e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from To
Commission File Number 1-8403
ENERGY CONVERSION DEVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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38-1749884 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3800 Lapeer Road, Auburn Hills, Michigan
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48326 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (248) 475-0100
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of each Exchange on which registered |
Common Stock, $.01 par value per share
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendments to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). o Yes þ No
As of December 31, 2010, the aggregate market value of the registrants Common Stock held by non-affiliates of the registrant was
approximately $244.4 million based on the closing price as reported on the NASDAQ Global Select Market.
As of August 19, 2011, there were 53,269,925 shares of the registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the registrants Proxy Statement to be filed within 120
days of June 30, 2011 for the 2011 Annual Meeting of Stockholders.
TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
FORM 10-K
FISCAL YEAR ENDED JUNE 30, 2011
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PART I
Energy Conversion Devices, Inc. and Subsidiaries
Item 1: Business
In this Report, we use the terms Company, ECD, we, us and our, unless otherwise
indicated or the context otherwise requires, to refer to Energy Conversion Devices, Inc. and its
consolidated subsidiaries. Certain disclosures included in this Report constitute forward-looking
statements that are subject to risks and uncertainties. See Item 1A, Risk Factors, and Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements.
Overview
Energy Conversion Devices, Inc. (ECD) (NASDAQ: ENER), through its United Solar Ovonic (USO)
subsidiary, is a global leader in building-integrated and rooftop photovoltaics (PV). The
Company manufactures, sells and installs thin-film solar laminates that convert sunlight to clean,
renewable energy using proprietary technology. ECDs UNI-SOLAR® brand products are unique because
of their flexibility, lightweight, ease of installation, durability and real-world efficiency.
In addition, ECDs Ovonic Materials Division is a pioneer in advanced battery technology,
primarily as the inventor and worldwide licensor of nickel-metal-hydride (NiMH) battery
technology, as well as state-of-the-art cathode materials for Lithium-Ion (Li-Ion) batteries, and
is developing low-cost fuel cells, hydrogen production from bioreformation and hydrogen storage
technologies. In July 2011, we announced that we are seeking a strategic sale of our subsidiary,
Ovonic Battery Company, Inc. (OBC), which comprises substantially all of the business of our
Ovonic Materials Division, in order to focus on our United Solar Ovonic business activities.
Our Business Segments
We operate our business in two segments: United Solar Ovonic and Ovonic Materials. Financial
information regarding each segment is available in Note 25, Business Segments, to our Notes to
the Consolidated Financial Statements.
United Solar Ovonic
Our USO segment, which primarily consists of our wholly owned subsidiary, United Solar Ovonic
LLC, is the worlds only large-scale manufacturer of flexible PV laminates designed to be
integrated directly with roofing materials. Our PV laminates, which are marketed under the
UNI-SOLAR® brand, have several advantages over conventional, commodity glass-based solar panels,
including: better aesthetics; lighter weight; suitability for a broader range of commercial roofs
including the growing low-load bearing roof and building-integrated photovoltaic (BIPV) market;
easier installation including the ability to be factory integrated into roofing materials; no roof
penetrations; lower total installed cost; and higher incentives in key markets.
We sell our PV laminates principally for commercial and industrial rooftop applications
through roofing materials manufacturers, builders and building contractors, and solar power
installers/integrators that incorporate our PV laminates into their products for commercial sale
and then handle all aspects of
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the customer relationship, including marketing, sales and service. Our products offer
solutions for low load-bearing rooftops, BIPV and building-applied photovoltaics (BAPV).
In addition to commercial rooftop solutions, we are expanding our product line to include
residential applications. Our PowerShingle has the look of a conventional asphalt shingle and is
installed in a similar fashion. The product leverages the unique characteristics of UNI-SOLAR®
laminates and opens the fast-growing residential rooftop solar market to us.
We manufacture our PV laminates using our proprietary vacuum deposition and large-scale,
roll-to-roll manufacturing process that deposits amorphous silicon as a thin film on a stainless
steel substrate. We have designed, developed and manufactured the automated production equipment
based on these proprietary technologies. We believe our manufacturing process and product design
create significant barriers to entry for competitors who may seek to produce products similar to
ours. We also believe that consolidating our PV equipment design and manufacturing activities with
our PV laminate manufacturing process allows us to more effectively improve our manufacturing
efficiency and reduce capital costs.
Our PV modules compete with conventional electricity generation technologies and renewable
energy generation technologies such as wind-powered turbines. Our principal competitors in the
solar market include the following: Sharp Corporation, Q-Cells AG, Kyocera Corporation, Sanyo
Electric Co., Ltd. (Sanyo), SunPower Corp., Mitsubishi Electric Corporation, Yingli Green Energy,
Trina Solar Limited, and Suntech Power Holdings Co., Ltd., all of which predominantly manufacture
crystalline or polycrystalline silicon PV modules, and First Solar, Inc., which manufactures
thin-film cadmium telluride PV modules on glass substrates. Solyndra LLC, Global Solar Energy Inc.
and Ascent Solar Technologies, Inc., all of which manufacture copper indium gallium diselenide
(CIGS) solar modules, represent emerging technologies seeking to compete with us. The
competitiveness of alternative energy generation products, including solar power products, is
typically enhanced by governmental incentives designed to encourage the use of these products as
compared to conventional energy-generation sources, which today are less expensive at the customer
level in most locations. However, our long-term goal is to compete directly, without subsidies, in
energy markets.
We have entered into long-term supply agreements with our customers, some of which are
take-or-pay agreements (under which we could demand that the customer purchase a specified
minimum amount of our products). As of June 30, 2011, our backlog of anticipated product sales for
fiscal years 2012 through 2016 was $303.0 million. As of June 30, 2010, our backlog of anticipated
product sales was approximately $634.6 million. Anticipated product sales include future firm
commitments under take-or-pay agreements (i.e., contractually required minimum quantities),
confirmed orders from customers as of June 30, 2011, and government contracts. The Companys
estimate of anticipated product sales may be impacted by various assumptions, including anticipated
price reductions, currency exchange rates and overall customer demand. Current macroeconomic
conditions, including the global economic crisis, are adversely impacting our customers, including
some customers (who are unable to fully comply) with take-or-pay agreements, and, as a result, our
revenues and net income are likewise adversely impacted. We are working with our customers to
preserve relationships and maximize long-term value by, among other things, reallocating product
shipments to other customers and pursuing other remedies (including contract renegotiations), as
appropriate on a case-by-case basis. For a discussion of the risks associated with our backlog and
customer demand more generally, see Item 1A, Risk Factors.
Our strategic customers include Soprema, Constellation Energy, General Membrane, Unimetal,
Alwitra Flachdach Systeme GmbH, Marcegaglia Taranto S.p.A., and Derbigum Suisse Sarl. The only
customer with sales in excess of 10% of our solar sales for the 2011 fiscal year were affiliates
of the Winch Energy Group, which collectively represented 15% of our solar sales, in connection
with a series
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of solar installation projects in Southern Italy. The only customer with sales in excess of
10% of our solar sales for the 2010 fiscal year was Enel Green Power, which represented 20% of our
solar sales, in connection with a solar project in Naples, Italy. For more information about our
major customers and our revenues by geographic region, see Note 25, Business Segments, to our
Notes to the Consolidated Financial Statements.
We presently have 120 megawatts (MW) of nameplate manufacturing capacity. Our long-term
research and development strategy involves reducing production costs, improving
light-to-electricity conversion efficiency and identifying new commercial applications for our
products. We seek to offset our research and development costs with third-party funding, including
product development agreements and government funding. In June 2010, we announced our Technology
Roadmap to improve our conversion efficiency and reduce manufacturing cost per watt by introducing
new processes in our production machines. In the first phase, we modified, and are now optimizing,
a deposition line at our Auburn Hills campus to incorporate our new high frequency (HF)
deposition technology. The next phase will involve modifications of another deposition line at our
Greenville campus to incorporate our HF technology depositing enhanced-efficiency silicon
(Nano-Crystalline), which is expected to further increase aperture area efficiency in calendar
year 2012, with further reductions in cost per watt. These modifications will also increase the
capacity of the modified lines.
The key raw materials used in our United Solar Ovonic segment are stainless steel, high purity
industrial gases (primarily argon, nitrogen, hydrogen, silane and germane) and polymer materials.
We believe we have adequate sources for the supply of key raw materials and components for our PV
laminate manufacturing needs. We have recently expanded our supplier base for certain key raw
materials and components for efficiency, cost reduction and quality, while limiting the number of
suppliers who act as the single-source supplier for a particular raw material. We are actively
managing our direct material costs through purchasing strategies, product design and operating
improvements. We have entered into long-term supply agreements, some of which are take-or-pay
agreements that require us to purchase a specified minimum amount of materials, with our suppliers.
Our United Solar Ovonic segment is headquartered in Auburn Hills, Michigan, and has
manufacturing facilities in Auburn Hills and Greenville, Michigan, Tijuana, Mexico and LaSalle,
Ontario. We maintain sales offices in France, Germany, Italy and the United States. Additionally,
we have established a joint venture, United Solar Ovonic Jinneng Limited, which is organized under
the laws of the Peoples Republic of China, to manufacture solar products in China for sale in the
Chinese market using solar cells purchased from, and technology licensed by, USO. We presently own
25% of the joint venture, with the option to increase our ownership to 51% in certain
circumstances. Tianjin Jinneng Investment Co. owns the remainder of the joint venture. The joint
venture commenced operations in the fourth quarter of fiscal year 2010.
Ovonic Materials
Our Ovonic Materials segment invents, designs and develops materials and products based on our
pioneering materials science technology. We seek to commercialize our proprietary technology
internally and through third-party relationships, such as licenses and joint ventures. We
commercialize our advanced battery technology, both NiMH batteries and Li-Ion cathode materials
technologies, through this segment. We are also engaged in pre-commercialization activities for
our emerging technologies the funding of which we seek to offset with royalties and licensing
revenues and third-party funding, including product development agreements and government funding.
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In July 2011, we announced that we are seeking a strategic sale of our subsidiary OBC, which
conducts our NiMH battery technology licensing and materials manufacturing activities and comprises
substantially all of the business of this segment, in order to focus on our United Solar Ovonic
business activities. OBC is a consolidated subsidiary, in which we have a 93.6% equity interest
with the balance owned by Honda Motor Company, Ltd. (3.2%) and Sanoh Industrial Co., Ltd. (3.2%).
Advanced Battery Technology
We have established our advanced battery technology platform based upon our proprietary NiMH
and Li-Ion battery technologies. Our NiMH technology has historically formed the core of this
business, and we are executing on a commercialization strategy focused principally upon licensing
our NiMH battery technology to battery manufacturers throughout the world for consumer,
transportation and stationary applications. We are in the process of implementing a similar
commercialization strategy for our Li-Ion cathode materials technology. We also offer proprietary
high-performance mixed-metal hydroxide cathode materials for use in both NiMH and Li-Ion batteries.
NiMH batteries are rechargeable energy storage solutions offering high power and energy, long
cycle life and maintenance-free operation. Li-Ion batteries are also rechargeable energy storage
solutions typically offering higher energy density than comparable NiMH batteries but do not have
the proven durability and abuse tolerance of NiMH batteries. Products using our NiMH battery
technology compete with lithium battery technologies, lead-acid, nickel-cadmium and primary
alkaline disposable batteries.
Our advanced battery technologies are adaptable to a broad range of consumer, transportation
and stationary applications. Transportation NiMH batteries are in widespread commercial use in
hybrid electric vehicles where the NiMH chemistry offers proven cost, safety, performance and
durability. The electrification of vehicles worldwide in hybrid electric vehicles (HEV), plug-in
HEV (PHEV) and pure battery electric vehicles (BEVs) is expected to be a high-growth
opportunity for rechargeable batteries, although there is significant competition in these
transportation segments from emerging technologies such as Li-Ion.
Licensing
We have licensed our NiMH battery technology to worldwide NiMH battery manufacturers,
principally for consumer and transportation applications, on a royalty-bearing, non-exclusive
basis. We receive royalties from manufacturers who are currently producing NiMH batteries using
our technology. Royalties from Sanyo for consumer and transportation applications represented 48%
and 36% of our revenues in this segment for fiscal years 2011 and 2010, respectively.
We plan to commercialize our Li-Ion cathode materials technology through licensing and
cooperative ventures with our existing and new licensees and strategic value-chain partners.
Materials Manufacturing
We produce proprietary high-performance mixed-metal hydroxide cathode materials for use in
NiMH and Li-Ion batteries. Our proprietary cathode materials offer advantages such as higher
capacity and power, greater cycle life, high-temperature performance and lower costs. Sales to
Gold Peak Industries (Holdings) Limited represented 100% of our NiMH materials product sales in
this segment for both fiscal years 2011 and 2010, and 0.7% and 16%, respectively, of our total
revenues in this segment for fiscal years 2011 and 2010. We conduct our manufacturing operations
at a semi-automated facility in Troy, Michigan.
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The raw materials used in our mixed-metal hydroxide business are primarily nickel, cobalt and
manganese. All of the raw materials used are generally readily available from numerous sources,
but interruptions in production or delivery of key raw materials could have an adverse impact on
our manufacturing operations in this segment. Prices for these raw materials fluctuate in the
normal course of business due to supply and demand. Our product pricing formula to our customers
is based on the raw material price.
Emerging Technologies
Our research and development activities have generated new technologies, which we are seeking
to commercialize. These technologies, some of which are discussed below, require further
development and substantial additional funding to reach widespread commercial product status. We
seek to offset our funding requirements by obtaining third-party funding through strategic
alliances and government contracts.
Ovonic Solid Hydrogen Storage Technologies
Hydrogen is a clean and efficient fuel source, and we are developing a practical approach of
storing hydrogen in a solid metal matrix at low pressures using a family of efficient metal
hydrides. Our solid hydrogen storage solutions have several advantages over conventional gaseous
and liquid storage solutions, including improved volumetric density and greater safety due to our
technologys low-pressure refilling and storage capabilities. We are presently selling
pre-production volumes of portable hydrogen canisters manufactured in our Rochester Hills, Michigan
facility.
Ovonic Metal Hydride Fuel Cell Technologies
Fuel cells are environmentally clean power generators in which hydrogen and oxygen are
combined to produce electricity, with water and heat as the only by-products. Our proprietary
Ovonic metal hydride-based alkaline fuel cell technology provides equivalent power at a much lower
cost compared to conventional stationary proton exchange membrane (PEM) fuel cells, which use
expensive platinum catalysts. As part of our development activities, we have demonstrated high
power, long life fuel stacks that meet the power and life requirements of certain stationary market
applications at a fraction of the cost of PEM fuel cells.
Ovonic Bioreformation Technologies
Hydrogen is a widely used industrial gas. Our Ovonic reformation technology produces
high-purity hydrogen in a safe process from a variety of renewable biofuel and biomass sources at
far lower operating temperatures than commercial processes and without the generation of carbon
dioxide gas. Our proprietary process has the potential to dramatically reduce distributed hydrogen
cost by eliminating high transportation costs.
Ovonyx
Our Ovonyx joint venture is commercializing our proprietary Ovonic Universal Memory (OUM)
technology through licensing and product development arrangements. OUM is a type of nonvolatile
memory that can replace conventional nonvolatile or FLASH memory in applications requiring
retention of stored data when power is turned off, including in smartphones, computers, digital
cameras and microelectronics. OUM, which is also known in the semiconductor industry as
phase-change random access memory (PCM or PRAM), offers several advantages over conventional
nonvolatile memory,
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including significantly faster write time, greater scalability, lower power utilization and
longer life, and is compatible with existing complementary metal-oxide-semiconductor manufacturing
processes.
