The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended January 1, 2012 filed with the SEC on March 1, 2012, and all of our other filings, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.

This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by the use of statements that include phrases such as we "expect," "anticipate," "plan," "intend," "continue," "may," "can," "believe" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward- looking statement. We discuss these risks and uncertainties in detail in Part I. Item 1A. of our 2011 Form 10-K together with further risks discussed in Part II. Item 1A. Risk Factors of this Form 10-Q.

Introduction

Overview

We are organized into two Strategic Business Units ("SBUs"), Renewable Energy Solutions and Power Solutions. The SBUs focus on both the products and services we provide and the customers and end markets that we serve. We are focused on improving our operational and financial performance. Our top objectives are to gain additional market share, execute our operational strategy, and increase profitability and cash flows.

Our strategy is to gain market share by entering new markets and by providing our customers with innovative products and additional product offerings. Our new product introductions increase power density and provide our customers with a greater range of options to meet their diverse power and solar needs. These new product offerings range from a line of liquid-cooled inverters which serve the demands of the utility market, particularly in North America, to microinverters which are currently in the testing phase. In addition, we have added software management capabilities to our inverter offerings through our Vision software technology in order to allow customers the ability to remotely monitor and control individual PV plants or assets. We are also expanding our Power Solutions product line which includes our Platinum efficiency for custom front-end applications as well as other applications supporting our medical, rail and industrial equipment customers.

We are focused on improving our operational strategy and are implementing lean manufacturing processes at all of our factories. In addition, we are reducing lead times, improving deliveries to customer request dates, and reducing freight and other transportation costs by localizing the supply chain. As part of our strategy for geographic diversification in our Renewable Energy Solutions SBU, we have entered into the North American and Asia Pacific markets and have established new factories in North America and China, as well as product development laboratories, and we continue to build our regional sales and service teams. We will continue to strategically invest in sales and marketing, R&D and our global service team as we believe these are key drivers of our business.

Lastly, we are continuing to drive profitability and improve our cash flows by refining our manufacturing operations thereby reducing our costs to manufacture products and increasing production levels at our facilities in North America and China. We have stabilized the cost of our

Asian operations and continue to work through certain facility ramp-up costs in our North American facility, including significant freight and expedite charges, as we establish a local North American supply chain.

Renewable Energy Solutions: We offer inverters, management systems, accessories and services for the renewable energy marketplace that includes both photovoltaic/solar and wind applications. In the renewable energy market, we sell a broad product line of inverters and service offerings that provide our customers with industry-leading efficiency, more harvested power, increased uptime and reliability, ease of installation, and monitoring software. We sell our renewable energy products to distributors/installers, EPCs and OEMs. We are engaged in the design and production of inverters for renewable energy products that convert PV/solar or wind energy into useable AC power. Our string inverters are used in residential and small commercial applications, while our central inverters are designed for large commercial and utility installations for both the solar and wind markets. These products scale in size from 300 Ws up to 2.5 MW. Our product offering also provides our customers with greater control and monitoring of their renewable energy assets using a SaaS platform.

Power Solutions: Our power conversion and power management solutions are used in computer servers, data storage, networking, telecommunications and industrial applications. We sell our power conversion products to OEMs, distributors, and service providers. We are engaged in the design and production of the following power conversion products:

º •
º AC/DC power supplies that convert AC from a primary power source, such as a wall outlet, into a precisely controlled DC voltage. Virtually every electronic device that plugs into an AC wall outlet requires some type of AC/DC power supply, and we provide a broad range of solutions that power a wide variety of OEM equipment.

º •
º DC power systems that are used by communications and Internet service providers to power their equipment, and are used as backup power for large communications infrastructure equipment.

º •
º DC/DC converters that modify an existing DC voltage level to a different DC voltage level to meet the power needs of various subsystems and components within electronic equipment. Our DC/DC converters include high-density and low-density "brick" converters that are generally used to control power on communications printed circuit boards and also include POL converters that power devices within an IBA as well as in other applications.

