Commitments and Contingencies

6 Months Ended

Jul. 02, 2023

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

COMMITMENTS AND CONTINGENCIES

Facility and Equipment Leases

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

	Three Months Ended				Six Months Ended
(In thousands)	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
Operating lease expense	$	3,661	$	3,364	$	7,282	$	6,579
Finance lease expense:
Amortization expense	1,031		308		1,806		308
Interest expense on lease liabilities	274		71		463		71
Sublease income	(295)		(104)		(1,041)		(191)
Total	$	4,671	$	3,639	$	8,510	$	6,767
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	4,151	$	4,980	$	7,900	$	8,720
Operating cash flows for finance leases	274		71		463		71
Financing cash flows for finance leases	1,031		118		1,806		118
Right-of-use assets and property, plant, and equipment obtained in exchange for leases:
Operating leases	$	1,723	$	649	$	3,809	$	1,526
Finance leases	5,656		4,236		8,091		4,236

	As of
	July 2, 2023		January 1, 2023
Weighted-average remaining lease term (in years):
Operating leases	3.5		3.7
Finance leases	3.4		3.4
Weighted-average discount rate:
Operating leases	7.8	%	8.0	%
Finance leases	7.0	%	7.0	%

The future minimum lease payments to be paid under non-cancellable leases in effect as of July 2, 2023, are as follows:

	Operating Leases		Finance Leases
As of July 2, 2023	(In thousands)
2023 (remaining six months)	$	7,212	$	2,872
2024	13,121		5,653
2025	9,422		5,490
2026	7,799		3,999
2027	4,906		1,069
Thereafter	2,091		61
Total lease payments	44,551		19,144
Less: imputed interest	(6,177)		(2,044)
Total	$	38,374	$	17,100

Purchase Commitments

Future purchase obligations under non-cancellable purchase orders and long-term supply agreements as of July 2, 2023 are as follows:

(In thousands)	Fiscal 2023 (remaining six months)		Fiscal 2024		Fiscal 2025		Fiscal 2026		Fiscal 2027		Thereafter		Total
Future purchase obligations	$	134,002	$	184,926	$	159,929	$	778	$	784	$	3,745	$	484,164

The future purchase obligations presented above primarily consist of commitments to purchase photovoltaic modules pursuant to the supply agreements with Maxeon Solar entered into on February 14, 2022 and December 31, 2022, as well as commitments to purchase Module-Level Power Electronics (“MLPEs”) supplied by one vendor.

On April 5, 2023, we entered into a new Master Supply Agreement with Waaree Energies Ltd. (“Waaree”) for the purchase of various photovoltaic modules and components to be used in our residential systems. On May 25, 2023, we terminated the Master Supply Agreement with Waaree, including all outstanding purchase orders, and the parties are discussing the disposition of work-in-progress at the time of termination. Waaree products continue to be warranted by Waaree in accordance with the relevant provisions of the Master Supply Agreement.

We review the terms of all our long-term supply agreements annually and 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 2, 2023 and July 3, 2022:

	Three Months Ended				Six Months Ended
(In thousands)	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
Balance at the beginning of the period	$	84,333	$	78,496	$	78,880	$	80,282
Accruals for warranties issued during the period	10,233		3,610		20,561		3,866
Settlements and adjustments during the period	(6,034)		(3,522)		(10,909)		(5,564)
Balance at the end of the period	$	88,532	$	78,584	$	88,532	$	78,584

Pursuant to the Definitive Agreement entered into by us and TotalEnergies Renewables in connection with the sale of our C&I Solutions business, we agreed to indemnify TotalEnergies Renewables for certain projects that were sold as part of our business prior to the sale. During the three and six months ended July 2, 2023, we recorded an additional $1.9 million and $8.7 million of warranty expenses related to our indemnifications of TotalEnergies Renewables, respectively, which is included within “net (loss) income from discontinued operations attributable to stockholders” on our condensed consolidated statements of operations.

Liabilities Associated with Uncertain Tax Positions

Total liabilities associated with uncertain tax positions were $12.9 million and $12.3 million as of July 2, 2023 and January 1, 2023, 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 2, 2023 and January 1, 2023, our provision was $8.2 million, primarily for tax-related indemnifications, of which $4.9 million was recorded within “contract liabilities, net of current portion,” “accrued liabilities,” and “other long-term liabilities” on our condensed consolidated balance sheets related to our indemnifications with TotalEnergies Renewables.

SunPower is party to various supply agreements with Hemlock Semiconductor Operations, LLC (f/k/a Hemlock Semiconductor Corporation) and its affiliate, Hemlock Semiconductor, LLC, (collectively, the “Hemlock Agreements”), for the procurement of polysilicon. In connection with the Spin-off of Maxeon Solar, 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 of the first quarter of 2023, Maxeon Solar's commitment under the Hemlock Agreement was finalized. As of July 2, 2023, there are no further payment obligations remaining under the Hemlock Agreements or 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 $2.9 million as of July 2, 2023.

In addition, as of July 2, 2023, we have retained a total of $29.8 million of warranty reserves related to our indemnification with TotalEnergies Renewables in connection with the sale of our C&I Solutions business, which is included within “accrued liabilities” and “other long-term liabilities” on our condensed consolidated balance sheets.

Legal Matters

We are 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.