We own 38.6% (or 33.3% on a fully diluted basis after giving effect to the potential exercise
of stock options and warrants) of the common stock of Ovonyx. As part of this joint venture
arrangement, we have contributed intellectual property, licenses, production processes and know
how. In addition to our equity interest in Ovonyx, we receive 0.5% of the Ovonyx annual gross
revenue as a royalty.
Ovonyx has entered into royalty-bearing, nonexclusive license agreements with Intel
Corporation, Samsung Electronics Co., Ltd., Elpida Memory, Inc., STMicroelectronics N.V., BAE
Systems, Hynix Semiconductor, Inc. and Numonyx B.V. (acquired by Micron Technology, Inc.) to
produce OUM products. Under most of these agreements, Ovonyx has participated in joint development
programs to assist in the commercialization of OUM phase-change memory products.
Our Technology and Intellectual Property
The principal markets in which we compete the alternative energy generation, energy storage
and information technology markets are characterized by rapid change and competition driven by
technological and product performance advantages, as well as cost. We have driven some of this
activity through our pioneering and proprietary materials, product and production process
technologies. At the same time, we are actively engaged in product design and development to
commercialize and improve our materials, products and production processes.
Research and Development Expenditures
Our research and development expenditures are reflected as cost of revenues from product
development agreements and product development and research expenses in our Consolidated Statements
of Operations. We seek to offset our research and development costs with third-party funding,
including joint ventures, product development agreements and government funding.
Patents and Intellectual Property
We maintain an extensive patent portfolio presently consisting of approximately 240 U.S.
patents and 247 foreign counterparts to which we are regularly adding new patents based upon our
continuing research and development activities. Importantly, our portfolio includes numerous basic
and fundamental patents applicable to each of our segments, covering not only materials, but also
the production technology and products we develop. Based on the breadth and depth of our patent
portfolio, we believe that our proprietary patent position is sustainable notwithstanding the
expiration of certain patents. We do not expect the expiration of any patents to materially affect
the business prospects of any of our segments.
Competition
Since our businesses are based upon our pioneering technologies that offer fundamental
solutions in the alternative energy generation, energy storage and information technology markets,
we compete not only at the product level for market share but also at the technology level for
market acceptance. Consequently, our competition includes well-established conventional
technologies, other alternative technology solutions and other technologies within an alternative
solution. For example, our PV technology competes with conventional electricity-generation
technologies, such as gas and coal; alternative electricity-generation technologies, such as wind
and nuclear; and other solar technologies, such as crystalline and thin-film products. Our
business competitors include some of the worlds largest
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industrial companies, many of which are pursuing new technology solutions in addition to their
well-established conventional technologies.
A key factor affecting demand for PV systems is the levelized cost of energy (LCOE) supplied
by such systems in comparison to other sources of electricity. LCOE is determined by dividing the
net present value of the total lifetime cost of a PV system by the net present value of the total
energy output of the system measured in kilowatt hours. Major factors affecting the LCOE of PV
systems include the cost of the PV products, energy conversion efficiency of the PV products, cost
of the remaining components of the PV system (balance-of-system costs), maintenance costs, and
durability of performance, including energy yield. Incentive structures, if applicable, also
affect the value of a PV systems LCOE. Developers and purchasers of PV systems, particularly
utility-scale and large commercial grid-connected systems, generally seek to obtain the lowest LCOE
by choosing PV systems that optimize this combination of low PV product cost, high conversion
efficiency, low balance-of-system and maintenance costs, and long-time durability. As a result of
technology innovation, manufacturing scale and efficiency improvements and dramatic reductions in
the cost of polycrystalline silicon and certain other raw materials used in many PV products, the
LCOE of PV systems generally has been declining rapidly in recent years.
We believe our research and development activities demonstrate our key business and
technological advantages, mainly through our continuous efforts in inventing new technologies and
improving existing materials, products and production processes. However, even as we successfully
pursue these research and development activities, some of our technologies, particularly in the
alternative energy generation and energy storage markets, presently face commercial barriers as
compared to well-established conventional technologies, including infrastructural barriers,
customer transition costs and higher manufacturing costs associated with present production
volumes. The competitiveness of products based on our technologies in these areas is typically
enhanced by external factors, including rising energy costs, concerns regarding energy security and
governmental incentives at the consumer level. Our long-term goal is to compete directly in energy
markets without subsidies.
Our Employees
As of June 30, 2011, we employed approximately 1,300 people, approximately 610 of whom are
located in the United States.
Available Information
Our website address is energyconversiondevices.com. We make available on our website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities and Exchange Commission (SEC). We also make available on our website, or
in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business
Conduct, charters for the committees of our Board of Directors and other information related to the
Company. The information found on our website is not part of this or any other report we file
with, or furnish to, the SEC.
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Item 1A: Risk Factors
Our success depends significantly on our ability through technology improvements to reduce the cost
and improve the conversion efficiency of our solar laminates and otherwise to continue to develop
and market new and innovative products. There can be no assurance that such efforts will be
successful or the capital spending required will be available.
Our financial performance depends in part on our ability to enhance our existing solar
laminates, develop new and innovative products and product applications, reduce our costs of
producing solar laminates, and adopt or develop new technologies that continue to differentiate our
products from those of our competitors. The continued demand for our solar products is premised in
part on the features of our solar laminates that distinguish them from the solar products of our
competitors and the resulting unique product applications. These features include physical
flexibility, the ability of our laminates to be integrated with roofing materials, light weight,
superior resistance to wind uplift, durability, no roof penetration and ease of installation.
There are companies using similar or competitive technologies that have introduced or announced
plans to introduce solar products incorporating some or all of these features. In addition, all
solar products compete based on efficiency and significant advances in the efficiency of the solar
products of our competitors also could provide them with a competitive advantage. If we fail to
enhance our existing solar laminates, develop new and innovative products and product applications,
or adopt or develop new technologies that continue to differentiate our products from those of our
competitors, our business, financial condition and results of operations could be adversely
affected.
We are executing on our Technology Roadmap to improve both the conversion efficiency and cost
per watt of our laminates and thereby reduce the LCOE of PV systems that incorporate our laminates
to enhance our ability to compete more effectively with other PV suppliers. Our Technology Roadmap
requires a substantial investment of financial resources and novel alterations of our manufacturing
processes and product designs. It also requires careful project management and coordination of
multiple simultaneous activities. There is no assurance that we will have access to sufficient
capital to fund our Technology Roadmap or otherwise be able to execute fully or timely on our
Technology Roadmap in order to achieve the cost-reduction and conversion-efficiency goals that we
have established. If we are unable to achieve these goals, our ability to compete effectively with
other PV suppliers and our financial condition and results of operations will be adversely
affected.
The continuing global economic, capital markets and credit disruptions, including sovereign debt
issues, pose risks for our business segments.
The continuing global economic, capital markets and credit disruptions, including the
sovereign debt issues in Europe, pose risks for our business segments. These risks include slower
economic activity and investment in construction projects that make use of our products and
services. These economic developments, particularly decreased credit availability, have reduced
demand for solar products, including our solar laminates. Further, these conditions have caused
some of our customers to be unable to fully comply with the terms of their agreements to purchase
our solar laminates.
Continued decreases in credit availability, as well as continued economic instability, may
adversely impact our existing or future business and require that we reallocate product shipments
from customers who are unable to satisfy their contractual obligations to other customers or pursue
other remedies, including contract renegotiation.
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The decline in polysilicon prices, and the increase in the global capacity of PV products, is
causing downward pressure on the prices of our products, resulting in lower revenues and earnings.
Polysilicon, a key raw material for traditional crystalline PV products, is readily available
to solar cell and module manufacturers after several years of short supply and prices have been
falling rapidly. These price reductions by our competitors are contributing to price reductions of
solar cells and modules that compete with our laminates. While we believe our laminates have unique
characteristics that make them attractive for a variety of applications, particularly BIPV
installations, the market price decline of competitive products is resulting in downward pressure
on our pricing that negatively impacts our revenues and earnings and could impact inventory
carrying values.
We have instituted demand-creation initiatives that are extending our business model and subjecting
us to additional business and financial risks.
We have instituted demand-creation initiatives in our United Solar Ovonic segment to stimulate
demand for our products. Certain of these initiatives have extended our business model in this
segment from principally manufacturing and selling laminates through our channel partners to
include project origination, development, design, and installation. As a result, these initiatives
have exposed us to additional business risks, such as credit risks (project financing), project
construction and performance risks and risk of investment loss, which risks may be significant.
There can be no assurance that these initiatives will successfully stimulate demand for our
products.
In response to market conditions, we have instituted capital expenditure and cost-reduction
initiatives that are impacting our financial performance and our cash resources and will continue
to do so in the future.
We have instituted a number of cost-reduction initiatives to improve our cost structure and
preserve capital in response to market conditions. We have incurred restructuring expenses as a
result of certain of these activities and may incur additional restructuring expenses as we pursue
further cost-reduction activities in the future. In addition, in response to market conditions, we
temporarily suspended our manufacturing expansion in our United Solar Ovonic segment and reduced
our production in this segment. We recognized under-absorption of overhead costs resulting from
our production adjustments and may recognize similar costs in the future if we do not operate our
facilities at production capacity. If our production levels and related cash flows further reduce,
we may be required to record an additional impairment to our property, plant and equipment, which
could have a material adverse effect on our financial position and results of operations.
Furthermore, there can be no assurance that market demand will align with our present
manufacturing capacity and, as a result, our business could be materially adversely affected.
Volatility in customer demand in the solar industry could affect future levels of sales and
profitability and limit our ability to predict such levels; if we are unable to balance our
production levels with customer demand, our business and financial results will be materially
adversely impacted.
The market for solar products is volatile, fluctuating rapidly with global financial and
political conditions. As a result of these market conditions, we have adjusted our production
levels to meet expected demand with the result that we are operating significantly below capacity.
If we are unable to balance our production levels with customer demand, our business and
financial results will be materially adversely impacted.
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Historically, we have maintained moderate lead times, which have enabled customers to place
orders close to their true needs for product. In defining our financial goals and projections, we
consider inventory on hand, backlog, production cycles and expected order patterns from customers.
If our estimates in these areas become inaccurate, we may not be able to meet our revenue goals and
projections. Further, those orders may be for products that meet the customers unique
requirements so that those cancelled orders would, in addition, result in an inventory of unsalable
products, and thus potential inventory write-offs. We routinely estimate inventory reserves
required for such products, but actual results may differ from these reserve estimates. If these
differences are material, our business and financial results will be materially adversely impacted.
We face intense competition from other companies producing solar energy and other renewable energy products.
The solar energy market is intensely competitive and rapidly evolving. The number of solar
energy product manufacturers is rapidly increasing due to the growth of actual and forecast demand
for solar energy products and the relatively low barriers to entry. If we fail to attract and
retain customers in our target markets for our current and future core products, namely solar
laminates, we will be unable to increase our revenue and market share. Some of our competitors
have established more prominent market positions. If we fail to attract and retain customers and
establish successful distribution networks in our target markets for our products, we will be
unable to increase our sales. In addition, many of our competitors manufacture predominantly
crystalline or polycrystalline silicon solar modules which are currently sold at lower cost and
have higher conversion efficiency than our solar laminates.
We may also face competition from new entrants to the solar energy market, including those
that offer more advanced technological solutions or that have greater financial resources. A
significant number of our competitors are developing or currently producing products based on more
advanced solar energy technologies, including amorphous silicon, string ribbon, CIGS and nano
technologies, which may eventually offer cost and technology advantages over the technologies
currently used by us. A widespread adoption of any of these technologies could result in a rapid
decline in our position in the solar energy market and our revenue if we fail to adopt such
technologies or develop new competing technologies. Furthermore, the entire solar energy industry
also faces competition from conventional energy (for example a decline in base grid electricity
prices), and non-solar renewable energy providers. Due to the relatively high manufacturing costs
compared to most other energy sources, solar energy is generally not competitive without government
incentive programs.
Many of our existing and potential competitors have substantially greater financial,
technical, manufacturing and other resources than we do. Our competitors greater size in some
cases provides them with a competitive advantage with respect to manufacturing because of their
economies of scale and their ability to purchase raw materials at lower prices. As a result, those
competitors may have stronger bargaining power with their suppliers and may have an advantage over us in negotiating
favorable pricing, as well as securing supplies in times of shortages. Many of our competitors
also have greater brand name recognition, more established distribution networks, balance of system
capabilities, and larger customer bases. In addition, many of our competitors have
well-established relationships with our current and potential distributors and have extensive
knowledge of our target markets. As a result, they may be able to devote more resources to the
research, development, promotion and sale of their products, or respond more quickly to evolving
industry standards and changes in market conditions than we can. Our failure to adapt to changing
market conditions and to compete successfully with existing or new competitors may materially and
adversely affect our financial condition and results of operations.
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Our customers increasingly need financing to purchase our products, which exposes us to additional
business and credit risks.
Availability and cost of financing are significant factors that affect demand for our
products. Developers and owners of solar facilities typically require project financing before
initiating a solar installation. Roofing contractors and other solar integrators must obtain
working capital financing to carry inventory of our products and maintain their operations.
Historically, most of our customers have arranged their own financing without assistance from us,
but with the illiquidity of current financing markets some of our customers have sought various
forms of credit support from us. From time to time, we may provide credit support to certain
customers through open account sales or extended payment terms. Due to our size and capital
constraints, we are not able to satisfy all credit requests by our customers. These credit support
transactions expose us to credit risk, including the risk of default by customers. In addition, if
we are unable to provide credit to our customers, or otherwise induce third parties to satisfy
customer credit demands, we could lose sales and be unable to achieve our future business plan.
We have a history of losses and our future profitability is uncertain; the failure to maintain
sustainable profitability could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Since our inception, we have incurred significant net losses. Principally as a result of
ongoing operating losses, we had an accumulated deficit of $1,080.5 million as of June 30, 2011.
Our goal is to operate our business in such a way that profitability is sustainable over the long
term. Nonetheless, we may be unable to become profitable or sustain profitability in the future,
which in turn could materially and adversely impact our ability to repay our debt and could
materially decrease the market value of our common stock (and as a result, the value of our
convertible senior notes). We expect to continue to make significant capital expenditures and
anticipate that our cash needs will increase as we seek to:
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continuously improve our manufacturing operations, whether domestically or
internationally; |
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service our debt obligations; |
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develop our distribution network; |
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continue to research and develop our products and manufacturing technologies; |
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implement our demand creation initiatives; |
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implement internal systems and infrastructure to support our growth; and |
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retain key members of management and other personnel, and hire additional personnel. |
We do not know whether our revenue will grow at all or grow rapidly enough to fund our cash
needs and our limited operating history under our current business strategy and new management team
makes it difficult to assess the extent of the expenses or their impact on our operating results.
If we fail to achieve profitability, our business, results of operations, financial condition and
cash flows could be materially adversely affected.
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As a result of our outstanding convertible notes, we are highly leveraged. Our indebtedness, along
with our other contractual commitments, could adversely affect our business, financial condition
and results of operations, as well as our ability to meet any of our payment obligations.
Additionally, if we are unable to generate sufficient cash flow to meet our payment obligations
when they become due, we will need to refinance or restructure our payment obligations or pursue
other alternatives, which may include seeking protection under federal bankruptcy laws.