º •
º Additional products that include digital control products for motors and a variety of other application-specific specialty power products.

We follow accounting standards set by the Financial Accounting Standards Board, ("FASB"). The FASB sets generally accepted accounting principles ("GAAP") that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. There have been no material changes in our critical accounting policies described in Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012.

Results of Operations

Consolidated

Net Sales. Net sales increased $42.5 million, or 8%, to $547.3 million for the first six months of fiscal 2012 from $504.8 million for the first six months of fiscal 2011. The increase in sales primarily relates to increases in the volume of megawatts shipped within the Renewable Energy SBU during the first six months of 2012 over the levels of the same period of 2011, as demand increased in advance of Feed-in-Tariff reductions in Germany and Italy. During the end of the second quarter of 2012, Germany and Italy enacted reductions in the levels of Feed-in-Tariffs offered which will be effective during the third quarter of 2012. The volume increase was partially offset by price declines due to a competitive pricing environment resulting in a negative impact to revenue. Revenue increases in the Renewable Energy SBU, were partially offset by decreases in the Power SBU as a result of softening within the power industry during fiscal 2012, and due to a substantial amount of delinquent backlog, built up as a result of the constrained supply chain during fiscal 2010, was cleared out during the first quarter of 2011 favorably impacting net sales in that period, and this favorable impact did not recur during the first six months of fiscal 2012.

Net sales increased $61.2 million, or 24%, to $321.5 million for the second quarter of fiscal 2012 from $260.3 million in the comparable period of 2011. The increase in revenue relates to volume increases in the Renewable Energy SBU as demand increased in advance of Feed-in-Tariff changes in Germany and Italy. These increases in revenue were offset partially by a decrease in revenue for the Power SBU as a result of softening within the industry across all product lines, most notably impacting the Network Power Systems market.

Net sales by business segment were as follows, in millions:

                                     Three Months Ended                     Six Months Ended
                               July 1, 2012       July 3, 2011       July 1, 2012       July 3, 2011
Renewable Energy Solutions    $ 254.6      79 %  $ 180.0      69 %  $ 403.4      74 %  $ 331.6      66 %
Power Solutions                  66.9      21 %     80.3      31 %    143.9      26 %    173.2      34 %

Total                         $ 321.5     100 %  $ 260.3     100 %  $ 547.3     100 %  $ 504.8     100 %

Net sales by customer category were as follows, in millions:

                                 Three Months Ended                     Six Months Ended
                           July 1, 2012       July 3, 2011       July 1, 2012       July 3, 2011
     Distributors         $ 184.7      58 %  $ 116.4      45 %  $ 293.2      54 %  $ 228.4      45 %
     OEMs                    77.5      24 %     92.6      35 %    157.7      29 %    179.9      36 %
     EPCs                    58.7      18 %     50.8      20 %     94.7      17 %     93.6      18 %
     Service providers        0.6       -        0.5       -        1.7       -        2.9       1 %

     Total                $ 321.5     100 %  $ 260.3     100 %  $ 547.3     100 %  $ 504.8     100 %

Net sales for the three and six months ended July 1, 2012 and July 3, 2011 by end-markets under this new classification were as follows:

                                            Three Months             Six Months
                                                Ended                   Ended
                                        July 1,      July 3,     July 1,     July 3,
                                          2012        2011        2012        2011
      Renewable Energy                        79 %         69 %        74 %        66 %
      Servers, Storage and Networking         10 %         14 %        14 %        15 %
      Industrial Equipment                     9 %         11 %         9 %        13 %
      Network Power Systems                    2 %          6 %         3 %         6 %

      Total                                  100 %        100 %       100 %       100 %

     Gross Profit.

