Introduction

We are organized into two 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 conversion 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 production. In addition, we are adding software management capabilities to our inverter offerings that 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.

As part of our Renewable Energy Solutions operational strategy, we have entered into the North American and Asia Pacific markets and have established 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. We are focused on reducing lead times, improving deliveries to customer request dates, and reducing freight and other transportation costs by localizing the supply chain.

Lastly, we are continuing to drive profitability and cash flow generation by refining our manufacturing operations thereby reducing our costs to manufacture products. To mitigate ongoing price erosion in our markets, we design our new products to be significantly lower in cost than the product being replaced along with value engineering existing products to reduce material, labor and other costs. In addition, we continually evaluate our operating expense structure to ensure it is appropriate to business conditions.

Renewable Energy Solutions: We offer inverters, management systems, accessories and services for the renewable energy marketplace that includes PV 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, greater 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 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 the solar market. These products scale in size from 250 W up to 2.5 MW. Our product offerings also provide 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.

Critical Accounting Estimates

The application of our accounting policies requires management to make judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts may be reported if there are changes in the assumptions and estimates. Any changes to our assumptions or estimates may impact our operating results. Estimates are used for, but not limited to, the accounting for sales returns and discounts, allowance for doubtful accounts, inventory valuation, depreciation and amortization, warranty costs, long-lived and indefinite-lived assets impairment, restructuring charges, uncertain tax positions and the recoverability of deferred tax assets, and stock-based compensation. Management has identified the following accounting policies as critical to an understanding of our financial statements and as areas most dependent on management's judgment and estimates. Other accounting policies are described in Note 2 of Notes to Consolidated Financial Statements under Part IV, Item 15 of this Annual Report on Form 10-K.

Revenue Recognition-In accordance with ASC 605, "Revenue Recognition," we recognize revenue from product sales when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is reasonably assured. Sales are recorded net of sales returns and discounts, which are estimated based upon historical data.

For customers purchasing certain renewable energy products, we may provide performance monitoring support services after the product has been shipped. For arrangements including such additional deliverables, we recognize revenue in accordance with the standards set forth in ASC 605-25 "Revenue Recognition-Multiple-Element Arrangements." The standard sets the requirements for establishing separate units of accounting in a multiple-element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party objective evidence ("TPOE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE or TPOE is available. Revenue generated from the performance monitoring support services, including the related hardware to monitor the performance of the inverter, is deferred and recognized as the related services are performed.

We also sell extended warranties. Revenue derived from the extended warranties is deferred and recognized as the revenue is earned over the warranty period. We deferred $30.6 million and $20.7 million related to extended warranties and performance monitoring services for the fiscal years ended December 30, 2012 and January 1, 2012, respectively.

Title is deemed to pass at the time of shipment (or at the time of inventory consumption for customers on VMI because this is the point at which revenue is earned and realizable and the earnings

process is complete. For most shipments, title to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product leaves our warehouse. For shipments in which title transfers at a later date, revenue recognition is delayed. Shipping and handling costs may be charged to customers and revenue generated by these charges is included in net sales. Costs relating to shipping and handling are included in cost of goods sold.

Generally, we offer our distributors a standard agreement which includes payment terms, description of rights to return or exchange product, and price discounts. In general, payment is due within 30 days of shipment of the product to the distributors. The distributor may have a right to return if we discontinue a product that the distributor has on hand. The distributor may have a right to exchange up to 5% of the dollar value of products purchased within the prior six-month period, so long as the distributor is currently purchasing at least the equivalent dollar value in new product. Estimated product exchanges or returns are accrued for at the time of the sale based on historical information in accordance with ASC 605-15 "Revenue Recognition- Products." We may also give price discounts to a distributor at the time a purchase order is received from the distributor for product that they will sell to a specific customer. The price discount is typically available for one year following issuance of the purchase order for items listed on the purchase order. We accrue for the estimated price discount at the time revenue is recognized.