Together with our subsidiaries, we have a significant amount of debt and debt service
requirements. As of June 30, 2011, we have approximately $263.2 million face value of outstanding
debt due in June 2013 and approximately $60.7 million in other long-term obligations. This level
of debt and related debt service could have significant consequences on our future operations,
including:
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making it more difficult for us to meet our payment and other obligations; |
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resulting in an event of default if we and our subsidiaries fail to comply with
covenants contained in our debt agreements, which could result in such debt becoming
immediately due and payable; |
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reducing the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes, and limiting our ability
to obtain additional financing for these purposes; |
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limiting our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and the
general economy; |
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making it difficult to attract additional investment capital or to consummate other
transactions to fund our Technology Roadmap; and |
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placing us at a competitive disadvantage compared to our competitors that have less
debt or are less leveraged. |
Any of the above-listed factors could have an adverse effect on our business, financial
condition, results of operations, liquidity and future prospects. Our ability to meet our payment
and other obligations under our debt instruments depends on our ability to generate significant
cash flow in the future. This, to some extent, is subject to general economic, financial,
competitive, legislative and regulatory factors, as well as other factors that are beyond our
control. Our ability to generate cash flow depends principally on the success of our Technology
Roadmap to enhance our competitiveness by increasing the conversion efficiency and reducing the
cost of our solar laminates. We cannot assure you that our Technology Roadmap will be successful,
our business will generate cash flow from operations, or that future borrowings or other sources of
capital will be available to us under existing or any future credit facilities or otherwise, in an
amount sufficient to enable us to meet our payment obligations and to fund other liquidity needs.
If we are not able to generate sufficient cash flow to service our debt obligations, we will need
to refinance or restructure our debt, sell assets, reduce or delay capital investments, seek to
raise additional capital and/or undertake other transactions to meet our obligations. If we are
unable to implement one or more of these alternatives in a satisfactory manner, we may not be able
to meet our payment obligations under our debt and other obligations and we may be forced to seek
protection under federal bankruptcy laws.
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If we do not maintain compliance with NASDAQ Global Select Market continued listing requirements,
our common stock may be delisted and we may be required to repurchase or refinance our convertible
notes. Delisting may decrease our stock price and make it harder for our
stockholders to trade our stock and would have a material adverse effect on our liquidity and
potentially result in a default if we are required to repurchase our convertible senior notes
before their current maturity in June 2013.
Our common stock is currently listed for trading on the NASDAQ Global Select Market. The
continued listing of our common stock is subject to the satisfaction of certain ongoing conditions
pertaining to our financial performance and marketability of our stock, including the requirement
that the minimum bid price of our common stock equal or exceed $1.00 at least once over any period
of 30 consecutive trading days. The trading price of our stock is affected by numerous market
factors apart from our financial performance and prospects that make it difficult to predict future
stock prices. As of August 19, 2011, our common stock last exceeded the minimum bid requirement on
August 2, 2011. If we are unable to meet the minimum bid price requirement, NASDAQ would promptly
notify us of such deficiency and we generally would have a 180-day period to meet this requirement
before our stock could be suspended from trading or delisted, although such period may be extended
for appeals and, in the discretion of NASDAQ, for an additional compliance period of up to 180
days. During the 180-day compliance period, we would regain compliance with this listing standard
if the minimum bid price exceeds $1.00 for 10 consecutive trading days (which may be extended to no
more than 20 consecutive trading days at the election of NASDAQ staff). In addition, during any
such period or any extension granted by NASDAQ we could seek to regain compliance with the minimum
bid price requirement by obtaining stockholder approval of a reverse stock split. Due to the
NASDAQ procedures and other methods of regaining compliance with the minimum bid criteria that are
described above, we do not presently expect non-compliance with the minimum bid criteria to cause
our common stock to be delisted. However, there can be no assurance that we will be able to
maintain compliance with the minimum conditions for continued listing. If our common stock is
removed from listing, the price of our common stock may decrease and it may become harder to trade
our common stock. In addition, if our common stock ceases to be listed on the NASDAQ Global Select
Market and is not listed on another U.S. national securities exchange, such event would constitute
a fundamental change under the terms of our Convertible Senior Notes (Notes). In the event of
a fundamental change, the holders of the Notes would have the right to require us to repurchase
their Notes within 35 days, which would have a material adverse effect on our liquidity. There is no assurance that additional sources of liquidity to repay the notes can be obtained on terms acceptable to the Company, or at all. If we
were unable to repurchase Notes under such circumstances, we would be in default under our
indenture.
We may incur future restructuring charges and long-lived asset impairment losses.
We have recorded long-lived asset impairment losses, including impairment losses for goodwill
and intangible assets, and employee severance and restructuring charges. Generally, we record
long-lived asset impairment losses when we determine that our estimates of the future undiscounted
cash flows will not be sufficient to recover the carrying value of the long-lived assets. During
2011 and 2010, we recorded substantial long-lived asset impairment losses and wrote off the entire
balance of our goodwill and intangible assets in 2010. In light of the continued volume reductions
we have experienced, we may incur similar losses and charges in the future, and those losses and
charges may be significant.
Significant warranty and product liability claims could adversely affect our business and results
of operations.
We may be subject to warranty and product liability claims in the event that our solar
laminates or PV systems fail to perform as expected or if a failure of our solar laminates or PV
systems results, or is
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alleged to result, in bodily injury, property damage or other damages.
Since our solar laminates and PV systems are electricity-producing devices, it is possible that our
products could result in injury, whether by product malfunctions, defects, improper installation or
other causes. In addition, because the products we are developing incorporate new technologies and use new installation methods, we cannot
predict whether or not product liability claims will be brought against us in the future or the
effect of any resulting negative publicity on our business. As a result of our acquisition of Solar Integrated Technologies, Inc. (SIT),
we may be subject to warranty and product liability claims associated with the manufacture, sale
and installation of products by SIT before the acquisition.
Moreover, we may not have adequate resources in the event of a successful claim against us.
Our current standard product warranty for our solar laminates ranges from 20-25 years. We
believe our warranty periods are competitive with industry practice. Due to the long warranty
period and our proprietary technology, we bear the risk of extensive warranty claims long after we
have shipped product and recognized revenue. Although we test our solar power products for
reliability and durability, we cannot ensure that we effectively simulate the 20-25 year warranty
period. Any increase in the defect rate of our products would cause us to increase the amount of
warranty reserves and have a corresponding negative impact on our financial results.
A successful warranty or product liability claim against us that is not covered by insurance
or is in excess of our available insurance limits could require us to make significant payments of
damages. In addition, quality issues can have various other ramifications, including delays in the
recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs
associated with repairing or replacing products, and a negative impact on our goodwill and
reputation. The possibility of future product failures could cause us to incur substantial
expenses to repair or replace defective products. Furthermore, widespread product failures may
damage our market reputation and reduce our market share and cause sales to decline.
We have international operations, which we are expanding, that are vulnerable to risks associated
with doing business in foreign countries.
We have a PV laminate manufacturing facility in Tijuana, Mexico, a joint venture in Tianjin,
China to manufacture PV laminates, and in 2011 we began establishing a PV laminate manufacturing
facility in LaSalle, Ontario. Also, a portion of our expenses are denominated in currencies other
than U.S. dollars. International operations and transactions are subject to certain risks inherent
in doing business abroad, including:
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the potential that we may be forced to forfeit, voluntarily or involuntarily, foreign
assets due to economic or political instability in the countries in which we choose to
locate our manufacturing facilities; |
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the potential that the debt crisis in certain European countries and financial
restructuring efforts may cause the value of the Euro to further deteriorate and reduce
the purchasing power of European customers; |
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difficult and expensive compliance with the commercial and legal requirements of
international markets; |
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difficulty in interpreting and enforcing contracts governed by foreign law, which may
be subject to multiple, conflicting and changing laws, regulations and tax systems; |
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inability to obtain, maintain or enforce intellectual property rights; |
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encountering trade barriers such as export requirements, tariffs, currency exchange
controls, taxes and other restrictions and expenses, which could affect the competitive
pricing of our solar laminates and reduce our market share in some countries; |
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being subjected to additional withholding taxes or other tax on our foreign income or
tariffs and other restrictions on foreign trade and investment, including currency
exchange controls; |
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being subjected to fluctuations in exchange rates which may affect product demand and
our profitability in U.S. dollars to the extent the price of our solar laminates and cost
of raw materials, labor and equipment is denominated in a foreign currency; |
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limitations on dividends or restrictions against repatriation of earnings; |
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difficulty in recruiting and retaining individuals skilled in international business
operations; |
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increased costs associated with maintaining international marketing efforts; and |
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potentially adverse tax consequences associated with our permanent establishment of
operations in more countries. |
In addition, since expanding our business globally is an important element of our strategy,
our exposure to these risks will be greater in the future. The likelihood of such occurrences and
their potential effect on us vary from country to country and are unpredictable. However, any such
occurrences could be harmful to our business and our profitability.
Demand for our products is affected by existing regulations concerning the electrical utility
industry; changes to such regulations may present technical, regulatory and economic barriers to
the purchase and use of solar power products, which may significantly reduce demand for our
products.
The market for electricity generation products is influenced heavily by foreign, federal,
state and local government regulations and policies concerning the electric utility industry, as
well as internal policies and regulations promulgated by electric utilities. These regulations and
policies often relate to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States (at both the national level and the state and local
level) and in a number of other countries, these regulations and policies are being modified and
may continue to be modified.
Customer purchases of, or further investment in the research and development of, alternative
energy sources, including solar power technology, could be deterred by these regulations and
policies, which could result in a significant reduction in the potential demand for our solar power
products. For example, utility companies commonly charge fees to larger, industrial customers for
disconnecting from the electric grid or for having the capacity to use power from the electric grid
for back-up purposes. These fees could increase the cost to our customers of using our solar power
products and make them less desirable, thereby harming our business, prospects, results of
operations and financial condition.
We anticipate that our solar power products and their installation will be subject to
oversight and regulation in accordance with national, state and local laws and ordinances relating
to building codes, safety, environmental protection, utility interconnection and metering and
related matters. There is also a burden in having to track the requirements of individual
countries and states and design equipment to comply with the varying standards. Any new government
regulations or utility policies pertaining to our solar power products may result in significant
additional expenses to us and our resellers and their customers and, as a result, could cause a
significant reduction in demand for our solar power products.
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We receive a significant portion of our revenues from a small number of customers.
We historically have entered into agreements with a relatively small number of major customers
throughout the world. Our five largest customers represented approximately 41%, 42% and 46% of our
total revenue for the fiscal years ended June 30, 2011, 2010 and 2009, respectively. Any loss or
material reduction in sales to any of our top customers would be difficult to recoup from other
customers and could have an adverse effect on our sales, results of operations, financial condition
and cash flows.
The reduction or elimination of government incentives related to solar power could cause our
revenues to decline.
Today, the cost of solar power exceeds the cost of power furnished by the electric utility
grid in most locations. As a result, federal, state and local government bodies in many countries,
most notably Germany, Japan, Italy, Spain, France, Greece, China, Canada, United Kingdom and the
United States, have provided incentives in the form of feed-in tariffs, rebates, tax credits and
other incentives to end users, distributors, system integrators and manufacturers of solar power
products to promote the use of solar energy to reduce dependency on other forms of energy. Some of
these government mandates and economic incentives have expired, are scheduled to be reduced or
expire, or could be eliminated altogether. Reductions in, or eliminations or expirations of,
incentives related to solar power could result in decreased demand for our solar laminates or
result in increased price competition and lower our revenue. In 2011, changes to the government
feed-in tariff programs in Italy and France adversely affected our business and may continue to do
so.
The expansion of our business into new markets, such as residential, may increase our exposure to
certain risks, including class action claims.
We are developing and have launched new applications of our solar technology, including solar
laminates to be integrated into residential roofing materials. Our new solar technology
applications may not gain market acceptance and we may not otherwise be successful in entering new
markets, including the market for residential applications. Moreover, entry into new markets may
increase our exposure to certain risks that we currently face or expose us to new risks. For
example, the residential construction market for solar energy systems is exposed to different risks
than the commercial construction markets, including more acute seasonality, sensitivity to interest
rates, and other macroeconomic conditions, as well as aesthetics and enhanced legal exposure. In
particular, new home developments can result in class action litigation when one or more homes in a
development experience problems with roofing or power systems. If we penetrate the residential
market and experience product failures that create property damage or personal injury, we may be
exposed to greater liability of a different nature than with respect to product failures in
commercial building applications.
We have focused our business strategy on, and invested significant financial resources in, the BIPV
segment of the PV market and there is no guarantee that the demand for BIPV systems will develop as
we anticipate.
Our recent business strategy has focused on increasing demand for BIPV systems. We believe
that there has been an increase in demand for BIPV systems based in part on increasing interest and
customer support from the building industry, solar customers and governments. As a result, we have
invested, and will continue to invest, significant financial resources in the production and
commercialization of our solar laminates for BIPV systems. If the BIPV segment does not develop as
we anticipate, or takes longer to develop than we anticipate, we may experience difficulties
implementing our growth and business targets. This in turn could adversely impact our business,
financial condition and results from operations.
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We may be unable to obtain key raw materials that meet our quality, quantity and cost
requirements.
The key raw materials used in our business are stainless steel, resin-based polymers, nickel
and high purity industrial gases, primarily argon, nitrogen, hydrogen, silane and germane. Most of
our key raw materials are readily available from numerous sources; however, we have, in certain
instances, selected single-source suppliers for certain key raw materials and components for
efficiency, cost and quality. Our supply chain and operations could be adversely impacted by the
failure of the suppliers of the single-sourced materials to provide us with the raw materials that
meet our quality, quantity and cost requirements. In addition, significant shortages or price
increases in raw materials that are not single-sourced may adversely impact our business. Any
constraint on our production may cause us to be unable to meet our obligations under customer
purchase orders, and any increase in the price of raw materials could constrain our margins, either
of which would adversely impact our financial results. In order to limit the risk that raw
materials would not be readily available to us, we entered into a number of firm volume contracts
with raw material suppliers. Significant fluctuations in our purchasing volume for such raw
materials could expose us to contract damages that would adversely impact our financial results.
We actively manage our raw materials and other supply costs through purchasing strategies,
product design and operating improvements; however, our management may not always be effective,
which could adversely impact our supply chain and financial condition. Some of our suppliers may
be unable to supply our demand for raw materials and components. In such event, we may be unable
to identify new suppliers or qualify their products for use in our production lines in a timely
manner and on commercially reasonable terms. Raw materials and components from new suppliers also
may be less suited for our technology and yield solar laminates with lower conversion efficiencies,
higher failure rates and higher rates of degradation than solar laminates manufactured with the raw
materials from our current suppliers. Our failure to obtain raw materials and components that meet
our quality, quantity and cost requirements in a timely manner could interrupt or impair our
ability to manufacture our solar laminates or increase our manufacturing cost, either of which
would adversely impact our prospects, financial condition and results of operations.
If we lose key personnel or are unable to attract and retain qualified personnel to maintain and
expand our business, financial condition, results of operations and prospects could be adversely
affected.
Our success is highly dependent on the continued services of the senior management team and of
a limited number of skilled managers, scientists and technicians. The loss of any of these
individuals could have a material adverse effect on us. In addition, our success will depend upon,
among other factors, the recruitment and retention of additional highly skilled and experienced
management and technical personnel. There can be no assurance that we will be able to retain
existing employees or to attract and retain additional personnel on acceptable terms given the
competition for such personnel in industrial, academic and nonprofit research sectors.
We may become subject to legal or regulatory proceedings which may reach unfavorable resolutions.