                                          Three Months           Six Months
                                             Ended                  Ended
                                      July 1,     July 3,    July 1,    July 3,
                                        2012       2011        2012       2011
          Gross profit, in millions     $ 97.5    $   87.4    $ 152.5    $ 171.6
          Gross profit margin             30.3 %      33.6 %     27.9 %     34.0 %

Gross profit for the first six months of fiscal 2012 decreased by $19.1 million to $152.5 million from a gross profit of $171.6 million in the comparable period in 2011. As a percentage of net sales, gross margin decreased to 27.9% for the first six months of fiscal 2012 from a gross margin of 34.0% for the same period in 2011. Gross profit for the second quarter of fiscal 2012 was $97.5 million compared with a gross profit of $87.4 million in the comparable period in 2011. As a percentage of net sales, gross margin decreased to 30.3% for the second quarter of fiscal 2012 from a gross margin of 33.6% for the same period in 2011.

Gross margin for the quarter and six months ended July 1, 2012 was negatively impacted as a result of competitive pressures within the Renewable Energy SBU. Gross margin also declined due to increased warranty related expenses and factory ramp-up costs in North America in our Renewable Energy SBU, offset partially by reductions in material costs.

Selling, General and Administrative Expense. Selling, general and administrative expense increased $7.6 million, or 18%, to $49.6 million for the first six months of fiscal 2012 from $42.0 million for the same period in 2011. As a percentage of net sales, selling, general and administrative expense increased to 9% for the first six months of fiscal 2012 from 8% for the same period in fiscal 2011. The increase in selling, general and administrative expense was primarily a result of our investment in the expansion of the sales and marketing teams to support our Renewable Energy business.

Selling, general and administrative expense increased $4.5 million, or 22%, to $25.4 million for the second quarter of fiscal 2012 from $20.9 million for the same period in 2011. As a percentage of net sales, selling, general and administrative was 8% for the second quarter of both fiscal 2012 and fiscal 2011.

Research and Development. Research and development expense increased by $0.3 million, or 1%, to $23.7 million for the first six months of fiscal 2012 from $23.4 million in the first six months of fiscal 2011. As a percentage of net sales, research and development decreased to 4% for the first six months of fiscal 2012 compared with 5% for the same period of 2011. Research and development remained relatively flat at $11.9 million in the second quarter of fiscal 2012 compared with $12.1 million in the second quarter of fiscal 2011. As a percentage of net sales, research and development decreased to 4%

during the second quarter of 2012 from 5% during the same period of 2011. Research and development spending related to our continued investments in innovative new products.

Amortization of Intangible Assets. Amortization of intangible assets was $0.8 million for the six-month period ended July 1, 2012 compared to $0.9 million for the same period in July 3, 2011. Amortization of intangible assets was $0.4 million for the second quarter of fiscal 2012 compared to $0.5 million in the second quarter of 2011.

Litigation Charges. On December 22, 2010, a United States District Court assessed a judgment against the Company indicating that certain of our products directly or indirectly infringe on patents established by SynQor, Inc. and awarded damages plus interest against the Company. See "Legal Proceedings" under Part II, Item 1 of this Quarterly Report on Form 10-Q. In accordance with ASC 450-20, "Accounting for Contingencies: Loss Contingencies," we accrued the portion of the contingency that was deemed to be probable and reasonably estimable. During the six-month periods ended July 1, 2012 and July 3, 2011, we recorded approximately $0.1 million and $0.9 million, respectively, for interest charges related to the damages accrued. During the quarter ended July 3, 2011, we recorded approximately $0.6 million for interest charges related to the damages accrued.

Income from Operations. As a result of the items above, income from operations was $78.3 million for the first six months of fiscal 2012 compared with income from operations of $104.5 million for the first six months of fiscal 2011. Income from operations was $59.8 million for the second quarter of fiscal 2012 compared with income from operations of $53.3 million for second quarter of fiscal 2011.

Interest Income (Expense), Net. Net interest expense was less than $0.1 million for the first six months of fiscal 2012, compared with net interest expense of approximately $1.8 million for the comparable period in 2011. Net interest expense was less than $0.1 million for the second quarter of fiscal 2012, compared with net interest expense of approximately $0.9 million for the comparable period in 2011.

