds of$46.1 million from the sale of equity investments and return of capital by an unconsolidated investee as well as$15.4 million cash received from the sale of our O&M business, net of deconsolidated cash and$7.7 million in proceeds from equity investments without readily determinable fair value. This was partially offset by$13.4 million in capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems. Net cash used in investing activities in the six months endedJune 30, 2019 was$30.8 million , which included$61.5 million in capital expenditures primarily related to the expansion of our solar cell manufacturing capacity and costs associated with solar power systems. Additionally,SunPower purchased a$10.0 million equity method investment inSunStrong Partners andSunStrong Holdings . This was partially offset by proceeds of$40.5 million from business divestiture and$0.2 million proceeds from the sale of property, plant, and equipment.
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Table of Contents Financing Activities Net cash used in financing activities in the six months endedJune 28, 2020 was$81.4 million , which included: (i)$119.3 million in repayments of various debt and other obligations; (ii)$87.1 million of cash paid for convertible debt; (iii)$8.4 million in purchases of treasury stock for tax withholding obligations on vested restricted stock; and (iv)$0.9 million of equity offering costs. This was partially offset by: (i)$121.5 million of proceeds from bank loans and other debt; (ii)$10.6 million of proceeds from the issuance of non-recourse power plant and commercial financing, net of issuance costs; and (iii)$2.2 million of cash received from the settlement of a contingent consideration arrangement. Net cash provided by financing activities in the six months endedJune 30, 2019 was$96.6 million , which included: (i)$143.7 million in net proceeds of bank loans and other debt; (ii)$65.7 million in net proceeds from the issuance of non-recourse residential financing, net of issuance costs; and (iii)$29.3 million of net contributions from noncontrolling interests related to residential lease projects. This was partially offset by: (i)$125.1 million for repayments of various bank loans; (ii)$9.0 million payment for SolarWorld asset purchase agreement; (iii)$4.4 million in purchases of treasury stock for tax withholding obligations on vested restricted stock; (iv)$2.4 million in settlement of a contingent consideration arrangement; and (v)$1.2 million payments for non-r ecourse financing.
Debt and Credit Sources
Convertible Debentures
As ofJune 28, 2020 , an aggregate principal amount of$425.0 million of the 4.00% senior convertible debentures due 2023 (the "4.00% debentures due 2023") remained issued and outstanding. The 4.00% debentures due 2023 were issued onDecember 15, 2015 . Interest on the 4.00% debentures due 2023 is payable onJanuary 15 andJuly 15 of each year, beginning onJuly 15, 2016 . Holders are able to exercise their right to convert the debentures at any time into shares of our common stock at an initial conversion price approximately equal to$30.53 per share, subject to adjustment in certain circumstances. If not earlier repurchased or converted, the 4.00% debentures due 2023 mature onJanuary 15, 2023 . Holders may require us to repurchase all or a portion of their 4.00% debentures due 2023, upon a fundamental change, as described in the related indenture, at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. If we undergo a non-stock change of control, as described in the related indenture, the 4.00% debentures due 2023 will be subject to redemption at our option, in whole but not in part, for a period of 30 calendar days following a repurchase date relating to the non-stock change of control, at a cash redemption price equal to 100% of the principal amount plus accrued and unpaid interest. Otherwise, the 4.00% debentures due 2023 are not redeemable at our option prior to the maturity date. In the event of certain events of default,Wells Fargo Bank, National Association ("Wells Fargo"), the trustee, or the holders of a specified amount of then-outstanding 4.00% debentures due 2023 will have the right to declare all amounts then outstanding due and payable. InJune 2014 , we issued$400.0 million in aggregate principal amount of our 0.875% debentures due 2021. An aggregate principal amount of$250.0 million of the 0.875% debentures due 2021 were initially acquired by Total. Interest is payable semi-annually, beginning onDecember 1, 2014 . The 0.875% debentures due 2021 are convertible into shares of our common stock at any time based on an initial conversion rate of 20.5071 shares of common stock per$1,000 principal amount of 0.875% senior convertible debentures (which is equivalent to an initial conversion price equal to approximately$48.76 per share, which provided Total the right to acquire up to 5,126,775 shares of our common stock and now provides the right to acquire 3,969,375 shares of our common stock following the purchase noted below). 