We are involved in legal proceedings arising in the normal course of business. Due to the
inherent uncertainties of legal proceedings, the outcome of any such proceeding could be
unfavorable, and we may choose to make payments or enter into other arrangements to settle such
proceedings. Failure to settle such proceedings could require us to pay damages or other expenses,
which could have a material adverse effect on our financial condition or results of operations. We
have been subject to legal proceedings in
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the past involving the validity and enforceability of certain of our patents. While such
patent-related legal proceedings have been resolved, such proceedings can require the expenditure
of substantial management time and financial resources and can adversely affect our financial
performance. There can be no assurance that we will not be a party to other legal proceedings in
the future.
We are subject to a variety of federal, state and local laws, rules and regulations related to the
discharge or disposal of toxic, volatile or other hazardous chemicals that may expose us to
liability and other compliance risks.
Although we believe that we are in compliance with these laws, rules and regulations, the
failure to comply with present or future regulations could result in fines, suspension of
production or cessation of operations. Third parties may also have the right to sue to enforce
compliance. Moreover, it is possible that increasingly strict requirements imposed by
environmental laws and enforcement policies thereunder could require us to make significant capital
expenditures.
The operation of a manufacturing plant entails the inherent risk of environmental damage or
personal injury due to the handling of potentially harmful substances. There can be no assurance
that we will not incur material costs and liabilities in the future because of an accident or other
event resulting in personal injury or unauthorized release of such substances into the environment.
In addition, we generate hazardous materials and other wastes that are disposed of at licensed
disposal facilities. We may be liable, irrespective of fault, for material cleanup costs or other
liabilities incurred at these facilities in the event of a release of hazardous substances by such
facilities into the environment.
Our success depends in part upon our ability to protect our intellectual property and our
proprietary technology including our trade secrets and other confidential information.
Our success depends in part on our ability to obtain and maintain intellectual property
protection for products based on our technologies. Our policy is to seek to protect our products
and technologies by, among other methods, filing United States and foreign patent applications
related to our proprietary technology, inventions and improvements. The patent positions of
companies like ours are generally uncertain and involve complex legal and factual questions. Our
ability to maintain our proprietary position for our technology will depend on our success in
obtaining effective patent claims and enforcing those claims once granted. We do not know whether
any of our patent applications will result in the issuance of any patents. Our issued patents and
those that we may issue in the future may be challenged, invalidated, rendered unenforceable or
circumvented, which could limit our ability to stop competitors from marketing related products or
the length of term of patent protection that we may have for our products and technologies. In
addition, the rights granted under any issued patents may not provide us with competitive
advantages against competitors with similar products or technologies. Furthermore, our competitors
may independently develop similar technologies or duplicate technology developed by us in a manner
that does not infringe our patents or other intellectual property. Because of the extensive time
required for development and commercialization of products based on our technologies, it is
possible that, before these products can be commercialized, any related patents may expire or
remain in force for only a short period following commercialization, thereby reducing any
advantages of these patents and making it unlikely that we will be able to recover investments we
have made to develop our technologies and products based on our technologies.
In addition to patent protection, we also rely on protection of trade secrets, know-how and
confidential and proprietary information. To maintain the confidentiality of trade secrets and
proprietary information, we have entered into confidentiality agreements with our employees, agents
and consultants upon the commencement of their relationships with us. These agreements require
that all confidential
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information developed by the individual or made known to the individual by us during the
course of the individuals relationship with us be kept confidential and not disclosed to third
parties. Our agreements with employees also provide that inventions conceived by the individual in
the course of rendering services to us will be our exclusive property. Individuals with whom we
have these agreements may not comply with their terms. In the event of the unauthorized use or
disclosure of our trade secrets or proprietary information, these agreements, even if obtained, may
not provide meaningful protection for our trade secrets or other confidential information. To the
extent that our employees or consultants use technology or know-how owned by others in their work
for us, disputes may arise as to the rights in related inventions. Adequate remedies may not exist
in the event of unauthorized use or disclosure of our confidential information. The disclosure of
our trade secrets would impair our competitive position and could have a material adverse effect on
our operating results, financial condition and future growth prospects.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time
consuming.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be
required to file patent infringement claims, which can be expensive and time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or
is unenforceable, or may refuse to stop the other party from using the technology at issue on the
grounds that our patents do not cover the technology. An adverse determination of any litigation
or defense proceedings could put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings brought by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to our patent applications.
Litigation or interference proceedings may fail and, even if successful, may result in substantial
costs and be a distraction to our management. We may not be able to prevent misappropriation of
our proprietary rights, particularly in countries where the laws may not protect such rights as
fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure. In addition, during the course of this litigation, there could be
public announcements of the results of hearings, motions or other interim proceedings or
developments. If securities analysts or investors perceive these results to be negative, it could
have a substantial adverse effect on the price of our common stock.
We may not prevail in any litigation or interference proceeding in which we are involved.
Even if we do prevail, these proceedings can be expensive and distract our management.
Third parties may own or control patents or patent applications that are infringed by our products
or technologies.
Our success depends in part on avoiding the infringement of other parties patents and
proprietary rights. In the United States and most other countries, patent applications are
published 18 months after filing. As a result, there may be patents of which we are unaware, and
avoiding patent infringement may be difficult. We may inadvertently infringe third-party patents
or patent applications. These third parties could bring claims against us that, even if resolved
in our favor, could cause us to incur substantial expenses and, if resolved against us, could
additionally cause us to pay substantial damages. Further, if a patent infringement suit were
brought against us, we and our joint venture partners and licensees could be
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forced to stop or delay research, development, manufacturing or sales of products based on our
technologies in the country or countries covered by the patent we infringe, unless we can obtain a
license from the patent holder. Such a license may not be available on acceptable terms, or at
all, particularly if the third party is developing or marketing a product competitive with products
based on our technologies. Even if we were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual property.
We also may be required to pay substantial damages to the patent holder in the event of an
infringement. Under some circumstances in the United States, these damages could be triple the
actual damages the patent holder incurs. If we have supplied infringing products to third parties
for marketing or licensed third parties to manufacture, use or market infringing products, we may
be obligated to indemnify these third parties for any damages they may be required to pay to the
patent holder and for any losses the third parties may sustain themselves as the result of lost
sales or damages paid to the patent holder.
Any successful infringement action brought against us may also adversely affect marketing of
products based on our technologies in other markets not covered by the infringement action.
Furthermore, we may suffer adverse consequences from a successful infringement action against us
even if the action is subsequently reversed on appeal, nullified through another action or resolved
by settlement with the patent holder. The damages or other remedies awarded, if any, may be
significant. As a result, any infringement action against us would likely harm our competitive
position, be costly and require significant time and attention of our key management and technical
personnel.
Compliance with environmental regulations can be expensive, and noncompliance with these
regulations may require us to pay substantial fines, suspend production or cease operations.
The operation of our manufacturing facilities entails the use and handling of potentially
harmful substances, including toxic and explosive gases that pose inherent risks of environmental
damage or personal injury. Although we believe that we are in material compliance with
environmental rules and regulations, there can be no assurance that we will not incur material
costs and liabilities in the future because of an accident or other event resulting in personal
injury or unauthorized release of such substances into the environment. We may be liable,
irrespective of fault, for material cleanup costs or other liabilities incurred at these facilities
in the event of a release of hazardous substances into the environment by our operations.
For example, our manufacturing process involves the controlled storage and use of silane and
germane gases, both of which are toxic and combustible. Although we have rigorous safety
procedures for handling these materials, the risk of accidental injury from such hazardous
materials cannot be completely eliminated. If we have an accident at one of our facilities
involving a release of these substances, we may be subject to civil and/or criminal penalties,
including financial penalties and damages, and possibly injunctions preventing us from continuing
our operations.
In addition, it is possible that increasingly strict requirements imposed by environmental
laws and enforcement policies could require us to make significant capital expenditures. To date
such laws and regulations have not had a significant impact on our operations, and we believe that
we have all necessary permits to conduct operations as they are presently conducted. If more
stringent laws and regulations are adopted in the future, the costs of compliance with these new
laws and regulations could be substantial. The failure to comply with present or future
regulations could result in fines, third-party lawsuits, and suspension of production or cessation
of operations.
20
We have entered into joint ventures and licensing agreements to develop and commercialize products
based on our technologies and we must manage such joint ventures and licensing agreements
successfully.
We have entered into licensing and joint venture agreements in order to develop and
commercialize certain products based on our technologies. Any revenue or profits that may be
derived by us from these agreements will be substantially dependent upon our ability to agree with
our joint venture partners and licensees about the management and operation of the joint ventures
and license agreements. In addition, any revenue or profits from such agreements will be
substantially dependent on the willingness and ability of our joint venture partners and licensees
to devote their financial resources and manufacturing and marketing capabilities to commercialize
products based on our technologies. There can be no assurance that we will agree regarding the
operation of such joint ventures and licensing agreements that required financial resources will be
available on mutually agreeable terms or that commercialization efforts will be successful. If we
and our joint venture partners and licensees are unable to agree with respect to the operation of
our joint ventures and licensing agreements, are unwilling or unable to devote financial resources
or are unable to commercialize products based on our technologies, we may not be able to realize
revenue and profits based on our technologies and our business could be materially adversely
affected.
Our government product development and research contracts may be terminated by unilateral
government action, or we may be unsuccessful in obtaining new government contracts to replace those
that have been terminated or completed.
We have several government product development and research contracts. Any revenue or profits
that may be derived by us from these contracts will be substantially dependent upon the government
agencies willingness to continue to devote their financial resources to our research and
development efforts. There can be no assurance that such financial resources will be available or
that such research and development efforts will be successful. Our government contracts may be
terminated for the convenience of the government at any time, even if we have fully performed our
obligations under the contracts. Upon a termination for convenience, we would generally only be
entitled to recover certain eligible costs and expenses we had incurred prior to termination and
would not be entitled to any other payments or damages. Therefore, if government product
development and research contracts are terminated or completed and we are unsuccessful in obtaining
replacement government contracts, our revenue and profits may decline and our business may be
adversely affected.
Our ability to utilize certain carryover tax attributes could be substantially limited if we
experience an ownership change under the Internal Revenue Code, which may adversely affect our
results of operations and financial condition.
As a result of our past financial performance, we have significant net operating losses
and research and development credit carryforwards which expire from 2012 to 2030. We also have
certain built-in losses based on the tax basis of our assets. Section 382 of the Internal Revenue
Code of 1986, as amended (the Code), contains rules that limit the ability of a company that
undergoes an ownership change to utilize its net operating loss carryforwards and certain built-in
losses (generally, the excess of the tax basis in an asset over its fair market value as of the
Section 382 change date) in years after the ownership change. The built-in loss rules apply to all
future tax deductions, including depreciation, during a five-year period following the date of the
ownership change. An ownership change for purposes of Section 382 of the Code generally refers to
any change in ownership of more than 50% of the companys stock over a three-year period. These
rules generally operate by focusing on ownership
21
changes among stockholders owning, directly or indirectly, 5% or more of the stock of a
company or any change in ownership arising from a new issuance of the companys stock.
If we undergo an ownership change for purposes of Section 382 as a result of future
transactions involving our common stock, including purchases or sales of stock between our greater
than 5% stockholders, our ability to use carryover tax attributes would be subject to the
limitations of Section 382. Depending on the resulting limitations, a significant portion of our
net operating loss carryforwards could expire before we would be able to use them and our future
tax deductions for existing tax basis would be limited, which could potentially result in future
tax payments. Our inability to utilize such carryover tax attributes may adversely affect our
results of operations and financial condition.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
Our corporate headquarters is located in Auburn Hills, Michigan. We currently own or lease
facilities worldwide which are used for manufacturing, technical, research and development, sales,
and administrative purposes. The manufacturing facilities range in size from 10,000 square feet to
326,000 square feet, with an aggregate of 1.7 million square feet. In addition, we own
approximately 25 acres of land in Battle Creek, Michigan upon which we started the construction of
a building for our manufacturing expansion and subsequently paused in the third quarter of fiscal
year 2009. In August 2009, we acquired SIT which has its European headquarters in Mainz, Germany.
We believe these facilities are adequate for our business needs.
The following table presents the locations of our primary facilities and the segment that use
such facilities:
|
|
|
Property Location |
|
Own or Lease |
Corporate Headquarters, Auburn Hills, Michigan
|
|
Lease |
|
|
|
Ovonic Materials Segment |
|
|
Rochester Hills, Michigan
Troy, Michigan
|
|
Lease
Lease |
|
|
|
United Solar Ovonic Segment |
|
|
Auburn Hills, Michigan (2 facilities)
Greenville, Michigan (2 facilities)
Tijuana, Mexico
Los Angeles, California
Mainz, Germany
LaSalle, Ontario
|
|
Lease
Own
Lease
Lease
Lease
Lease |
In addition, we lease sales offices for our United Solar Ovonic segment in Los Angeles,
California and Mt. Laurel, New Jersey, USA; Villafranca, Italy; and Paris, France.
22
Item 3: Legal Proceedings
We are involved in certain legal actions and claims arising in the ordinary course of
business, including, without limitation, commercial disputes, intellectual property matters,
personal injury claims, tax claims and employment matters. Although the outcome of any legal
matter cannot be predicted with certainty, we do not believe that any of these other legal
proceedings or matters in which we are currently involved, either individually or in the aggregate,
will have a material adverse effect on our business, liquidity, consolidated financial position or
results of operations.
Item 4: Removed and Reserved
23
PART II
Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock is listed on the NASDAQ Global Select Market under the symbol ENER. As of
August 19, 2011, there were 2,074 holders of record of our common stock.
The following table sets forth the range of high and low closing prices for our common stock
as reported by The Nasdaq Global Select Market, Inc. for each period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
(in dollars per share) |
|
|
|
|
|
First Quarter (July September) |
|
$ |
5.80 |
|
|
$ |
3.76 |
|
|
$ |
15.55 |
|
|
$ |
10.32 |
|
Second Quarter (October December) |
|
|
5.38 |
|
|
|
4.20 |
|
|
|
13.26 |
|
|
|
9.92 |
|
Third Quarter (January March) |
|
|
5.08 |
|
|
|
1.88 |
|
|
|
12.55 |
|
|
|
7.16 |
|
Fourth Quarter (April June) |
|
|
2.34 |
|
|
|
1.05 |
|
|
|
7.77 |
|
|
|
4.10 |
|
Dividends
We have not paid any cash dividends in the past and do not expect to pay any in the
foreseeable future.
Stock Price Performance Graph
The following graph compares the cumulative 5-year total return provided stockholders on ECDs
common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ
Clean Edge Green Energy index. Data for the NASDAQ Composite and the NASDAQ Clean Edge Green
Energy Index assume market cap weighting and reinvestment of dividends over a five-year period. An
investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common
stock and in each of the indexes on June 30, 2006, and its relative performance is tracked through
June 30, 2011.
24
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Energy Conversion Devices, Inc., the NASDAQ Composite Index
and the NASDAQ Clean Edge Green Energy Index
|
|
|
* |
|
$100 invested on 6/30/06 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2006 |
|
|
6/30/2007 |
|
|
6/30/2008 |
|
|
6/30/2009 |
|
|
6/30/2010 |
|
|
6/30/2011 |
|
|
Energy Conversion Devices, Inc. |
|
|
100.00 |
|
|
|
84.60 |
|
|
|
202.14 |
|
|
|
38.84 |
|
|
|
11.25 |
|
|
|
3.24 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
122.33 |
|
|
|
108.31 |
|
|
|
86.75 |
|
|
|
100.42 |
|
|
|
132.75 |
|
NASDAQ Clean Edge Green Energy |
|
|
100.00 |
|
|
|
129.77 |
|
|
|
158.48 |
|
|
|
88.64 |
|
|
|
85.17 |
|
|
|
93.87 |
|
The stock price performance included in this graph is not necessarily indicative of
future stock price performance.