Accounts Receivable and Allowance for Doubtful Accounts-We establish the allowance for doubtful accounts based on our assessment of the collectability of individual customer accounts. We regularly review the adequacy of these allowances by considering internal factors such as historical experience, credit quality and age of the receivable balances as well as external factors such as economic and political conditions that may affect a customer's ability to pay, historical default rates, and long-term historical loss rates published by major third-party credit-rating agencies. We also consider the concentration of receivables outstanding with a particular customer in assessing the adequacy of our allowances. An allowance for doubtful accounts is provided for at the point it is probable that the receivable is uncollectible. In addition, we have established credit insurance covering certain high-risk receivables.

We establish our allowance for doubtful accounts by considering both customer-specific and country-specific issues. Our assessments consider customer financing availability, customer payments as compared with contractual terms, customer liquidity, and all other known customer-specific issues.
Country-specific issues include feed-in tariffs, financing within the region and any other known issues. We also monitor the economic and political changes and evaluate the related impact on our customers' credit worthiness and establish reserves on those related receivables at the point in time when collectability is no longer deemed probable.

Currently, we have not experienced any increasing trends in uncollectible accounts that are material to our financial statements. However, changes to government incentive programs in certain European countries have increased market uncertainty resulting in reduced availability of capital and credit impacting our customers in the Renewable Energy Solutions SBU and may, in turn, impact our ability to collect our receivables from our European customers. Availability of capital to our customers correlates to the markets in which government incentives and feed-in tariffs are offered, and the increases or decreases of available customer financing follows the increases and decreases in such incentives in most markets. Accordingly, as a result of the uncertainty in the Europe, we have established credit insurance covering approximately 50% of our Renewable Energy Solutions receivables in Europe, established upfront credit limits with our customers, require certain customers to provide bank guarantees and letters or credit, and have required certain customers to make advanced payment for product in order to mitigate uncollectible accounts.

Inventories-Inventories are stated at the lower of cost (first-in, first-out method) or market. We review the historical and projected usage for inventory in determining excess and obsolete inventory.

We estimate the projected usage of each inventory item by performing a quarterly analysis of expected future usage of raw materials, subassemblies-in-process and finished goods on an item-by-item basis. Such analysis includes the consideration of current sales backlog supported by customer purchase orders as well as forecasted sales of each inventory item for the next four quarters. Forecasted sales of each inventory item takes into consideration historical usage during the last 12 months, expected demand in the next 12 months, known or anticipated technological changes, the commonality of components and sub-assemblies used in multiple products, the maturity of the product in its life cycle, and any other macroeconomic factors. The methodology for forecasting demand may be modified depending on specific product lifecycles and local circumstances. We write down the carrying value of inventory in excess of this demand. In addition, we evaluate the reliability of our assessment of projected usage by comparing such projected usage amounts to actual subsequent usage noting that such analysis has not indicated a significant variance between forecast and actual usage of inventory that would materially impact our inventory valuation.

Any non-cancelable open purchase orders for components we are obligated to purchase in excess of projected usage, or for open purchase orders where the market price is lower than the purchase order price, are recorded as other accrued expenses on our consolidated balance sheet.

Property and Equipment-Property and equipment are recorded at cost. Provision for depreciation has been made based upon the estimated useful lives of these assets, which range from three to 20 years, using principally the straight-line method. Provision for amortization of leasehold improvements is made based upon the estimated lives of the assets or terms of the leases, whichever are shorter.

Warranties-We offer our customers warranties on products sold based on product type and application. In general, these standard warranties range from two to 10 years. We also offer our renewable energy customers extended warranty contracts with terms between five and 10-years after the standard warranty period expires and account for such extended warranty contracts in accordance with ASC 605-20-25, "Revenue Recognition." We review our warranty liability quarterly based on an analysis of actual expenses and failure rates by specific product line and estimated future costs and projected failure rate trends by specific product line. Factors taken into consideration when evaluating our warranty reserve are (i) historical claims for each product, (ii) the maturity of the product in its life cycle, (iii) volume increases, (iv) life of warranty,
(v) historical warranty repair costs and (vi) other factors. To the extent that actual experience differs from our estimate, the provision for product warranties will be adjusted in future periods.