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. During the three months endedJune 28, 2020 , we purchased$90.3 million of aggregate principal amount of our 0.875% debentures due 2021 for approximately$87.1 million , net. Total held a principal amount of$56.4 million of the total convertible debt repurchased and the remaining was held by other third-party investors. The purchases and early retirements resulted in a gain from extinguishment of debt of approximately$3.0 million , which represented the difference between the book value of our 0.875% debentures due 2021, net of the remaining unamortized discount prior to repurchase and the reacquisition price of our 0.875% debentures due 2021 upon repurchase. The gain was recorded within "Other, net" on the condensed consolidated statement of operations. Financing for Safe Harbor Panels Inventory OnSeptember 27, 2019 , we entered into a joint venture with Hannon Armstrong Sustainable Infrastructure Capital, Inc. ("Hannon Armstrong"), to finance up to 200 MWs of panels inventory, preserving the 30% federal Investment Tax Credit ("ITC") for third-party owned commercial and residential systems and meeting safe harbor guidelines. 70 --------------------------------------------------------------------------------
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The loan carries an interest rate of 7.5% per annum payable quarterly. Principal amount on the loan is expected to be repaid quarterly from the financing proceeds of the underlying projects. The ultimate maturity date for the loan isJune 30, 2022 . As ofMarch 29, 2020 , we have drawn$99.5 million under this facility. During the three and six months endedJune 28, 2020 , we repaid$1.5 million and did not have any additional drawdowns. Loan Agreement withCalifornia Enterprise Development Authority ("CEDA") OnDecember 29, 2010 , we borrowed from CEDA the proceeds of the$30.0 million aggregate principal amount of CEDA's tax-exempt Recovery Zone Facility Revenue Bonds (SunPower Corporation -Headquarters Project ) Series 2010 (the "Bonds") maturingApril 1, 2031 , under a loan agreement with CEDA. Certain of our obligations under the loan agreement were contained in a promissory note datedDecember 29, 2010 issued by us to CEDA, which assigned the promissory note, along with all right, title and interest in the loan agreement, to Wells Fargo, as trustee, with respect to the Bonds for the benefit of the holders of the Bonds. The Bonds bear interest at a fixed-rate of 8.50% per annum. As ofJune 28, 2020 , the fair value of the Bonds was$30.8 million , determined by using Level 2 inputs based on quarterly market prices as reported by an independent pricing source.
As of
Revolving Credit Facility with Credit Agricole
OnOctober 29, 2019 , we entered into a Green Revolving Credit Agreement (the "2019 Revolver") with CréditAgricole Corporate and Investment Bank ("Credit Agricole"), as lender, with a revolving credit commitment of$55.0 million . The 2019 Revolver contains affirmative covenants, events of default and repayment provisions customarily applicable to similar facilities and has a per annum commitment fee of 0.05% on the daily unutilized amount, payable quarterly. Loans under the 2019 Revolver bear either an adjusted LIBOR interest rate for the period elected for such loan or a floating interest rate of the higher of prime rate, federal funds effective rate, or LIBOR for an interest period of one month, plus an applicable margin, ranging from 0.25% to 0.60%, depending on the base interest rate applied, and each matures on the earlier ofApril 29, 2021 , or the termination of commitments thereunder. Our payment obligations under the 2019 Revolver are guaranteed byTotal SE up to the maximum aggregate principal amount of$55.0 million . In consideration of the commitments ofTotal SE , we are required to pay them a guaranty fee of 0.25% per annum on any amounts borrowed under the 2019 Revolver and to reimburseTotal SE for any amounts paid by them under the parent guaranty. We have pledged the equity of a wholly-owned subsidiary that holds our shares ofEnphase Energy, Inc. common stock to secure our reimbursement obligation under the parent guaranty. We have also agreed to limit our ability to draw funds under the 2019 Revolver, to no more than 67% of the fair market value of the common stock held by our subsidiary at the time of the draw.
As of
OnSeptember 27, 2011 , we entered into a letter of credit facility with Deutsche Bank Trust which provides for the issuance, upon request by us, of letters of credit to support our obligations in an aggregate amount not to exceed$200.0 million . Each letter of credit issued under the facility is fully cash-collateralized and we have entered into a security agreement with Deutsche Bank Trust, granting them a security interest in a cash collateral account established for this purpose.