25
Item 6: Selected Financial Data
Set forth below is certain financial information derived from the Companys audited
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010(1) |
|
|
2009(1)(2) |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(thousands, except per share data) |
|
|
|
|
|
Consolidated Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
232,546 |
|
|
$ |
254,416 |
|
|
$ |
316,293 |
|
|
$ |
255,861 |
|
|
$ |
113,567 |
|
Impairment loss |
|
$ |
228,831 |
|
|
$ |
359,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
$ |
6,700 |
|
|
$ |
4,736 |
|
|
$ |
2,231 |
|
|
$ |
9,396 |
|
|
|
|
|
Net (loss) income |
|
$ |
(306,417 |
) |
|
$ |
(457,175 |
) |
|
$ |
7,839 |
|
|
$ |
3,853 |
|
|
$ |
(25,231 |
) |
(Loss) earnings per share |
|
$ |
(6.40 |
) |
|
$ |
(10.75 |
) |
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
(0.64 |
) |
Diluted (loss) earnings per share |
|
$ |
(6.40 |
) |
|
$ |
(10.75 |
) |
|
$ |
0.18 |
|
|
$ |
0.09 |
|
|
$ |
(0.64 |
) |
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
388,478 |
|
|
$ |
691,947 |
|
|
$ |
1,076,097 |
|
|
$ |
1,041,967 |
|
|
$ |
600,679 |
|
Long-Term Obligations |
|
$ |
251,244 |
|
|
$ |
263,950 |
|
|
$ |
269,386 |
|
|
$ |
342,055 |
|
|
$ |
25,796 |
|
|
|
|
(1) |
|
As adjusted due to the implementation of accounting guidance for own-share lending
arrangements. See Note 1, Nature of Operations, Basis of Presentation and Summary of
Significant Accounting Policies, to our Notes to the Consolidated Financial Statements. |
|
(2) |
|
As adjusted due to the implementation of accounting guidance for convertible debt instruments
that may be settled in cash upon conversion. See Note 1, Nature of Operations, Basis of
Presentation and Summary of Significant Accounting Policies, to our Notes to the Consolidated
Financial Statements. |
26
|
|
|
Item 7: |
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations |
This section summarizes significant factors affecting the Companys consolidated operating
results, financial condition and liquidity for the three-year period ended June 30, 2011. This
section should be read in conjunction with the Companys Consolidated Financial Statements and
related notes appearing elsewhere in this report.
Overview
We design, manufacture and sell photovoltaic (PV) products known as PV or solar laminates
that generate clean, renewable energy by converting sunlight into electricity. Solar sales
represent more than 90% of our revenues. Our subsidiary, Ovonic Battery Company, Inc. (OBC),
generates most of the balance of our revenues through fees and royalties from licensees of our
nickel metal hydride (NiMH) battery technology and sales of high performance nickel hydroxide
used in NiMH batteries. In July 2011, we announced that we are seeking a strategic sale of OBC in
order to focus on our United Solar Ovonic business activities.
The following key factors should be considered when reviewing our results for the periods
discussed:
|
|
|
Our consolidated financial results are driven primarily by the performance of our
United Solar Ovonic segment. Our United Solar Ovonic segment accounted for 95% and 93% of
our total revenue in the fiscal years ended June 30, 2011 and 2010, respectively. Our
United Solar Ovonic segment generated an operating loss of $269.4 million and $418.0
million in the fiscal years ended June 30, 2011 and 2010, respectively. Given the size of
this segment relative to our other business activities, our overall success in the
foreseeable future will be aligned primarily with the performance of our United Solar
Ovonic segment and subject to the risks of that business. Additionally, we announced in
July 2011 that we are seeking a strategic sale of OBC, which comprises substantially all
of the business of our Ovonic Materials segment (see below). If we successfully
consummate a strategic sale, of which there can be no assurance, then our consolidated
financial results will be driven exclusively by the performance of our United Solar Ovonic
business activities. |
|
|
|
|
Global economic, capital markets and credit disruptions have significantly impacted
current market conditions in the solar market and created uncertainty that is
substantially impacting our United Solar Ovonic solar business. We believe that there
remains strong interest in alternative energy in general and solar in particular, but
existing global political and financial conditions are significantly disrupting key solar
markets. Our United Solar Ovonic segment has been significantly impacted by these
disruptions as reflected by the substantial decline in our solar shipments, revenues and
income during the fiscal third and fourth quarters, principally due to our concentration
in two of these markets Italy and France. While we believe that these markets will
return as attractive markets for us, albeit with different dynamics, and other markets are
emerging, including the North American market, we have undertaken several initiatives to
improve our business to respond to the near-term disruptions and better position our
Company for the future. These initiatives include restructuring to better align our cost
structure to our expected near-term run rates and strategic priorities, including a
substantial transition of our management leadership; enhancing our focus on our technology
roadmap to improve the conversion efficiency and reduce the cost of our solar products;
adjusting our sales focus in Europe to better balance direct project sales to our existing
channel partners and other leading building materials companies; expanding our sales focus
in North America and emerging markets, particularly with building materials companies, and solar integrators and distributors; and introducing new |
27
|
|
|
products and programs that leverage the unique characteristics of our products (e.g.,
lightweight, flexible and easy to install/integrate) (see below). |
|
|
|
|
We are focusing our business model on our core channel strategy and introducing new
products and programs that leverage the unique characteristics of our products, and
de-emphasizing our project execution activities, to enhance profitability. We believe
that we are the only commercial scale manufacturer of lightweight flexible photovoltaic
products and that the unique characteristics of our products (e.g., lightweight, flexible
and easy to install/integrate) provide us a significant competitive advantage for certain
applications that can lead to improved revenues and profitability. We have developed
business relationships, particularly in key markets in Europe, with building materials
manufacturers who value these unique characteristics and have core competencies to
leverage these characteristics in delivering integrated solar solutions to their
customers. We have extended this approach in North America and are also developing
business relationships with large commercial roofing installers, who likewise value our
product differentiation. Additionally, we are introducing new products and programs that
leverage the unique characteristics of our products and substantially expand our
addressable markets. For example, we have introduced our PowerShingle product for the
residential market and have begun selling our PowerTilt product for the building-applied
commercial rooftop market. We are also introducing our Open Solar initiative to unlock
innovation and substantially reduce system costs for highly integrated solar solutions for
the rooftop market and adjacent applications (such as landfills), as well as consumer
applications. At the same time, we are de-emphasizing our project execution activities,
which we had developed over the last several years in response to prior market conditions
that temporarily favored larger systems. During fiscal 2011, project execution activities
constituted $65.8 million of revenues, representing 28% of our consolidated revenues. We
believe that there will continue to be large, direct project sale opportunities for our
products, and we are competitively positioned to originate these opportunities based on
our world-class rooftop expertise, which has been derived in part by our considerable
project execution experience. However, we also believe that project execution in most
cases can be handled more effectively by our channel partners and growing number of local,
qualified installers. We, therefore, intend to focus our core rooftop competencies to
secure product sales opportunities, including providing applications engineering and
design support to our customers to facilitate rooftop installations rather than turnkey
systems sales. |
|
|
|
|
We are aggressively reducing costs to improve our overall competitiveness. We are
focused on reducing the cost per watt of our solar products through various initiatives,
including material cost reductions, product enhancements, manufacturing and quality
improvements, and execution of our Technology Roadmap to increase the conversion
efficiency of our solar products. In August 2010, we announced a plan to realign our
solar manufacturing capacity in our United Solar Ovonic segment among our existing
facilities as part of our overall cost-reduction activities. As part of this plan, we
shifted certain final assembly operations from our Auburn Hills, Michigan campus to our
Tijuana, Mexico facility and relocated our corporate headquarters from Rochester Hills to
our Auburn Hills location. In May 2011, we initiated a comprehensive cost- reduction
program that included functional consolidations and organizational realignment addressing
all levels of the organization. We recognized restructuring expenses in connection with
these activities, as detailed elsewhere, and may incur additional restructuring expenses
as we pursue further cost-reduction activities in the future. Additionally, due to market
conditions that are impairing current demand for our solar
products (see above), we are moderating production of our solar products. We are
recognizing under-absorption of fixed overhead costs, and associated period costs, as a
result of these production adjustments that substantially increase our production cost per
watt and may recognize similar costs in the future if we do not sustainably operate our
facilities at productive capacity. |
28
|
|
|
We are seeking the strategic sale of OBC, which comprises substantially our entire
Ovonic Materials segment, in order to focus on our United Solar Ovonic business
activities. We have developed proprietary technologies in our Ovonic Materials segment
that we believe have value, including technologies for advanced NiMH and Li-Ion batteries.
The development activities for these technologies have been substantially balanced with
external sources of revenues, such as royalties and development agreements (principally
government contracts), to align our development commercialization efforts at sustainable
levels. We continually evaluate commercialization opportunities and strategic
alternatives to maximize value for these technologies, which may include licenses, joint
ventures and sales. Accordingly, in July 2011, we announced that we are seeking the
strategic sale of OBC, which comprises substantially our entire Ovonic Materials segment.
We expect to account for OBC in the future as Discontinued Operations while the sale
process continues in accordance with GAAP, effectively eliminating OBCs financial
performance from our consolidated financial results and consolidating our remaining
activities into a single business segment. |
Key Indicators of Financial Condition and Operating Performance
In evaluating our business, we use product and system sales, gross profit, pre-tax income,
earnings per share, net income, EBITDA, EBITDARS (Earnings Before Interest, Taxes, Depreciation,
Amortization and Restructuring and Stock expenses), cash flow from operations and other key
performance metrics. We also use production and shipments, both measured in megawatts (MW), and
gross margins on product sales as key performance metrics for our United Solar Ovonic segment,
particularly in connection with the manufacturing operations in this segment.
29
Results of Operations
We have two segments, United Solar Ovonic and Ovonic Materials. We include the Solar
Integrated Technologies, Inc. (SIT) business in our United Solar Ovonic segment.
The following table summarizes our revenues and operating income (loss) for the last three
fiscal years ended June 30, and reconciles to the amounts included in our consolidated financial
statements. The grouping Corporate and Other below does not meet the definition of a segment as
it contains our headquarters costs, consolidating entries and our investments in joint ventures,
which are not allocated to the above segments; however, it is included below for reconciliation
purposes only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Operating Income (Loss) |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009(1) |
|
|
|
(in thousands) |
|
United Solar Ovonic |
|
$ |
221,899 |
|
|
$ |
237,437 |
|
|
$ |
302,758 |
|
|
$ |
(269,449 |
) |
|
$ |
(418,001 |
) |
|
$ |
44,447 |
|
Ovonic Materials |
|
|
10,593 |
|
|
|
16,810 |
|
|
|
13,317 |
|
|
|
4,273 |
|
|
|
8,666 |
|
|
|
3,912 |
|
Corporate and Other |
|
|
54 |
|
|
|
169 |
|
|
|
218 |
|
|
|
(22,891 |
) |
|
|
(25,766 |
) |
|
|
(27,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
232,546 |
|
|
$ |
254,416 |
|
|
$ |
316,293 |
|
|
$ |
(288,067 |
) |
|
$ |
(435,101 |
) |
|
$ |
20,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As adjusted due to the implementation of accounting guidance for convertible debt
instruments that may be settled in cash upon conversion. See Note 1, Nature of Operations,
Basis of Presentation, and Summary of Significant Accounting Policies, to our Notes to the
Consolidated Financial Statements for additional information. |
Year Ended June 30, 2011 Compared to Year Ended June 30, 2010
United Solar Ovonic Segment
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
REVENUES |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
154,284 |
|
|
$ |
197,554 |
|
System sales |
|
|
65,832 |
|
|
|
29,781 |
|
Revenues from product development agreements |
|
|
1,619 |
|
|
|
9,895 |
|
License and other revenues |
|
|
164 |
|
|
|
207 |
|
|
|
|
|
|
|
|
TOTAL REVENUES |
|
|
221,899 |
|
|
|
237,437 |
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
144,600 |
|
|
|
201,087 |
|
Cost of system sales |
|
|
65,280 |
|
|
|
33,087 |
|
Cost of revenues from product development agreements |
|
|
599 |
|
|
|
8,184 |
|
Product development and research |
|
|
6,697 |
|
|
|
7,900 |
|
Preproduction costs |
|
|
397 |
|
|
|
305 |
|
Selling, general and administrative |
|
|
42,238 |
|
|
|
40,421 |
|
Loss on disposal of property, plant and equipment |
|
|
205 |
|
|
|
1,153 |
|
Impairment loss |
|
|
228,831 |
|
|
|
359,228 |
|
Restructuring charges |
|
|
2,501 |
|
|
|
4,073 |
|
|
|
|
|
|
|
|
TOTAL EXPENSES |
|
|
491,348 |
|
|
|
655,438 |
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME |
|
$ |
(269,449 |
) |
|
$ |
(418,001 |
) |
|
|
|
|
|
|
|
30
Total revenues for the year ended June 30, 2011 were $221.9 million, a decrease of $15.5
million, or 7%, compared to the same period in 2010. This decrease in total revenues was primarily
due to a $43.3 million decline in product sales, as well as an $8.3 million decline in product
development revenue, partially offset by a $36.1 million increase in system sales.
The
$43.3 million decline in product sales was primarily due to a
$20.5 million decline in
sales due to a lower average selling price and a $22.8 million decline in sales due to lower
volume. The $36.1 million increase in system sales was due to revenues from large-scale projects
in the United States and Italy. The $8.3 million decline in revenues from product development
agreements was due to an accounting reclassification. Effective in the first quarter of fiscal
year 2011, funding from cost-sharing agreements is recorded net with product development and
research expenses. See Note 1, Nature of Operations, Basis of Presentation and Summary of
Accounting Policies Revenues from Product Development Agreements, to our Notes to the
Consolidated Financial Statements for additional information.
Cost of product sales for the year ended June 30, 2011 was $144.6 million, a decrease of $56.5
million, or 28%, compared to the same period in 2010. The decline was primarily due to a $37.4
million decline in cost due to a combination of lower cost product mix and lower volume and $10.3
million of reduced unabsorbed overhead charges, with the remainder due to improved operating
efficiencies.
Cost of product sales
as a percentage of product sales in fiscal 2011 improved over fiscal 2010 due to higher overall production levels,
lower material costs, lower depreciation, improved manufacturing efficiencies and the absence of incremental
costs as a result of the SIT acquisition. However, in the second half
of fiscal 2011, production was
curtailed from planned 2011 levels to bring inventory to more normal levels, and as a result cost of product
sales was negatively impacted by $12.4 million for unabsorbed overhead costs, $5.8 million for raw material
and other commitments that will not be achieved, and $2.3 million to adjust inventory to its actual cost.
Cost of system sales for the year ended June 30, 2011 was $65.3 million, an increase of $32.2
million, or 97%, compared to the same period in 2010. The increase was primarily due to costs from
large- scale projects in the United States and Italy, with the majority of those costs being
incurred in the second half of the current fiscal year.
The combined cost of revenues from product development agreements and product development and
research expenses for the year ended June 30, 2011 was $7.3 million, a decrease of $8.8 million, or
55%, compared to the same period in 2010. The decrease was primarily due to lower product
development and research expenses on funded projects and a change in our accounting policy for
revenues from product development agreements which requires government funding from cost-sharing
agreements to be recognized as an offset to the aggregated research and development expense rather
than contract revenues. The $10.8 million gross expense in the current year was partially offset
by $3.5 million of funding from cost-share agreements. Effective in the first quarter of fiscal
year 2011, funding from government cost-sharing agreements is recorded net with product development
and research expenses.