The net interest expense recorded during the quarter and six months ended July 1, 2012 primarily related to amortization of issuance costs associated with the $150 million revolving credit facility entered into March 29, 2011. The net interest expense recorded during the quarter and six months ended July 3, 2011 primarily related to approximately $36 million of senior convertible notes issued May 8, 2009 at an effective interest rate of 10.5%.

Other Income (Expense), Net. Net other income was $3.3 million for the first six months of fiscal 2012 compared with net other expense of $6.7 million for the same period in 2011. Included in net other income for the first six months of fiscal 2012 were gains on foreign currency transactions of approximately $3.1 million compared with losses on foreign currency transactions of approximately $4.9 million in 2011. Net other income was $12.2 million for the second quarter of fiscal 2012 compared with net other expense of $4.5 million for the same period in 2011. Net other income for the second quarter of fiscal 2012 consisted of gains on foreign currency transactions of approximately $12.2 million compared with losses on foreign currency transactions of approximately $2.4 million in 2011. The gains, related to remeasurement of foreign currency transactions, during the second quarter and first six months of 2012 were due primarily to the Euro weakening against the USD, and conversely the losses incurred during the quarter and first six months of 2011 were due to the Euro strengthening against the USD. Our primary foreign currencies are the Euro, the Chinese RMB, and the British Pound.

Provision for Income Taxes. The provision for income taxes was $29.5 million for the first six months of fiscal 2012 compared to $34.1 million for the first six months of fiscal 2011. The provision for income taxes was $25.2 million for the second quarter of fiscal 2012 as compared to $16.6 million recorded during the second quarter of fiscal 2011. The provision for income taxes recorded in both

periods primarily related to taxes recorded at certain of our profitable European locations. The effective tax rate increased to 36.1% for the first six months of fiscal 2012 from 35.5% in the first six months of fiscal 2011 and to 35.0% for the second quarter of fiscal 2012 from 34.7% in the second quarter of fiscal 2011, as a result of the change in geographical mix of pre-tax income at our foreign locations.

Our effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in the U.S. and our various foreign jurisdictions. Under ASC 740-270, "Interim Reporting of Income Taxes," we are required to adjust our effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of ASC 740-270 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

Although we record deferred income tax assets in jurisdictions where we generate a loss for income tax purposes, we also record a valuation allowance against these deferred income tax assets when, in management's judgment, it is more likely than not that the deferred tax assets will not be realized. As a result, we may record no tax benefit in jurisdictions where we incur a loss, but record tax expense in jurisdictions where we record taxable income and have no NOL carryforward. As a result, few meaningful comparisons can be made on our consolidated tax rates between periods.

Equity in earnings (loss) of joint venture. During the first six months of fiscal 2012, we recorded a loss of approximately $0.4 million related to our equity share in the earnings (loss) of a joint venture compared with income of $0.6 million recorded during the same period in fiscal 2011. During the second quarter of fiscal 2012, we recorded a loss of approximately $0.1 million related to our equity share in the earnings (loss) of a joint venture compared with income of $0.4 million recorded during the same quarter of fiscal 2011. Losses incurred by the joint venture during the first six months of 2012 relate to softness in the power industry as certain customers delayed their orders in light of the uncertain macroeconomic environment.

Preferred stock dividend and accretion. During the first six months of fiscal 2011 in connection with the issuance of $23.6 million of redeemable convertible preferred stock to Silver Lake Sumeru, we recorded $1.7 million related to the 10% preferred stock dividend and accretion, of which $1.2 million related to preferred dividends declared and $0.5 million related to the periodic accretions under the interest method. During the second quarter of fiscal 2011, we recorded $0.9 million, consisting of $0.6 million related to the preferred stock dividend and $0.3 million related to the periodic accretions under the interest method. The preferred stock was converted to common stock during the fourth quarter of fiscal 2011.