As of
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Table of Contents Other Facilities
Asset-Backed Loan with
OnMarch 29, 2019 , we entered in a Loan and Security Agreement withBank of America, N.A , which provides a revolving credit facility secured by certain inventory and accounts receivable in the maximum aggregate principal amount of$60.0 million . The Loan and Security Agreement contains negative and affirmative covenants, events of default and repayment and prepayment provisions customarily applicable to asset-backed credit facilities. The facility bears a floating interest rate of LIBOR plus an applicable margin, and matures on the earlier ofMarch 29, 2022 ,March 1, 2021 (a date that is 91 days prior to the maturity of our 2021 convertible debentures), or the termination of the commitments thereunder. During the three and six months endedJune 28, 2020 we repaid$8.6 million and$12.3 million , respectively. During the three and six months endedJune 28, 2020 , we drew an additional$8.7 million and$21.1 million , respectively. We had a balance outstanding of$28.0 million as ofJune 28, 2020 . During the three and six months endedJune 30, 2019 , we had drawn$3.5 million and$12.5 million , respectively, and repaid$0.3 million .
SunTrust Facility
OnJune 28, 2018 , we entered in a Financing Agreement withSunTrust Bank , which provides a revolving credit facility in the maximum aggregate principal amount of$75.0 million . Each draw down from the facility bears either a base rate or federal funds rate plus an applicable margin or a floating interest rate of LIBOR plus an applicable margin, and matures no later than three years. As ofJune 28, 2020 , we had$75.0 million in borrowing capacity under this limited recourse construction financing facility.
Non-recourse Financing and Other Debt
In order to facilitate the construction, sale or ongoing operation of certain solar projects, including our residential leasing program, we regularly obtain project-level financing. These financings are secured either by the assets of the specific project being financed or by our equity in the relevant project entity and the lenders do not have recourse to our general assets for repayment of such debt obligations, and hence the financings are referred to as non-recourse. Non-recourse financing is typically in the form of loans from third-party financial institutions, but also takes other forms, including "flip partnership" structures, sale-leaseback arrangements, or other forms commonly used in the solar or similar industries. We may seek non-recourse financing covering solely the construction period of the solar project or may also seek financing covering part or all of the operating life of the solar project. We classify non-recourse financings in our condensed consolidated balance sheets in accordance with their terms; however, in certain circumstances, we may repay or refinance these financings prior to stated maturity dates in connection with the sale of the related project or similar such circumstances. In addition, in certain instances, the customer may assume the loans at the time that the project entity is sold to the customer. In these instances, subsequent debt assumption is reflected as a financing outflow and operating inflow in the condensed consolidated statements of cash flows to reflect the substance of the assumption as a facilitation of customer financing from a third party.
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Table of Contents Liquidity As ofJune 28, 2020 , we had unrestricted cash and cash equivalents of$235.3 million as compared to$423.0 million as ofDecember 29, 2019 . Our cash balances are held in numerous locations throughout the world, and as ofJune 28, 2020 , we had approximately$39.4 million held outside ofthe United States . This offshore cash is used to fund operations of our business in theEurope andAsia Pacific regions as well as non-U.S. manufacturing operations, which require local payment for product materials and other expenses. The amounts held outside ofthe United States represent the earnings of our foreign subsidiaries which under the enacted Tax Act, incurred a one-time transition tax (such amounts were previously tax deferred). The incurrence, however, would did not result in a cash payment due to our cumulative net operating loss position. We expect total capital expenditures related to purchases of property, plant and equipment of approximately$63.9 million in fiscal 2020 in order to increase our manufacturing capacity for our highest efficiency A-Series (Maxeon 5) product platform and our Performance Line technology, improve our current and next generation solar cell manufacturing technology, and other projects. In addition, while we have begun the transition away from our project development business, we still expect to invest capital to develop solar power systems and plants for sale to customers. The development of solar power plants can require long periods of time and substantial initial investments. Our efforts in this area may consist of all stages of development, including land acquisition, permitting, financing, construction, operation and the eventual sale of the projects. We often choose to bear the costs of such efforts prior to the final sale to a customer, which involves significant upfront investments of resources (including, for example, large transmission deposits or other payments, which may be non-refundable), land acquisition, permitting, legal and other costs, and in some cases the actual costs of constructing a project, in advance of the signing of PPAs and EPC contracts and