Selling, general and administrative expenses for the year ended June 30, 2011 were $42.2
million, an increase of $1.8 million, or 5%, compared to the same period in 2010. The increase was
primarily related to increased bad debt and incentive plan expense, partially offset by savings in
consulting-related services.
During the third quarter, changing market conditions caused us to evaluate the recoverability
of our assets. As a result, we recorded an impairment loss of $228.8 million in carrying value of
our property, plant and equipment. During the same period of the prior year, changing market
conditions, losses incurred to date, the increased near-term capacity anticipated from our
Technology Roadmap developed
31
during the period and the implementation of our December 2009
restructuring plan caused us to evaluate the recoverability of our long-lived assets and goodwill.
As a result, we recorded a total impairment loss of $359.2 million. See Note 17, Impairment
Loss, to our Notes to the Consolidated Financial Statements for
additional information.
During the year ended June 30, 2011, we incurred restructuring charges to better align
operating expenses with near-term revenue expectations. The $2.5 million of charges were primarily
for employee severance offset by refinements to our existing reserve estimates. See Note 19,
Restructuring Charges, to our Notes to the Consolidated Financial Statements for additional
information.
Ovonic Materials Segment
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
REVENUES |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
407 |
|
|
$ |
2,897 |
|
Royalties |
|
|
8,069 |
|
|
|
7,984 |
|
Revenues from product development agreements |
|
|
754 |
|
|
|
1,870 |
|
License and other revenues |
|
|
1,363 |
|
|
|
4,059 |
|
|
|
|
|
|
|
|
TOTAL REVENUES |
|
|
10,593 |
|
|
|
16,810 |
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
366 |
|
|
|
2,423 |
|
Cost of revenues from product development agreements |
|
|
408 |
|
|
|
1,215 |
|
Product development and research |
|
|
3,561 |
|
|
|
3,447 |
|
Selling, general and administrative expenses |
|
|
1,985 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
TOTAL EXPENSES |
|
|
6,320 |
|
|
|
8,144 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
4,273 |
|
|
$ |
8,666 |
|
|
|
|
|
|
|
|
Our Ovonic Materials segments total revenues decreased by $6.2 million, or 37%, in 2011.
This decrease was due to decreases in license fees, product sales, and revenues from product
development agreements. The license fee reduction was primarily due to a non-recurring 2010
consumer NiMH battery license fee of $2.5 million. The product sales decrease was primarily due to
decreased sales of nickel hydroxide to our primary nickel hydroxide customer. The decrease in
product development contract revenue was due to the successful completion of certain contracts,
increased cost share for ongoing contracts, and a change in our accounting policy for revenues from
product development agreements which requires government funding from cost-sharing agreements to be
recognized as an offset to the aggregated research and development expense rather than contract
revenues.
Cost of product sales decreased $2.1 million for 2011, or 86%. This decrease was primarily
due to lower sales of nickel hydroxide to our primary nickel hydroxide customer.
The combined cost of revenues from product development agreements and product development and
research expenses for the year ended June 30, 2011 was $4.0 million, a decrease of $0.7 million, or
15%, compared to the same period in 2010. The decrease was primarily due to lower product
development and research expenses on funded projects and a change in our accounting policy for
revenues from product development agreements which requires government funding from cost-sharing
agreements to be recognized as an offset to the aggregated research and development expense rather
than contract revenues. The $4.2 million gross expense in the current year was partially offset by
$0.2 million of
32
funding from cost-share agreements. Effective in the first quarter of fiscal year
2011, funding from government cost-sharing agreements is recorded net with product development and
research expenses.
The increase in selling, general and administrative costs of $0.9 million was primarily due to
a change in the facilities allocation from ECD and USO.
Corporate and Other
Corporate activities consisting primarily of selling, general and administrative expenses,
including human resources, legal, finance, strategy, information technology, business development
and corporate governance, decreased by $3.4 million, or 13%, compared to the same period in 2010.
Lower salary, wage and related expenses of $6.5 million, or 26%, were partially offset by a
restructuring charge of $4.2 million related to employee severance costs.
Other Income (Expense)
Other expense was $18.0 million in fiscal year 2011 compared to $24.1 million in fiscal year
2010. The decrease of $6.1 million was principally due to lower interest expense, higher interest
income and foreign currency transaction gains in 2011. In fiscal year 2010, we received a $1.3 million distribution from our previously owned Cobasys joint venture.
Income Taxes
Our income tax expense was $0.4 million for fiscal year 2011 compared to a benefit of $2.2
million in fiscal year 2010. Fiscal year 2010 included certain federal refundable research
expenses and the benefit of net operating losses.
33
Year Ended June 30, 2010 Compared to Year Ended June 30, 2009
United Solar Ovonic Segment
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
REVENUES |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
197,554 |
|
|
$ |
292,402 |
|
System sales |
|
|
29,781 |
|
|
|
|
|
Revenues from product development agreements |
|
|
9,895 |
|
|
|
10,356 |
|
License and other revenues |
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUES |
|
|
237,437 |
|
|
|
302,758 |
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
201,087 |
|
|
|
206,047 |
|
Cost of system sales |
|
|
33,087 |
|
|
|
|
|
Cost of revenues from product development agreements |
|
|
8,184 |
|
|
|
7,414 |
|
Product development and research |
|
|
7,900 |
|
|
|
5,412 |
|
Preproduction costs |
|
|
305 |
|
|
|
5,409 |
|
Selling, general and administrative |
|
|
40,421 |
|
|
|
31,397 |
|
Loss on disposal of property, plant and equipment |
|
|
1,153 |
|
|
|
979 |
|
Impairment loss |
|
|
359,228 |
|
|
|
|
|
Restructuring charges |
|
|
4,073 |
|
|
|
1,653 |
|
|
|
|
|
|
|
|
TOTAL EXPENSES |
|
|
655,438 |
|
|
|
258,311 |
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME |
|
$ |
(418,001 |
) |
|
$ |
44,447 |
|
|
|
|
|
|
|
|
Total revenues for the year ended June 30, 2010 were $237.4 million, a decrease of $65.3
million, or 22%, compared to the same period in 2009. The decrease was primarily due to reductions
in product sales of $43.6 million due to lower sales volume and a $65.2 million decrease due to
lower average selling prices, offset by incremental system sales of $29.8 million and product sales of $14.0
million associated with our SIT business.
Cost of product sales for the year ended June 30, 2010 was $201.1 million, a decrease of $5.0
million or, 2%, compared to the same period in 2009. Approximately $30.8 million of the decrease
was due to decreased sales volume and change in product mix, $2.1 million of the decrease was due
to reduced warranty costs and $1.3 million of the decrease related to improved manufacturing
efficiencies. These decreases were offset by increased unabsorbed overhead costs of $15.8 million
due to a planned decrease in production and incremental costs of $13.4 million attributable to
sales in our SIT business.
Cost of system sales for the year ended June 30, 2010 was $33.1 million which were incremental
costs associated with our SIT business and system sales and included the write-off of certain
inventory of $2.5 million and $1.0 million in unabsorbed overhead costs.
Combined cost of revenues from product development agreements and product development and
research expenses increased by $3.3 million in 2010. Our combined product development and research
expenses are partially offset by revenues from product development agreements principally funded by
government programs under contracts from the U.S. Air Force and the Department of Energys Solar
America Initiative. The revenue remaining on each contract at the end of fiscal year 2010 was $4.8
million and $4.1 million, respectively. We continue to invest in
product development and research to
34
improve the throughput of our PV cell manufacturing equipment, reduce the cost of production and
increase the sunlight-to-electricity conversion efficiency of our PV laminates.
Preproduction costs (consisting of new employee training, facilities preparation, set-up
materials and supplies) decreased substantially for the year ended June 30, 2010, compared to
fiscal year 2009, primarily because we paused the expansion of our Michigan and Mexico facilities.
Selling, general, and administrative expenses for the twelve months ended on June 30, 2010
were $40.4 million, an increase of $9.0 million, or 29%, compared to the same period in 2009. The
increase was primarily due to additional expenses from the SIT business of $11.6 million.
The loss on disposal of property, plant and equipment increased by $0.2 million in 2010. The
increase was primarily due to disposals of equipment at our Greenville and Auburn Hills, Michigan
facilities.
We incurred impairment losses of $1.3 million related to the December 2009 restructuring plan,
of which $1.1 million was related to equipment and $0.2 million related to intangible assets which
will no longer be utilized. During the third quarter, changing market conditions, losses incurred
to date and the increased near-term capacity anticipated from our Technology Roadmap developed
during the third quarter, caused us to evaluate the recoverability of our long-lived assets and
goodwill. As a result, we recorded an additional impairment loss of $358.0 million, which
consisted of $320.7 million for property, plant and equipment, $35.4 million for goodwill and $1.9
million for intangible assets. See Note 17, Impairment Loss, to our Notes to the Consolidated
Financial Statements for additional information.
During the year ended June 30, 2010, we incurred restructuring charges related to the
severance of certain employees of $3.9 million and $0.2 million for equipment relocation costs
associated with the consolidation of certain production operations from our Auburn Hills 1
facility. See Note 19, Restructuring Charges, to our Notes to the Consolidated Financial
Statements for additional information.
35
Ovonic Materials Segment
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
REVENUES |
|
|
|
|
|
|
|
|
Product sales |
|
$ |
2,897 |
|
|
$ |
2,590 |
|
Royalties |
|
|
7,984 |
|
|
|
6,355 |
|
Revenues from product development agreements |
|
|
1,870 |
|
|
|
3,053 |
|
License and other revenues |
|
|
4,059 |
|
|
|
1,319 |
|
|
|
|
|
|
|
|
TOTAL REVENUES |
|
|
16,810 |
|
|
|
13,317 |
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
2,423 |
|
|
|
2,581 |
|
Cost of revenues from product development agreements |
|
|
1,215 |
|
|
|
2,093 |
|
Product development and research |
|
|
3,447 |
|
|
|
3,574 |
|
Selling, general and administrative expenses |
|
|
1,059 |
|
|
|
1,157 |
|
|
|
|
|
|
|
|
TOTAL EXPENSES |
|
|
8,144 |
|
|
|
9,405 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
8,666 |
|
|
$ |
3,912 |
|
|
|
|
|
|
|
|
Our Ovonic Materials segments total revenues increased by $3.5 million, or 26%, in 2010.
This increase was primarily due to increased license sales comprised of a consumer NiMH battery
license fee of $2.5 million, a $1.6 million increase in vehicle NiMH royalties, and a $0.3 million
increase in product sales. These increases were partially offset by a $1.2 million decrease in
product development contract revenue due to the successful completion of certain contracts and
increased cost-share for ongoing contracts.
Cost of product sales decreased $0.2 million, or 6%, for 2010. This decrease was primarily
due to decreased costs for nickel, the primary cost in our nickel hydroxide manufacturing process.
Combined cost of revenues from product development agreements and product development and
research expenses decreased by $1.0 million in 2010. The decrease was primarily due to reduced
research and development expenses resulting from reduced headcount and the completion of certain
product development contracts.
Corporate and Other
Selling, general and administrative expenses, which consist primarily of corporate operations,
including human resources, legal, finance, strategy, information technology, business development,
and corporate governance, decreased by $0.8 million in 2010. The reduction in selling, general and
administrative expenses in fiscal 2010 was primarily due to lower salaries, wages and related
expenses, lower stock and option award amortization offset by increases in administrative expenses.
Other Income (Expense)
Other expense was $24.1 million in fiscal 2010 compared to $11.3 million in fiscal year 2009.
The $12.8 million increase was principally due to increased interest expense of $13.3 million which
is related to a reduced level of capitalized interest, reduced interest income of $3.9 million due
to lower levels of investments in the period, and incremental foreign currency transaction losses
of $2.4 million associated with our SIT business, offset by a $4.3 million gain on debt extinguishment, $1.3 million
distribution
36
from our previously owned Cobasys joint venture and other-than-temporary impairment of
$1.0 million related to our investment in a Lehman Brothers bond in fiscal 2009.
Income Taxes
Our income tax benefit was $2.2 million for fiscal year 2010 compared to expense of $1.5
million in fiscal year 2009. The decrease in tax expense is primarily related to certain federal
refundable research expenses and the benefit of the current year net operating loss which will be
carried back to claim a refund of previously paid taxes under the current tax law.
Liquidity and Capital Resources
At June 30, 2011, we had consolidated working capital of $196.9 million. Our principal
sources of liquidity are cash, cash equivalents and short-term investments. We believe that cash,
cash equivalents and investments will be sufficient to meet our liquidity needs for our current
operations and planned capital expenditures during the fiscal year. However, during fiscal year
2012 we intend to continue to evaluate our liquidity to seek to address our longer term capital
needs, including maturity of our convertible notes and full implementation of our Technology
Roadmap. See Note 2, Liquidity and Continued Listing Requirements, to our Notes to the
Consolidated Financial Statements for additional information.
Cash Flows
Year Ended June 30, 2011 Compared to Year Ended June 30, 2010
Net
cash used in our operating activities was $24.2 million in 2011 compared to $34.2 million
in 2010. The $10.0 million decrease was driven by a reduction in our net income (loss) adjusted
for non-cash items of $5.8 million with $4.2 million net cash increase due to collections of
accounts receivable netted against cash outflow for inventory and accounts payable.
Net
cash used in investing activities was $22.1 million in 2011 compared to $70.9 million net
cash provided by investing activities in 2010. This decrease was principally due to a $137.4
million decrease in proceeds from maturities and sale of investments
and $6.4 million increased
capital expenditures, offset by increased cash flows from the repayment of development loans, a
decrease in restricted cash and a decrease in investment purchases of $48.6 million.
Net cash used in financing activities was $1.6 million in 2011 compared to 15.2 million in
2010. The decrease in cash used was a result of repayment of convertible notes and revolving
credit facility in 2010.
Cash Flows
Year Ended June 30, 2010 Compared to Year Ended June 30, 2009
Net cash used in our operating activities was $34.2 million in 2010 compared to $11.1 million
net cash provided by operating activities in 2009. The decrease was driven by a reduction in our
net income (loss) adjusted for non-cash items of $111.4 million offset by $66.1 million cash used
for changes in net working capital, specifically due to inventory, accounts receivable and accounts
payable.
Net cash provided by investing activities was $70.9 million in 2010 as compared to net cash
used in investing activities of $440.5 million in 2009. This increase was principally due to
reduced capital
37
expenditures of $210.3 million, reduced investment purchases of $100.7 million, increased
proceeds from maturities and sales of our investments of $225.7 million, offset by $14.2 million of
developmental loans.
Net cash used in financing activities was $15.3 million in 2010 compared to net cash provided
by financing activities of $0.9 million in 2009. This decrease was principally due to the $5.7
million repayment of the revolving credit facility and $8.0 million repayment of the convertible
notes assumed as part of the SIT acquisition in 2010.
Short-term Borrowings
During September 2010, we terminated our $30.0 million and $25.0 million secured revolving
credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The security
provided under the secured revolving credit facility has been released. The secured revolving
credit facility was replaced with a Letter of Credit Facility, also with JP Morgan Chase Bank, N.A.
Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of credit, which
will be secured by cash equal to 102% of the letters of credit exposure. The Letter of Credit
Facility matures on February 4, 2013. Letters of credit totaling approximately $8.6 million as of
September 30, 2010 were transferred from the cancelled secured revolving credit facility to the new
Letter of Credit Facility. As of June 30, 2011, outstanding letters of credit totaled $7.0
million.