Impairment of Long-Lived and Indefinite-Lived Assets-We review the recoverability of the carrying value of long-lived assets using the methodology prescribed in ASC 360. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Upon such an occurrence, recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows to which the assets relate to the carrying amount. If the asset is determined to be unable to recover its carrying value, it is written down to fair value. Fair value is determined based on discounted cash flows, appraised values or other information available in the market, depending on the nature of the assets. Methodologies for determining fair value are inherently based on estimates that may change, such as the useful lives of assets and our cash flow forecasts associated with certain assets. A change in these estimates may result in impairment charges, which would impact our operating results.

We review the carrying value of indefinite-lived intangible assets using the methodology prescribed in ASC 350 "Intangibles-Goodwill and Other." ASC 350 requires that we not amortize indefinite-lived intangible assets, but instead subject them to impairment tests on at least an annual basis and whenever circumstances suggest that they may be impaired. We test our long-lived and indefinite-lived assets for impairment on an annual basis at the end of our August fiscal month.

Restructuring Charges-We record restructuring charges in accordance with ASC
420 "Exit or Disposal Cost Obligations" and ASC 712 "Compensation-Nonretirement Postemployment Benefits," as applicable. ASC 420 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan. In accordance with the guidance provided under ASC 712, we accrue for severance expenses prior to notification for termination benefits that are contractual or required by regional labor laws or are pursuant to a substantive plan where the costs are deemed probable and reasonably estimable. Restructuring costs were related to the downsizing of operations and primarily consisted of specific charges that had been incurred or were to be incurred with no future economic benefit. These charges included costs related to personnel severance, continuing lease obligations for vacant facilities, and certain contract termination penalties and other shutdown costs. Calculation of the restructuring reserves includes management's judgment regarding closed facilities, which include assumptions about the length of time it will take for facilities to be subleased as well as the likely sublease income amount. Changes in these estimates may impact our operating results.

Income Taxes-We record a deferred income tax asset in jurisdictions where the Company generates a loss. We also record a valuation allowance against these deferred income tax assets in accordance with ASC 740, "Income Taxes," when, in management's judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. We record uncertain tax positions under the provisions of ASC 740. We recognize, in the consolidated financial statements, only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Under these provisions, we must assume that the taxing authority will examine the income tax position and will have full knowledge of all relevant information. For each income tax position that meets the more likely than not recognition threshold, we then assess the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. Unrecognized tax positions, if ever recognized in the financial statements, are recorded in the statement of operations as part of the income tax provision.

Stock-Based Compensation-We estimate the fair value of stock options and performance share units on the date of grant using the Black-Scholes option pricing model or the Monte Carlo Simulation model, respectively. Both models require the input of subjective assumptions, including the expected volatility of our common stock and an option's expected life. The fair value of our restricted stock and restricted stock units is determined based on the closing trading price of our common stock on the grant date. The amount of expense recognized represents the expense associated with the stock-based awards we expect to ultimately vest based upon an estimated rate of forfeitures. Our estimate of forfeitures is based on historical forfeiture behavior as well as any expected trends in future forfeiture behavior; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. As a result, our financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.

Recent Pronouncements and Accounting Changes-See Note 2-"Recent Pronouncements and Accounting Changes" of Notes to Consolidated Financial Statements under Part IV, Item 15 of this Annual Report on Form 10-K.

