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Commitments and Contingencies
 6 Months Ended
Jul. 03, 2022
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies COMMITMENTS AND CONTINGENCIES
Facility and Equipment Leases

The table below presents the summarized quantitative information with regard to facility and equipment lease contracts we have entered into:

Three Months EndedSix Months Ended
(In thousands)July 3, 2022July 4, 2021July 3, 2022July 4, 2021
Operating and finance lease expense$3,673 $3,346 $6,888 $6,817 
Sublease income(104)(105)(191)(211)
Rent expense$3,569 $3,241 $6,697 $6,606 
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating and finance leases$912 $4,082 $4,652 $8,001 
Financing cash flows for finance leases$118 $— $118 $— 
Right-of-use assets obtained in exchange for leases $649 $— $1,526 $11,528 
Weighted-average remaining lease term (in years) - operating and finance leases3.33.53.33.5
Weighted-average discount rate - operating and finance leases8.3 %8.9 %8.3 %8.9 %
The future minimum lease payments to be paid under non-cancellable leases in effect as of July 3, 2022, are as follows (in thousands):

As of July 3, 2022Operating Leases
2022 (remaining six months)$7,523 
202314,354 
202410,508 
20256,502 
20264,464 
Thereafter2,019 
Total lease payments45,370 
Less: imputed interest(6,330)
Total$39,040 

Purchase Commitments
 
Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of July 3, 2022 are as follows:

(In thousands)
Fiscal 2022 (remaining six months)
Fiscal 2023
Fiscal 2024
Fiscal 2025
Fiscal 2026
Thereafter
Total1
Future purchase obligations$129,517 $200,974 $2,004 $929 $778 $4,529 $338,731 

The future purchase obligations presented above primarily consist of commitments to purchase photovoltaic modules pursuant to the supply agreement with Maxeon Solar entered into on August 26, 2020, as well as commitments to purchase Module-Level Power Electronics ("MLPEs”) supplied by one vendor. On February 14, 2022, we entered into a Master Supply Agreement with Maxeon Solar which replaced the previous supply agreement dated as of August 26, 2020. the Master Supply Agreement was effective in the first quarter of fiscal 2022, and will remain in effect until December 31, 2023. The supply agreement also increases purchase prices and includes exclusivity provisions that will last until December 31, 2022 for certain products, and may be extended to October 13, 2023 for other products upon the satisfaction of certain conditions.

The terms of all our long-term supply agreements are reviewed annually by us and we assess the need for any accruals for estimated losses on adverse purchase commitments, such as lower of cost or net realizable value adjustments that will not be recovered by future sales prices, forfeiture of advanced deposits and liquidated damages, as necessary.

Product Warranties

The following table summarizes accrued warranty activities for the three and six months ended July 3, 2022 and July 4, 2021:

Three Months EndedSix Months Ended
(In thousands)July 3, 2022July 4, 2021July 3, 2022July 4, 2021
Balance at the beginning of the period$78,496 $64,684 $80,282 $62,801 
Accruals for warranties issued during the period3,610 469 3,866 9,675 
Settlements and adjustments during the period(3,522)(5,735)(5,564)(13,058)
Balance at the end of the period$78,584 $59,418 $78,584 $59,418 
In connection with a cracking issue identified in the fourth quarter of fiscal 2021, we recorded a one-time quality charge of $26.5 million during the fiscal year ended January 2, 2022. The total charge was estimated using assumptions of cost to be incurred on labor and material based on our plan and quoted third-party prices to replace all the installed and uninstalled connectors. During the first and second quarters of fiscal 2022, there have been no significant changes to the original estimate. We plan to complete the majority of the repairs through fiscal 2023.

Liabilities Associated with Uncertain Tax Positions
 
Total liabilities associated with uncertain tax positions were $15.4 million and $14.7 million as of July 3, 2022 and January 2, 2022, respectively. These amounts are included within “other long-term liabilities” on our condensed consolidated balance sheets in their respective periods as they are not expected to be paid within the next 12 months. Due to the complexity and uncertainty associated with our tax positions, we cannot make a reasonably reliable estimate of the period in which cash settlement, if any, would be made for our liabilities associated with uncertain tax positions in other long-term liabilities.

Indemnifications
 
We are a party to various agreements under which we may be obligated to indemnify the counterparty with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agree to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, negligent acts, damage to property, validity of certain intellectual property rights, non-infringement of third-party rights, and certain tax-related matters including indemnification to customers under Section 48(c) of the Internal Revenue Code of 1986, as amended, regarding solar commercial investment tax credits (“ITCs”) and U.S. Treasury Department (“U.S. Treasury”) cash grant payments under Section 1603 of the American Recovery and Reinvestment Act (each a “Cash Grant”). Further, in connection with our sale of residential lease assets in fiscal 2018 to SunStrong, we provide Hannon Armstrong Sustainable Infrastructure Capital, Inc. (“Hannon Armstrong”) indemnification related to cash flow losses arising from a recapture of California property taxes on account of a change in ownership, recapture of federal tax attributes and cash flow losses from leases that do not generate the promised savings to homeowners. The maximum exposure to loss arising from the indemnification for SunStrong is limited to the consideration received for the solar power systems. In each of these circumstances, payment by us is typically subject to the other party making a claim to us that is contemplated by and valid under the indemnification provisions of the particular contract, which provisions are typically contract-specific, as well as bringing the claim under the procedures specified in the particular contract. These procedures typically allow us to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration or amount. In some instances, we may have recourse against third parties or insurance covering certain payments made by us.
 