Renewable Energy Solutions

    Results for the Renewable Energy Solutions business segment for the three
and six months ended July 1, 2012 and July 3, 2011 are as follows, in millions:

                                     Three Months           Six Months
                                         Ended                 Ended
                                  July 1,    July 3,    July 1,    July 3,
                                    2012       2011       2012       2011
               Revenue             $ 254.6    $ 180.0    $ 403.4    $ 331.6
               Operating Income       65.3       56.0       84.0      101.5

During the first six months of fiscal 2012, revenue increased $71.8 million, or 22%, to $403.4 million from $331.6 million during the comparable period of fiscal 2011. During the second quarter of fiscal 2012, revenue increased $74.6 million, or 41%, to $254.6 million from $180.0 million

during the comparable period of fiscal 2011. The increase in revenue was a result of volume increases in megawatts shipped, due to higher demand in Europe based on anticipated reductions in Feed-in-Tariffs in Germany and Italy, and gains in market share within Europe.

Operating margins decreased to 21% during the first six months of fiscal 2012 from 31% for the comparable period of 2011 as a result of declines in sales prices, increased warranty costs, ramp-up costs in new factories, as well as increased investment in sales and marketing, service teams. Operating margins decreased to 26% during the second quarter of fiscal 2012 from 31% for the comparable period of 2011 as a result of declines in sales prices, increased warranty costs, ramp-up costs in new factories, as well as increased investment in sales and marketing, service teams, and R&D.

Power Solutions

    Results for the Power Solutions business segment for the three and six
months ended July 1, 2012 and July 3, 2011 are as follows, in millions: follows,
in millions:

                                      Three Months           Six Months
                                         Ended                  Ended
                                  July 1,     July 3,    July 1,    July 3,
                                    2012       2011        2012       2011
               Revenue              $ 66.9    $   80.3    $ 143.9    $ 173.2
               Operating income        2.3         3.1        9.3       14.9

During the first six months of fiscal 2012, revenue decreased $29.3 million, or 17%, to $143.9 million from $173.2 million during the comparable period of fiscal 2011. Operating margins decreased to 6% during the first six months of fiscal 2012 as compared to 9% operating margins in the comparable period of 2011. Revenue for the first six months of fiscal 2011 was favorably impacted as it included a substantial amount of delinquent backlog, built up as a result of the constrained supply chain during fiscal 2010, which was cleared out during that six-month period. The decreased operating margins were a result of the reduction in sales volumes.

During the second quarter of fiscal 2012, revenue decreased $13.4 million, or 17%, compared to fiscal 2011. Operating margins decreased to 3% during the second quarter of 2012 as compared to 4% during the second quarter of fiscal 2011. The decrease in revenue and operating margins for the second quarter of fiscal 2012 as compared with the same period of 2011 was due to industry-wide softening across all markets.

Liquidity and Capital Resources

Our cash and cash equivalents balance increased to $259.2 million at July 1, 2012 from $204.9 million at January 1, 2012. Our primary sources of cash in the first six months of fiscal 2012 consisted of $78.6 million of cash generated from operating activities. Our net cash used in investing activities in the first six months of fiscal 2012 consisted of $14.5 million for the acquisition of property and equipment. Cash used in financing activities included $4.8 million used to repurchase 1.1 million shares of our common stock.

Cash provided by operating activities of $78.6 million included increases in accounts payable and other accrued expenses of $27.0 million and $7.0 million, respectively, partially offset by increases in accounts receivable and inventories of $27.0 million and $12.7 million, respectively. In addition, $21.8 million was used for the payment of income taxes primarily related to our profitable European entities.

The aggregate limit on all credit facilities was approximately $150.8 million at July 1, 2012. The credit facilities bear interest on amounts outstanding at various intervals based on various applicable published market rates. At July 1, 2012, no amounts were outstanding on the credit facilities, and

$1.3 million was committed to guarantee letters of credit. After consideration . . .