Results of Operations

Our fiscal year ends on the Sunday closest to December 31. The fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011 represent 52-week years. The following table represents our consolidated statements of operations as a percentage of net sales for the periods presented:

                                                         Fiscal Year Ended
                                            December 30,     January 1,     January 2,
                                                2012            2012           2011
Net sales                                           100.0 %        100.0 %        100.0 %
Cost of goods sold                                   74.6           69.2           61.5

Gross profit                                         25.4           30.8           38.5
Selling, general and administrative                  10.2            8.7            7.1
Research, Development, and Engineering                4.5            4.7            3.5
Amortization of intangibles                           0.2            0.2            0.1
Restructuring and asset impairment costs                -              -            0.4
Litigation                                              -            0.2            2.1

Income from operations                               10.5           17.0           25.3
Interest income                                       0.1            0.2              -
Interest expense                                     (0.2 )         (0.5 )         (0.6 )
Other (expense) income, net                          (1.0 )          2.5           (0.8 )

Income before provision for income taxes              9.4           19.2           23.9
Provision for income taxes                            4.0            5.9            9.9

Income before equity in (loss) earnings
of joint venture                                      5.4           13.3           14.0
Equity in (loss) earnings of joint
venture, net of tax                                     -            0.1            0.1

Net income                                            5.4           13.4           14.1

Preferred stock dividend and accretion                  -            0.3            0.3

Net income attributable to common
stockholders                                          5.4 %         13.1 %         13.8 %

Comparison of Fiscal Year Ended December 30, 2012 with Fiscal Year Ended January 1, 2012

During Fiscal 2012, revenue remained relatively consistent compared to Fiscal 2011 despite macroeconomic pressures, specifically in the European market. The European market was affected by changes in local government feed-in tariffs and government subsidies that influenced customer demand for our renewable energy products. In addition, competitive pricing pressures negatively impacted the revenue and profitability of our Renewable Energy SBU.

Net Sales Net sales increased $5.9 million, or 0.6%, to $1,022.6 million for the fiscal year ended December 30, 2012 from $1,016.7 million for the fiscal year ended January 1, 2012. The increase in sales primarily relates to volume increases within the Renewable Energy Solutions SBU in Fiscal 2012 over the levels achieved in Fiscal 2011, as demand increased in advance of feed-in tariff reductions in Germany and Italy, which were effective during the third quarter of 2012 and increased sales in Australia. This volume increase was partially offset by price declines due to a competitive pricing environment that had a negative impact on revenue. During Fiscal 2012, we shipped 3.6 GW of inverters versus 2.9 GW during Fiscal 2011. Renewable Energy revenue increases were partially offset by decreases in revenue in the Power SBU as a result of softening within the power industry during Fiscal 2012 and the clearance of backlog in the first quarter of Fiscal 2011, which accumulated at the

end of fiscal year 2010 as a result of supply chain constraints. This favorable impact did not recur during Fiscal 2012.

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

                                           Year Ended              Year Ended
                                        December 30, 2012       January 1, 2012
         Renewable Energy Solutions    $      743.0      73 %  $     697.3      69 %
         Power Solutions                      279.6      27 %        319.4      31 %

         Total                         $    1,022.6     100 %  $   1,016.7     100 %



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

                                      Year Ended              Year Ended
                                   December 30, 2012       January 1, 2012
             Distributors         $      572.1      56 %  $     447.3      44 %
             OEMs                        270.7      26 %        378.4      37 %
             EPCs                        177.2      17 %        186.9      18 %
             Service providers             2.6       1 %          4.1       1 %

             Total                $    1,022.6     100 %  $   1,016.7     100 %



    No customer accounted for more than 10% of our sales during either of the
fiscal years ended December 30, 2012 or January 1, 2012.

    We have defined our end markets based on the customers we serve. Net sales
for the fiscal years 2012 and 2011 by end markets were as follows:

                                                      Year Ended
                                              December 30,     January 1,
                                                  2012            2012
           Renewable Energy                              73 %           69 %
           Servers, Storage and Networking               13 %           15 %
           Industrial Equipment                          10 %           11 %
           Network Power Systems                          4 %            5 %

           Total                                        100 %          100 %



     Gross Profit

                                                   Year Ended
. . .