Convertible Senior Notes
Our Convertible Senior Notes (Notes) bear interest at a rate of 3.0% per year, payable on
June 15 and December 15 of each year. If the Notes are not converted, they will mature on June 15,
2013. The Notes are only convertible prior to March 13, 2013 under specific circumstances involving
the price of our common stock, the price of the Notes and certain corporate transactions including,
but not limited to, an offering of common stock at a price less than market, a distribution of cash
or other assets to stockholders, a merger, consolidation or other share exchange, or a change in
control. The holders of the Notes may convert the principal amount of their notes into cash and,
if applicable, shares of our common stock initially at a conversion rate of 10.8932 shares
(equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal
amount of the Notes. The holders of the Notes are only entitled to amounts in excess of the
principal amount if shares of our common stock exceed a market price of $91.80 for a period of 20
consecutive trading days during the applicable cash settlement averaging period. The applicable
conversion rate will be subject to adjustments in certain circumstances. The Notes are senior
unsecured obligations of ECD and rank equal in right of payment with any future senior unsecured
debt of ECD, and senior in right of payment to all of ECDs existing and future debt, if any, that
is subordinated to the Notes.
In May 2010, we entered into exchange agreements with certain holders of our Notes whereby we
issued an aggregate of 2,770,871 shares of our common stock in exchange for an aggregate of
principal amount of $23.0 million held by the holders of the Notes. In connection with this
exchange we recorded a gain on debt extinguishment of $4.3 million.
In September 2010, we entered into exchange agreements with certain holders of our Notes
whereby we issued an aggregate of 1,309,263 shares of our common stock in exchange for an aggregate
principal amount of $9.1 million held by the holders of the Notes. In connection with this
exchange we recorded a gain on debt extinguishment of $1.2 million. In addition, in December 2010,
we entered into exchange agreements with certain holders of our Notes whereby we issued an
aggregate of 3,401,355 shares of common stock in exchange for an aggregate principal amount of
$21.0 million held by holders of the Notes. In connection with this we recorded a gain on debt
extinguishment of $2.1 million.
38
Our common stock is currently listed for trading on the NASDAQ Global Select Market. We must
continue to satisfy NASDAQs continued listing requirements or risk delisting of our securities.
In the event that our common stock is not listed on any of the NASDAQ Global Select Market, the
NASDAQ Global Market or a U.S. national securities exchange, the holders of our existing
convertible senior notes will have the right to require us to repurchase their notes. If we would
be unable to do so, we would be in default under our notes indenture. See Note 2, Liquidity and
Continued Listing Requirements, to our Notes to the Consolidated Financial Statements for
additional information.
Off-Balance Sheet Arrangements
Our off-balance sheet financing consists primarily of operating leases for equipment and
property. These leases have terms ranging from a month-to-month basis to 10 years. We incurred
lease expense of $6.5 million for the years ended June 30, 2011 and 2010 and $4.7 million for the
year ended June 30, 2009.
Contractual Obligations
We, in the ordinary course of business, enter into purchase commitments for certain raw
materials and capital equipment. Our contractual obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
|
|
(in thousands) |
|
Convertible senior notes |
|
$ |
263,153 |
|
|
$ |
|
|
|
$ |
263,153 |
|
|
$ |
|
|
|
$ |
|
|
Structured financing |
|
|
11,657 |
|
|
|
630 |
|
|
|
1,339 |
|
|
|
1,438 |
|
|
|
8,250 |
|
Capital lease obligations |
|
|
20,296 |
|
|
|
1,278 |
|
|
|
3,058 |
|
|
|
3,662 |
|
|
|
12,298 |
|
Interest on convertible
senior notes, structured
financing, and capital
lease obligations |
|
|
31,748 |
|
|
|
9,977 |
|
|
|
11,280 |
|
|
|
2,964 |
|
|
|
7,527 |
|
Operating leases |
|
|
24,272 |
|
|
|
5,307 |
|
|
|
7,740 |
|
|
|
6,622 |
|
|
|
4,603 |
|
Purchase obligations |
|
|
58,009 |
|
|
|
35,119 |
|
|
|
12,845 |
|
|
|
8,272 |
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
409,135 |
|
|
$ |
52,311 |
|
|
$ |
299,415 |
|
|
$ |
22,958 |
|
|
$ |
34,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate capital expenditures to be approximately $40 million during fiscal year
2012, primarily for projects included in the Technology Roadmap.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are more fully described in Note 1 Nature of Operations,
Basis of Presentation and Summary of Significant Accounting Policies, to our Notes to the
Consolidated Financial Statements. Certain of our accounting policies require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates and assumptions are based on our historical experience, the
terms of existing contracts, our evaluation of trends in the industry, information provided by our
customers and suppliers and information available from other outside sources, as appropriate.
However, they are subject to an inherent degree of uncertainty. As a result, actual results in
these areas may differ significantly from our estimates.
39
We consider an accounting estimate to be significant if it requires us to make assumptions
about matters that were uncertain at the time the estimate was made and changes in the estimate
would have had a significant impact on our consolidated financial position or results of
operations.
Inventory Reserves
We evaluate the recoverability of our inventory based upon assumptions about anticipated
customer demand and future market conditions. The key factors we consider when estimating our
inventory reserve include historical sales, anticipated demand, expected sales price, market
trends, product obsolescence, the effect new products might have on the sale of existing products
and other factors. If actual market conditions are less favorable than those projected by
management, additional inventory reserves may be required. Inventory reserves were $11.8 million
and $15.9 million at June 30, 2011 and 2010, respectively.
Warranty Reserve
The Company generally provides a five-year product warranty on workmanship and a 20-25 year
product warranty on power output on all solar product sales. When the Company recognizes revenue
for product sales, it accrues a liability for the estimated costs of meeting its warranty
obligations for those products. The Company estimates its warranty liability based on past
experience of specific individual claims and claims paid as well as the Companys engineering and
laboratory tests of its product under different conditions.
For installed solar systems, the Company generally provides a 5-10 year workmanship warranty
in addition to the applicable standard product warranty. Reserves for warranty costs are
recognized at the date of sale of the relevant products, at managements best estimate of the
expenditure required to settle the liability, taking into account the specific arrangements of the
transaction and past experience.
At June 30, 2011 and 2010, the Company had recorded a liability for future warranty claims of
approximately $38.0 million and $41.3 million, respectively.
Allowance for Uncollectible Accounts
We maintain an allowance for uncollectible accounts and consider a number of factors, when
estimating the allowance including the length of time trade accounts receivable are past due, trade
credit insurance coverage, previous payment and loss history, the customers current ability to pay
its obligation, and our knowledge of the customer and the customers business. The allowance for
doubtful accounts was $3.9 million and $1.8 million at June 30, 2011 and 2010, respectively.
Accounting for Business Combinations
We recorded all assets acquired and liabilities assumed, including goodwill and other
intangible assets, at fair value as of the date of the acquisition. The determination of the fair
values of assets acquired and liabilities assumed required us to make significant estimates and
assumptions that are highly judgmental and affect our financial statements.
Valuation of Long-Lived Assets
We periodically evaluate the carrying value of our long-lived assets whenever events or
changes in circumstances indicate that the carrying value of those assets may not be recoverable.
Our assessment utilizes quoted market prices, fair value appraisals, management forecasts and
discounted cash flow
40
analyses. The impairment analysis is highly judgmental and involves the use of significant
estimates and assumptions. These estimates and assumptions have a substantial impact on the amount
of any impairment loss recorded. Discounted cash flow analyses are dependent upon management
estimates and assumptions of future sales trends, current and expected future economic trends,
market conditions and the effects of new technologies. The estimates and assumptions used in the
impairment analysis are consistent with our business plan; however, actual cash flows in the future
may differ significantly from those previously forecasted.
Share-Based Compensation
We record the fair value of stock-based compensation grants as an expense. In order to
determine the fair value of stock options on the date of grant, we apply the Black-Scholes
option-pricing model. Inherent in this model are assumptions related to expected stock-price
volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest
rate and dividend yield are less subjective assumptions, typically based on factual data derived
from public sources, the expected stock-price volatility and option life assumptions require a
greater level of judgment.
We use an expected stock-price volatility assumption that is based on historical implied
volatilities of the underlying stock which is obtained from public data sources.
With regard to the weighted-average option life assumption, we consider the exercise behavior
of past grants and models the pattern of aggregate exercises. Patterns are determined on specific
criteria of the aggregate pool of optionees. Forfeiture rates are based on our historical data for
stock option forfeitures.
Impact of Recent Accounting Pronouncements
See Note 1, Nature of Operations, Basis of Presentation and Summary of Significant Accounting
Policies, to our Notes to the Consolidated Financial Statements for a description of recent
accounting pronouncements and the impact on our financial statements.
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements that involve risks and
uncertainties. These forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements
concerning our plans, objectives, goals, strategies, future events, future sales or performance,
capital expenditures, financing needs, plans or intentions relating to acquisitions, business
trends and other information that is not historical information. When used in this report, the
words estimates, expects, anticipates, projects, plans, intends, believes,
forecasts, foresees, likely, may, should, goal, target and variations of such words
or similar expressions are intended to identify forward-looking statements. All forward-looking
statements are based upon information available to us on the date of this report.
These forward-looking statements are subject to risks, uncertainties and other factors, many
of which are outside of our control, that could cause actual results to differ materially from the
results discussed in the forward-looking statements, including, among other things, the matters
discussed in Item 1A, Risk Factors. Factors you should consider that could cause these
differences are:
|
|
|
the worldwide credit markets including sufficiency and availability of credit financing
for solar projects and for our customers; |
41
|
|
|
the impact of the current lack of credit financing capacity on our customers ability
to meet their obligations to ECD and its subsidiaries; |
|
|
|
|
the worldwide demand for electricity and the market for renewable energy, including
solar energy; |
|
|
|
|
the ability or inability of conventional fossil fuel-based generation technologies to
meet the worldwide demand for electricity; |
|
|
|
|
government subsidies and policies supporting renewable energy, including solar energy; |
|
|
|
|
our expenses, sources of sales and international sales and operations; |
|
|
|
|
our ability to achieve expense reductions and anticipated levels of one-time costs,
including restructuring charges; |
|
|
|
|
potential inability to repay or restructure our outstanding indebtedness; |
|
|
|
|
future pricing of, and demand for, our solar laminates; |
|
|
|
|
the performance, features, costs, and benefits of our solar laminates and plans for the
enhancement of solar laminates; |
|
|
|
|
our ability to maintain high standards of quality in our product; |
|
|
|
|
the supply and price of components and raw materials; |
|
|
|
|
our ability to execute on our Technology Roadmap in a timely and cost-effective manner; |
|
|
|
|
our ability to retain our current key executives, integrate new key executives and
attract and retain other skilled managerial, engineering, sales and marketing personnel; |
|
|
|
|
the viability of our intellectual property and our continued investment in research and
development; |
|
|
|
|
our ability to divest non-core assets and businesses; |
|
|
|
|
payments and other obligations resulting from the unfavorable resolution of legal
proceedings; |
|
|
|
|
changes in, or the failure to comply with, government regulations and environmental,
health and safety requirements; |
|
|
|
|
interest rate fluctuations and both our and our end-users ability to secure financing
on commercially reasonable terms or at all; |
|
|
|
|
general economic and business conditions, including those influenced by international
and geopolitical events; and |
|
|
|
|
our ability to generate internal cash flow or arrange external financing for our
anticipated capital expenditures and Technology Roadmap. |
There may be other factors that could cause our actual results to differ materially from the
results referred to in the forward-looking statements. We undertake no obligation to publicly
update or revise forward-looking statements to reflect events or circumstances after the date made
or to reflect the occurrence of unanticipated events, except as required by law.
42
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
The following discussion about our exposure to market risk of financial instruments contains
forward-looking statements. Actual results may differ materially from those described.
Interest Rate Risk
Our investments in financial instruments are comprised of debt securities. All such
instruments are classified as securities available for sale. We do not invest in portfolio equity
securities, or commodities, or use financial derivatives for trading purposes. Our debt security
portfolio (corporate notes and U.S. government agency notes) represents funds held temporarily,
pending use in our business and operations. We had $102.9 million of these investments as of June
30, 2011. It is our policy that investments shall be rated A or higher by Moodys or Standard
and Poors, no single investment shall represent more than 10% of the portfolio and at least 10% of
the total portfolio shall have maturities of 90 days or less. Our market risk primarily relates to
the risks of changes in the credit quality of issuers. An interest rate increase or decrease of 1%
would increase or decrease the value of our portfolio by approximately
$0.7 million as of June 30, 2011.
Our Notes are subject to interest rate and market price risk due to the convertible feature of
the Notes. As interest rates rise, the fair market value of the Notes will decrease and as
interest rates fall, the fair market value of the Notes will increase. At June 30, 2011, the
estimated fair market value of our Notes was approximately $139.8 million. An increase or decrease
in market interest rates of 1% would increase or decrease the fair value of our Notes by
approximately $2.0 million.
Foreign Exchange Risk
We primarily conduct our business in U.S. Dollars, which may impact our foreign customers and
suppliers as a result of changes in currency exchange rates. These factors may adversely impact
our existing or future sales agreements and require us to reallocate product shipments or pursue
other remedies.
The majority of SITs sales in Europe are denominated in Euros while the related costs of
sales are denominated in Euros and U.S. Dollars. An increase or a decrease in exchange rates of 1%
would increase or decrease our foreign currency transaction gain by approximately $0.2 million.
We recognized a net foreign currency transaction gain of $1.1 million for the year ended June
30, 2011, and a net foreign currency transaction loss of $2.4 million for the year ended at June
30, 2010.
43
Item 8: Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Conversion Devices, Inc.
We have audited the accompanying consolidated balance sheets of Energy Conversion Devices,
Inc. (a Delaware corporation) and subsidiaries (the Company) as of June 30, 2011 and 2010, and
the related consolidated statements of operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the three years in the period ended June 30, 2011. Our audits of
the basic consolidated financial statements included the financial statement schedule listed in the
table of contents under Item 15(a)2. These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Energy Conversion Devices, Inc. and subsidiaries as of
June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2011, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of June
30, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August
25, 2011 expressed an unqualified opinion.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new
accounting guidance in the years ending June 30, 2011 and 2010 related to the accounting for
convertible debt and new accounting guidance in the year ended June 30, 2010 related to business
combinations.