the receipt of any revenue, much of which is not recognized for several additional months or years following contract signing. Any delays in disposition of one or more projects could have a negative impact on our liquidity. Certain of our customers also require performance bonds issued by a bonding agency or letters of credit issued by financial institutions, which are returned to us upon satisfaction of contractual requirements. If there is a contractual dispute with the customer, the customer may withhold the security or make a draw under such security, which could have an adverse impact on our liquidity. Obtaining letters of credit may require adequate collateral. All letters of credit issued under our 2016 Guaranteed LC Facilities are guaranteed byTotal SE pursuant to the Credit Support Agreement. OurSeptember 2011 letter of credit facility withDeutsche Bank Trust is fully collateralized by restricted cash, which reduces the amount of cash available for operations. As ofJune 28, 2020 , letters of credit issued under theDeutsche Bank Trust facility amounted to$3.6 million which were fully collateralized with restricted cash on our condensed consolidated balance sheets. Solar power plant projects often require significant up-front investments. These include payments for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible. We often make arrangements with third-party financiers to acquire and build solar power systems or to fund project construction using non-recourse project debt. As ofJune 28, 2020 , outstanding amounts related to our project financing totaled$20.0 million . There are no assurances, however, that we will have sufficient available cash to repay our indebtedness or that we will be able to refinance such indebtedness on similar terms to the expiring indebtedness. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain other debt financing. The current economic environment, however, could limit our ability to raise capital by issuing new equity or debt securities on acceptable terms, and lenders may be unwilling to lend funds on acceptable terms in the amounts that would be required to supplement cash flows to support operations. The sale of additional equity or convertible debt securities would result in additional dilution to our stockholders (and the potential for further dilution upon the exercise of warrants or the conversion of convertible debt) and may not be available on favorable terms or at all, particularly in light of the current conditions in the financial and credit markets. Additional debt would result in increased expenses and would likely impose new restrictive covenants which may be similar or different than those restrictions contained in the covenants under our current loan agreements and debentures. In addition, financing arrangements, including project financing for our solar power plants and letters of credit facilities, may not be available to us, or may not be available in amounts or on terms acceptable to us. We also continue to focus on improving our overall operating performance and liquidity, including managing cash flow and working capital. 73
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The global spread of the coronavirus ("COVID-19") created significant
uncertainty and economic disruptions worldwide. In our response to the COVID-19
pandemic, we instituted certain measures, including requirements to work
remotely for the majority of our workforce, travel restrictions and the idling
of our factories in France , Malaysia , Mexico , the Philippines , and the U.S
consistent with actions taken or recommended by governmental authorities. All of
our factories have resumed production as of May, in compliance with the relevant
local restrictions. We implemented several mitigating actions to prudently
manage our business during the current industry uncertainty relating to the
COVID-19 pandemic. These actions include reducing management salaries, freezing
hiring and merit increases, reducing capital expenditures and discretionary
spending, and temporarily moving most of our employees to a four-day work week
in recognition of reduced demand and workloads due to the pandemic. Most of our
employees reverted back to a full work week during the last week of June and
returned to full salary during the last week of July. We also continue to focus
on improving our overall operating performance and liquidity, including managing
cash flows and working capital.
Sufficient working capital and liquidity is necessary to support repayment of
our $309.7 million 0.875% senior convertible debentures due June 1, 2021 (the
"0.875% debentures due 2021"), $193.6 million of which are held by Total, for
which we believe our projected cash and cash equivalents including proceeds
received from the proposed spin-off ("Spin-Off") of Maxeon Solar Technologies,
Ltd. ("Maxeon Solar") will be adequate. Related to this transaction, we have
satisfied the substantive closing conditions to the proposed investment by
Tianjin Zhonghuan Semiconductor Co., Ltd., ("TZS"), a PRC joint stock limited
company, into the Maxeon Solar business including, among other things, the SEC
declaring the Maxeon Solar Form 20-F effective under the Exchange Act and
entering into financing arrangements for available borrowing capacity of no less
than $325.0 million . The remaining corporate and other actions necessary to
execute and consummate the Spin-Off transaction include the funding into escrow
of the final remaining portion of the TZS investment and we currently expect the
Spin-Off to be completed before the end of the third fiscal quarter of 2020.
