Fair Value Measurements

6 Months Ended

Jun. 28, 2020

FAIR VALUE MEASUREMENTS

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

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.

•Level 3 — Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We measure certain assets and liabilities at fair value on a recurring basis. There were no transfers between fair value measurement levels during any presented period.

The following table summarizes our assets and liabilities measured and recorded at fair value on a recurring basis as of June 28, 2020 and December 29, 2019:


	June 28, 2020														December 29, 2019
(In thousands)	Total Fair Value		Level 3		Level 2		Level 1		Total Fair Value		Level 3		Level 2		Level 1
Assets
Prepaid expenses and other current assets:
Derivative financial instruments (Note 12)	$	1,273	—		1,273		—		$	1,002	—		1,002		—
Other long-term assets:
Equity investments with fair value option ("FVO")	9,776		9,776		—		—		17,500		17,500		—		—
Equity investments with readily determinable fair value	249,152		—		—		249,152		173,908		—		—		173,908
Total assets	$	260,201	$	9,776	$	1,273	$	249,152	$	192,410	$	17,500	$	1,002	$	173,908
Liabilities
Accrued liabilities:
Derivative financial instruments (Note 12)	$	2,107	$	—	$	2,107	$	—	$	1,962	$	—	$	1,962	—
Other long-term liabilities:
Derivative financial instruments (Note 12)	649		—		649		—		373		—		373		—
Total liabilities	$	2,756	$	—	$	2,756	$	—	$	2,335	$	—	$	2,335	$	—

Equity investments with fair value option ("FVO")

We have elected the fair value option in accordance with the guidance in ASC 825, Financial Instruments, for our investment in the SunStrong joint venture and SunStrong Partners, LLC ("SunStrong Partners"), to mitigate volatility in reported earnings that results from the use of different measurement attributes (see Note 10). We initially computed the fair value for our investments consistent with the methodology and assumptions that market participants would use in their estimates of fair value with the assistance of a third-party valuation specialist. The fair value computation is updated on a quarterly basis. The investments are classified within Level 3 in the fair value hierarchy because we estimate the fair value of the investments using the income approach based on the discounted cash flow method which considered estimated future financial performance, including assumptions for, among others, forecasted contractual lease income, lease expenses, residual value of these lease assets and long-term discount rates, and forecasted default rates over the lease term and discount rates, some of which require significant judgment by management and are not based on observable inputs.

The following table summarizes movements in equity investments for the six months ended June 28, 2020. There were no internal movements to or from Level 3 from Level 1 or Level 2 for the six months ended June 28, 2020.


(In thousands)	Beginning balance as of December 29, 2019	Equity Distribution¹	Additional Investment	Ending balance as of June 28, 2020
Equity investments with FVO	$17,500	$(7,724)	$—	$9,776

¹During the second quarter of fiscal 2020, we received a total of $7.7 million in cash proceeds, $7.2 million from SunStrong Partners and $0.5 million from SunStrong. The distribution was in accordance with the original investment agreements for SunStrong Partners upon closing of the tax equity fund and was approved by the SunStrong Board of Directors on June 24, 2020. The distribution reduced our equity investment balance in SunStrong Partners and SunStrong classified in "other long-term assets" on our condensed consolidated balance sheet. See Note 10. for additional details and background.

Level 3 significant unobservable inputs sensitivity

The following table summarizes the significant unobservable inputs used in Level 3 valuation of our investments carried at fair value as of June 28, 2020. Included in the table are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.

2020

Assets:

Fair value

Valuation Technique

Unobservable input

Range (Weighted Average)

Other long-term assets:

Equity investments

9,776

Discounted cash flows

Discount rate
Residual value

9.5%-13% ⁽¹⁾

7.5% - 7.75% ⁽¹⁾

Total assets

9,776

⁽¹⁾The primary unobservable inputs used in the fair value measurement of our equity investments, when using a discounted cash flow model, are the discount rate and residual value. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. We estimate the discount rate based on our projected cost of equity. We estimate the residual value based on the contracted systems in place in the years being projected. Significant increases (decreases) in the residual value in isolation would result in a significantly higher (lower) fair value measurement.

Equity investments with readily determinable fair value

In connection with the divestment of our microinverter business to Enphase Energy, Inc. ("Enphase") on August 9, 2018, we received 7.5 million shares of Enphase common stock (NASDAQ: ENPH). The common stock received was recorded as an equity investment with readily determinable fair value (Level 1), with changes in fair value recognized in net income in accordance with ASU 2016-01 Recognition and Measurement of Financial Assets and Liabilities. For the three and six months ended June 28, 2020, we recorded gains of $71.1 million and $119.0 million, respectively, within "other, net" in our condensed consolidated statement of operations as compared to $67.5 million and $100.5 million in the three and six months ended June 30, 2019. During fiscal 2019, we sold one million shares of Enphase common stock in open market transactions. During the six months ended June 28, 2020, we sold an additional one million shares of Enphase common stock in open market transactions for cash proceeds of $43.7 million.

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

We measure certain investments and non-financial assets (including property, plant and equipment, and other intangible assets) at fair value on a non-recurring basis in periods after initial measurement in circumstances when the fair value of such asset is impaired below its recorded cost. As of June 28, 2020 and December 29, 2019, there were no material items recorded at fair value.

Equity Method Investments

Our investments accounted for under the equity method are described in Note 10. Equity Investments. We monitor these investments, which are included within "other long-term assets" on our condensed consolidated balance sheets, for impairment and record reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include Level 3 measurements such as the valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market prices, and declines in the results of operations of the issuer.

As of June 28, 2020 and December 29, 2019, we had $25.8 million and $26.5 million, respectively, in investments accounted for under the equity method (see "Note 10. Equity Investments").

Equity investments without readily determinable fair value

These equity investments are securities in privately-held companies without readily determinable market values. We periodically adjust the carrying value of our equity securities to cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer. Equity investments without readily determinable fair value are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using a combination of observable and unobservable inputs including valuation ascribed to the issuing company in subsequent financing rounds, volatility in the results of operations of the issuers and rights and obligations of the securities we hold.

Restricted marketable securities

Certain of our debt securities, classified as held-to-maturity, are Philippine government bonds that we maintain as collateral for business transactions within the Philippines. These bonds have various maturity dates and are classified as "Restricted short-term marketable securities" on our condensed consolidated balance sheets as of June 28, 2020 and December 29, 2019, respectively. Our Philippine branch subsidiary is required by the Philippine Securities and Exchange Commission to maintain a certain amount of deposits to ensure that it will be able to secure its liabilities as a foreign corporation's branch. Security bond deposits to the Philippine Securities and Exchange Commission are determined based on applicable regulations. The amounts are based on local audited statutory financial statement amounts, and the minimum deposits are updated within six months after the end of the year. As of June 28, 2020 and December 29, 2019, these bonds had a carrying value of $6.3 million and $6.2 million, respectively. We record such held-to-maturity investments at amortized cost based on our ability and intent to hold the securities until maturity. We monitor for changes in circumstances and events that would affect our ability and intent to hold such securities until the recorded amortized costs are recovered. No other-than-temporary impairment loss was incurred during any periods presented. The held-to-maturity debt securities were categorized in Level 2 of the fair value hierarchy.

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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