In certain circumstances, we are contractually obligated to compensate customers and investors for losses they may suffer as a result of reductions in benefits received under ITCs and U.S. Treasury Cash Grant programs. The indemnity expires in conjunction with the statute of limitation and recapture periods in accordance with the underlying laws and regulations for such ITCs and related benefits. We apply for ITCs and Cash Grant incentives based on guidance provided by the Internal Revenue Service (“IRS”) and the U.S. Treasury, which include assumptions regarding the fair value of the qualified solar power systems, among others. Certain of our development agreements, sale-leaseback arrangements, and financing arrangements with tax equity investors incorporate assumptions regarding the future level of incentives to be received, which in some instances may be claimed directly by our customers and investors. Generally, such obligations would arise as a result of reductions to the value of the underlying solar power systems as assessed by the IRS. At each balance sheet date, we assess and recognize, when applicable, the potential exposure from these obligations based on all the information available at that time, including any audits undertaken by the IRS. The maximum potential future payments that we could have to make under this obligation would depend on the difference between the eligible basis claimed on the tax filing for the solar energy systems sold or transferred to indemnified parties and the values that the IRS may determine as the eligible basis for the systems for purposes of claiming ITCs or Cash Grants. We use the eligible basis for tax filing purposes determined with the assistance of independent third-party appraisals to determine the ITCs that are passed through to and claimed by the indemnified parties. We continue to retain certain indemnities, specifically, around ITCs, Cash Grants and California property taxes, even after the underlying portfolio of assets is sold to a third party. For contracts that have such indemnification provisions, we recognize a liability under ASC 460, Guarantees, for the estimated premium that would be required by a guarantor to issue the same guarantee in a standalone arm’s-length transaction with an unrelated party. We recognize such liabilities at the greater of the fair value of the indemnity or the contingent liability required to be recognized under ASC 450, Contingencies. We initially estimate the fair value of any such indemnities provided based on the cost of insurance policies that cover the underlying risks being indemnified and may purchase such policies to mitigate our exposure to potential indemnification payments. After an indemnification liability is recorded, we derecognize such amount typically upon expiration or settlement of the arrangement. As of July 3, 2022 and January 2, 2022, our provision was $9.7 million and $9.6 million, respectively, primarily for tax-related indemnifications.

SunPower is party to various supply agreements (collectively, the “Hemlock Agreements”) with Hemlock Semiconductor Operations, LLC (f/k/a Hemlock Semiconductor Corporation) and its affiliate, Hemlock Semiconductor, LLC, for the procurement of polysilicon. In connection with the Spin-Off, SunPower and Maxeon Solar entered into an agreement pursuant to which Maxeon Solar received the benefit of SunPower’s rights under the Hemlock Agreements (including SunPower’s deposits and advanced payments thereunder) and, in return, Maxeon Solar agreed to perform all of SunPower’s existing and future obligations under the Hemlock Agreements, including all take-or-pay obligations (the “Back-to-Back Agreement”). As we remain a party to the Hemlock Agreements, we are contractually liable to the vendor along with Maxeon Solar.

During the second quarter of fiscal 2022, Hemlock communicated to us and Maxeon Solar that they believe that certain price escalation clauses for silicon metal have been triggered and would apply to all purchases of polysilicon for 2022 deliveries. We and Maxeon Solar do not believe that these inflationary price escalation clauses apply to the purchase of polysilicon for 2022 deliveries. We and Maxeon Solar are currently involved in discussions with Hemlock to explore a mutually acceptable resolution. Maxeon Solar’s remaining obligations under the Hemlock Agreements, without giving effect to any alleged inflationary price escalation clauses, amounts to $36.6 million for the remainder of fiscal 2022. This is gross of prepayments of $12.9 million as of July 3, 2022. We do not believe we have any current exposure under the Hemlock Agreements as of quarter ended July 3, 2022 as we are fully indemnified by Maxeon Solar under the Back-to-Back Agreement. As such, we do not carry any liability for the Hemlock Agreements on our condensed consolidated financial statements as long as Maxeon Solar complies with its obligations under the Hemlock Agreements and the Back-to-Back Agreement.

Pursuant to the Separation and Distribution Agreement entered into by us and Maxeon Solar, we agreed to indemnify Maxeon Solar for any liabilities arising out of certain existing litigation relating to businesses contributed to Maxeon Solar in connection with the Spin-Off. We expect to be actively involved in managing this litigation together with Maxeon Solar. The indemnity qualifies for the criteria for accounting under the guidance in ASC 460, and we have recorded the liability of litigation of $6.3 million equal to the fair value of the guarantee provided as of the period ended July 3, 2022. The fair value includes $2.0 million relating to a change in the fair value of the liability for one of the indemnified litigation matters that was settled during the second quarter of fiscal 2022.
Legal Matters

We are a party to various litigation matters and claims, including but not limited to intellectual property, environmental, and employment matters, that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of such matters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.