Assuming the Spin-Off is completed as planned, we believe that together with our
projected cash and cash equivalents, it will generate sufficient proceeds to
satisfy our debt obligations under the 0.875% debentures due 2021, however the
completion of this transaction is not certain until the actual closing. In
addition, if the Spin-Off transaction is not completed as planned, we have
historically been successful in our ability to divest certain investments and
non-core assets, secure other sources of financing, such as accessing the
capital markets, and implement other cost reduction initiatives such as
restructuring, to satisfy our liquidity needs; however, our ability to take
these steps may be adversely affected by many factors impacting us and the
markets generally, including COVID-19. Even when we can access capital markets,
the terms available to us from these sources could be materially and adversely
impacted, which may result in less favorable terms than we would ordinarily
expect to receive. If these alternative actions were necessary, we believe they
could be implemented prior to the maturity date of the 0.875% debentures due
2021.
Although we have historically been able to generate liquidity, we cannot
predict, with certainty, the outcome of our actions to generate liquidity as
planned. Additionally, we are uncertain of the full extent to which the COVID-19
pandemic will impact our business, operations and financial results over time.
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--------------------------------------------------------------------------------Table of Contents Contractual Obligations The following table summarizes our contractual obligations as ofJune 28, 2020 : Payments Due by Fiscal Period 2020 (remaining six (In thousands) Total months) 2021-2022 2023-2024 Beyond 2024 Convertible debt, including interest1$ 780,616 $
9,855
58,050 1,275 5,100 5,100 46,575
Other debt, including interest3 209,237 92,642 110,905 2,045 3,645
Future financing commitments4 2,900 2,900 - - -
Operating lease commitments5 110,650 8,936 34,892 24,214 42,608
Finance lease commitments6 1,840 322 1,316 202 -
Non-cancellable purchase orders7 149,310 149,310 - - -
Purchase commitments under agreements8 429,227 272,356 116,931 33,858 6,082
Deferred purchase consideration in
connection with acquisition9 30,000 30,000 - - -
Total $ 1,771,830 $ 567,596 $ 614,197 $ 491,127 $ 98,910
1Convertible debt, including interest, relates to the aggregate of
$734.7 million in outstanding principal amount of our senior convertible
debentures on June 28, 2020 . For the purpose of the table above, we assume that
all holders of the outstanding debentures will hold the debentures through the
date of maturity, and upon conversion, the values of the senior convertible
debentures will be equal to the aggregate principal amount with no premiums.
2CEDA loan, including interest, relates to the proceeds of the $30.0 million
aggregate principal amount of the Bonds. The Bonds mature on April 1, 2031 and
bear interest at a fixed rate of 8.50% through maturity.
3Other debt, including interest, primarily relates to non-recourse finance
projects and solar power systems and leases under our residential lease program
as described in "Item 1. Financial Statements-Note 9. Commitments and
Contingencies" in the Notes to the condensed consolidated financial statements
in this Quarterly Report on Form 10-Q.
4In connection with purchase and joint venture agreements with non-public
companies, we will be required to provide additional financing to such parties
of up to
5Operating lease commitments primarily relate to various facility lease agreements including leases entered into that have not yet commenced.
6Finance lease commitments primarily relate to certain buildings, manufacturing
and equipment under capital leases in
7Non-cancellable purchase orders relate to purchases of raw materials for inventory and manufacturing equipment from a variety of vendors.
8Purchase commitments under agreements primarily relate to arrangements entered into with several suppliers, including some of our unconsolidated investees, for polysilicon, ingots, wafers, and module-level power electronics and alternating current cables, among others. These agreements specify future quantities and pricing of products to be supplied by the vendors for periods up to 5 years and there are certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event we terminate these arrangements.
9In connection with the acquisition of
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Liabilities Associated with Uncertain Tax Positions
Due to the complexity and uncertainty associated with our tax positions, we cannot make a reasonably reliable estimate of the period in which cash settlement will be made for our liabilities associated with uncertain tax positions in other long-term liabilities. Therefore, they have been excluded from the table above. As ofJune 28, 2020 andDecember 29, 2019 , total liabilities associated with uncertain tax positions were$19.7 million and$20.1 million , respectively, and are included within "Other long-term liabilities" in our condensed consolidated balance sheets as they are not expected to be paid within the next twelve months. 76 --------------------------------------------------------------------------------
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Off-Balance Sheet Arrangements
As of
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