/s/ Grant Thornton LLP
Southfield, Michigan
August 25, 2011
44
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010(1) |
|
|
2009(1) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
154,691 |
|
|
$ |
200,451 |
|
|
$ |
294,992 |
|
System sales |
|
|
65,832 |
|
|
|
29,781 |
|
|
|
|
|
Royalties |
|
|
8,070 |
|
|
|
7,984 |
|
|
|
6,355 |
|
Revenues from product development agreements |
|
|
2,373 |
|
|
|
11,765 |
|
|
|
13,409 |
|
License and other revenues |
|
|
1,580 |
|
|
|
4,435 |
|
|
|
1,537 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
232,546 |
|
|
|
254,416 |
|
|
|
316,293 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
144,966 |
|
|
|
203,510 |
|
|
|
208,375 |
|
Cost of system sales |
|
|
65,280 |
|
|
|
33,087 |
|
|
|
|
|
Cost of revenues from product development agreements |
|
|
1,007 |
|
|
|
9,399 |
|
|
|
9,507 |
|
Product development and research |
|
|
10,258 |
|
|
|
11,347 |
|
|
|
8,986 |
|
Preproduction costs |
|
|
397 |
|
|
|
305 |
|
|
|
5,409 |
|
Selling, general and administrative |
|
|
63,079 |
|
|
|
66,797 |
|
|
|
58,902 |
|
Net loss on disposal of property, plant and equipment |
|
|
95 |
|
|
|
1,108 |
|
|
|
2,287 |
|
Impairment loss |
|
|
228,831 |
|
|
|
359,228 |
|
|
|
|
|
Restructuring charges |
|
|
6,700 |
|
|
|
4,736 |
|
|
|
2,231 |
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
520,613 |
|
|
|
689,517 |
|
|
|
295,697 |
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income |
|
|
(288,067 |
) |
|
|
(435,101 |
) |
|
|
20,596 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,603 |
|
|
|
1,331 |
|
|
|
5,226 |
|
Interest expense |
|
|
(25,404 |
) |
|
|
(28,676 |
) |
|
|
(15,390 |
) |
Gain on debt extinguishment |
|
|
3,327 |
|
|
|
4,294 |
|
|
|
|
|
Distribution from joint venture |
|
|
|
|
|
|
1,309 |
|
|
|
|
|
Other nonoperating income (expense), net |
|
|
1,609 |
|
|
|
(2,321 |
) |
|
|
(1,118 |
) |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
|
(17,865 |
) |
|
|
(24,063 |
) |
|
|
(11,282 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Income Taxes and Equity Loss |
|
|
(305,932 |
) |
|
|
(459,164 |
) |
|
|
9,314 |
|
Income tax expense (benefit) |
|
|
394 |
|
|
|
(2,248 |
) |
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Equity Loss |
|
|
(306,326 |
) |
|
|
(456,916 |
) |
|
|
7,839 |
|
Equity loss |
|
|
(91 |
) |
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
|
(306,417 |
) |
|
|
(457,175 |
) |
|
|
7,839 |
|
Net Loss Attributable to Noncontrolling Interest |
|
|
(345 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Attributable to ECD Stockholders |
|
$ |
(306,072 |
) |
|
$ |
(457,062 |
) |
|
$ |
7,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Share, Attributable to ECD Stockholders |
|
$ |
(6.40 |
) |
|
$ |
(10.75 |
) |
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss) Earnings Per Share, Attributable to ECD
Stockholders |
|
$ |
(6.40 |
) |
|
$ |
(10.75 |
) |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As adjusted due to implementation of FASB ASC 470-20 (See Note 1). |
See notes to consolidated financial statements.
45
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010(1) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
27,769 |
|
|
$ |
79,158 |
|
Short-term investments |
|
|
102,926 |
|
|
|
113,771 |
|
Accounts receivable, net |
|
|
39,153 |
|
|
|
72,021 |
|
Inventories, net |
|
|
68,499 |
|
|
|
61,495 |
|
Other current assets |
|
|
29,022 |
|
|
|
27,237 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
267,369 |
|
|
|
353,682 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net |
|
|
91,275 |
|
|
|
301,056 |
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
10,009 |
|
|
|
11,749 |
|
Lease receivable, net |
|
|
10,094 |
|
|
|
10,854 |
|
Other assets |
|
|
9,731 |
|
|
|
14,606 |
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
29,834 |
|
|
|
37,209 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
388,478 |
|
|
$ |
691,947 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
46,958 |
|
|
$ |
56,035 |
|
Current portion of warranty liability |
|
|
13,642 |
|
|
|
12,125 |
|
Other current liabilities |
|
|
9,897 |
|
|
|
9,130 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
70,497 |
|
|
|
77,290 |
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
Convertible senior notes |
|
|
232,226 |
|
|
|
243,654 |
|
Capital lease obligations |
|
|
19,018 |
|
|
|
20,296 |
|
Warranty liability |
|
|
24,338 |
|
|
|
29,210 |
|
Other liabilities |
|
|
17,350 |
|
|
|
19,872 |
|
|
|
|
|
|
|
|
Total Long-Term Liabilities |
|
|
292,932 |
|
|
|
313,032 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 150
million shares authorized,
53,311,152 and
48,554,812 issued at
June 30, 2011 and
2010, respectively |
|
|
533 |
|
|
|
486 |
|
Additional paid-in capital |
|
|
1,106,961 |
|
|
|
1,079,910 |
|
Treasury stock |
|
|
(798 |
) |
|
|
(700 |
) |
Accumulated deficit |
|
|
(1,080,460 |
) |
|
|
(774,388 |
) |
Accumulated other comprehensive loss, net |
|
|
(729 |
) |
|
|
(3,570 |
) |
|
|
|
|
|
|
|
Total ECD stockholders equity |
|
|
25,507 |
|
|
|
301,738 |
|
Accumulated deficit noncontrolling interest |
|
|
(458 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
25,049 |
|
|
|
301,625 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
388,478 |
|
|
$ |
691,947 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As adjusted due to implementation of FASB ASC 470-20 (See Note 1). |
See notes to consolidated financial statements.
46
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010(1) |
|
|
2009(1) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(306,417 |
) |
|
$ |
(457,175 |
) |
|
$ |
7,839 |
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss |
|
|
228,829 |
|
|
|
359,228 |
|
|
|
|
|
Depreciation and amortization |
|
|
18,045 |
|
|
|
32,708 |
|
|
|
33,605 |
|
Amortization of debt discount and deferred financing fees |
|
|
16,547 |
|
|
|
17,157 |
|
|
|
15,380 |
|
Share-based compensation |
|
|
5,342 |
|
|
|
4,428 |
|
|
|
5,273 |
|
Gain on debt extinguishment |
|
|
(3,327 |
) |
|
|
(4,294 |
) |
|
|
|
|
Other-than-temporary impairment of investment |
|
|
|
|
|
|
|
|
|
|
1,002 |
|
Net loss on disposal of property, plant and equipment |
|
|
95 |
|
|
|
1,258 |
|
|
|
2,287 |
|
Equity loss |
|
|
91 |
|
|
|
259 |
|
|
|
|
|
Other |
|
|
|
|
|
|
(180 |
) |
|
|
(597 |
) |
Changes in operating assets and liabilities, net of foreign exchange: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
33,783 |
|
|
|
(8,538 |
) |
|
|
(17,376 |
) |
Inventories |
|
|
(4,097 |
) |
|
|
35,283 |
|
|
|
(43,054 |
) |
Other assets |
|
|
(5,855 |
) |
|
|
(8,634 |
) |
|
|
(7,054 |
) |
Accounts payable and accrued expenses |
|
|
(5,810 |
) |
|
|
(7,201 |
) |
|
|
13,714 |
|
Other liabilities |
|
|
(1,376 |
) |
|
|
1,525 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(24,150 |
) |
|
|
(34,176 |
) |
|
|
11,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(38,418 |
) |
|
|
(31,992 |
) |
|
|
(242,257 |
) |
Acquisition of business, net of cash acquired |
|
|
|
|
|
|
(2,088 |
) |
|
|
|
|
Investment in joint venture |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
Purchases of investments |
|
|
(87,316 |
) |
|
|
(102,657 |
) |
|
|
(203,355 |
) |
Proceeds from maturity and sale of investments |
|
|
94,469 |
|
|
|
231,880 |
|
|
|
6,150 |
|
Proceeds from sale of property, plant and equipment |
|
|
219 |
|
|
|
48 |
|
|
|
|
|
Development loans |
|
|
7,177 |
|
|
|
(14,155 |
) |
|
|
|
|
Restricted cash |
|
|
1,740 |
|
|
|
(10,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(22,129 |
) |
|
|
70,850 |
|
|
|
(440,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments under capitalized lease obligations and other debt |
|
|
(1,610 |
) |
|
|
(1,549 |
) |
|
|
(1,054 |
) |
Repayment of revolving credit facility |
|
|
|
|
|
|
(5,705 |
) |
|
|
|
|
Repayment of convertible notes |
|
|
|
|
|
|
(8,000 |
) |
|
|
|
|
Increase in long-term customer deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of stock and share-based compensation, net of
expenses |
|
|
|
|
|
|
|
|
|
|
1,966 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,610 |
) |
|
|
(15,254 |
) |
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,500 |
) |
|
|
1,359 |
|
|
|
348 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(51,389 |
) |
|
|
22,779 |
|
|
|
(428,113 |
) |
Cash and cash equivalents at beginning of period |
|
|
79,158 |
|
|
|
56,379 |
|
|
|
484,492 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
27,769 |
|
|
$ |
79,158 |
|
|
$ |
56,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As adjusted due to implementation of FASB ASC 470-20 (See Note 1). |
See notes to consolidated financial statements.
47
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Number |
|
|
|
|
|
|
Paid In |
|
|
of |
|
|
|
|
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
of Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Interest |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
Balance at June 30, 2008 |
|
|
45,575 |
|
|
$ |
456 |
|
|
$ |
969,421 |
|
|
|
(11 |
) |
|
$ |
(700 |
) |
|
$ |
(325,165 |
) |
|
$ |
|
|
|
$ |
(2,100 |
) |
|
$ |
641,912 |
|
Net income(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,839 |
|
|
|
|
|
|
|
|
|
|
|
7,839 |
|
Unrealized gain on
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,292 |
|
|
|
2,292 |
|
Foreign currency
translation losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,622 |
) |
|
|
(1,622 |
) |
Unrealized losses on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,443 |
|
Equity component from
issuance of convertible
debt(1) |
|
|
|
|
|
|
|
|
|
|
84,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,630 |
|
Share-based compensation
expense, net of shares
issued |
|
|
180 |
|
|
|
2 |
|
|
|
7,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,170 |
|
Equity offering expenses |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
Balance at June 30, 2009 |
|
|
45,755 |
|
|
|
458 |
|
|
|
1,061,205 |
|
|
|
(11 |
) |
|
|
(700 |
) |
|
|
(317,326 |
) |
|
|
|
|
|
|
(1,496 |
) |
|
|
742,141 |
|
Net loss(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(457,062 |
) |
|
|
|
|
|
|
|
|
|
|
(457,062 |
) |
Unrealized losses on
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(469 |
) |
|
|
(469 |
) |
Foreign currency
translation losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,554 |
) |
|
|
(1,554 |
) |
Unrealized losses on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459,136 |
) |
Noncontrolling interest
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113 |
) |
|
|
|
|
|
|
(113 |
) |
Common stock issued in
connection with
convertible debt exchange |
|
|
2,771 |
|
|
|
28 |
|
|
|
14,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,305 |
|
Share-based compensation
expense, net of shares
issued |
|
|
29 |
|
|
|
|
|
|
|
4,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,428 |
|
Stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010 |
|
|
48,555 |
|
|
|
486 |
|
|
|
1,079,910 |
|
|
|
(15 |
) |
|
|
(700 |
) |
|
|
(774,388 |
) |
|
|
(113 |
) |
|
|
(3,570 |
) |
|
|
301,625 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(306,072 |
) |
|
|
|
|
|
|
|
|
|
|
(306,072 |
) |
Unrealized gains on
investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564 |
|
|
|
564 |
|
Foreign currency
translation gains, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,513 |
|
|
|
2,513 |
|
Unrealized loss on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236 |
) |
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303,231 |
) |
Noncontrolling interest loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345 |
) |
|
|
|
|
|
|
(345 |
) |
Common stock issued in
connection with convertible
debt exchange |
|
|
4,711 |
|
|
|
47 |
|
|
|
21,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,756 |
|
Share-based compensation
expense, net of shares
issued |
|
|
45 |
|
|
|
|
|
|
|
5,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,342 |
|
Stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98 |
) |
|
|
|
Balance
at June 30, 2011 |
|
|
53,311 |
|
|
$ |
533 |
|
|
$ |
1,106,961 |
|
|
|
(44 |
) |
|
$ |
(798 |
) |
|
$ |
(1,080,460 |
) |
|
$ |
(458 |
) |
|
$ |
(729 |
) |
|
$ |
25,049 |
|
|
|
|
|
|
|
(1) |
|
As adjusted due to implementation of FASB ASC 470-20 (See Note 1). |
See notes to consolidated financial statements.
48
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of Operations, Basis of Presentation and Summary of Significant Accounting
Policies
Nature of Operations
Energy Conversion Devices, Inc. (the Company or ECD), through its subsidiaries,
commercializes materials, products and production processes for the alternative energy generation
(primarily solar energy), energy storage and information technology markets.
On August 19, 2009, the Company acquired 100% of the outstanding common shares of Solar
Integrated Technologies, Inc. (SIT), a Los Angeles-based company that manufactures, designs and
installs building integrated photovoltaic roofing systems for commercial rooftops. The results of
SITs operations have been included in the Companys Consolidated Financial Statements beginning
August 19, 2009.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP).
The consolidated financial statements include the Company and the accounts of the Companys
subsidiaries in which it holds a controlling financial or management interest. All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include the accounts of ECD and its 100%-owned
subsidiaries United Solar Ovonic LLC and United Solar Ovonic Corporation (collectively referred to
as United Solar), and its 93.6%-owned subsidiary Ovonic Battery Company, Inc. (Ovonic Battery
or OBC) (collectively the Company). Beginning fiscal 2010, noncontrolling interests
(previously minority interests) are reported below net (loss) income under the heading Net Income
(Loss) Attributable to Noncontrolling Interest in the Companys Consolidated Statements of
Operations and shown as a component of equity in the Companys Consolidated Balance Sheets.
The Company has ownership interests in two joint ventures as discussed in Note 11, Investment
in Affiliates. The Company applies the equity method of accounting for investments in voting
stock which give it the ability to exercise significant influence over operating and financial
policies of the investee. Significant influence is generally defined as 20% to 50% ownership in
the voting stock of an investee. However, each investment in voting stock is analyzed to determine
if other factors are present, such as representation on the investees board of directors,
participation in policy making processes, material intercompany transactions, interchange of
managerial personnel, or technological dependency, which may indicate the Companys ability to
exercise significant influence absent a voting stock ownership greater than 20%.
The Company has performed an evaluation of subsequent events through the date the Companys
financial statements were issued. No material subsequent events have occurred that required
recognition or disclosure in these financial statements other than as discussed in Note 28,
Subsequent Events Discontinued Operations, to our Notes to the Consolidated Financial
Statements.
49
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods could differ from those
estimates.
Foreign Currency Translation
Assets and liabilities of the Companys foreign operations for which the local currency is the
functional currency are translated into U.S. dollars at period-end exchange rates, while income and
expenses are translated at the average exchange rates during the period. Translation gains or
losses are included in Accumulated Other Comprehensive Loss, net in the Stockholders Equity
section of the Consolidated Balance Sheets and separately as a component of Accumulated Other
Comprehensive Income (Loss) in the Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss). Gains and losses resulting from foreign currency transactions, which
are transactions denominated in a currency other than the functional currency, are included as a
component of Other nonoperating income (expense), net in the Consolidated Statements of Operations.
The Company recognized net foreign exchange transaction income of $1.1 million for the year ended
June 30, 2011 and a net foreign exchange transaction loss of $2.4 million and $0.6 million for the
years ended June 30, 2010 and 2009, respectively.
Product Sales
The Company recognizes revenue from product sales when evidence of an arrangement exists,
delivery has occurred, the selling price is fixed and determinable, and collectability is
reasonably assured.
The Company requires a written agreement to establish evidence of an arrangement. The written
agreement defines the selling price and other material terms, including those that may have an
impact on revenue, for example rebates and discounts (if applicable). The agreements generally
take the form of a take-or-pay or supply agreement, or a purchase order.
The Company determines product delivery based on the stated shipping terms in the agreement
and on the International Chamber of Commerce Official Rules for the Interpretation of Trade Terms
(Incoterms 2010). The Company primarily sells solar products under Incoterms 2010 ex-works terms,
meaning the right of possession and risk of loss are transferred to the buyer when the Company
places the products at the disposal of the buyer. For these sales, the Company affirmatively
notifies the buyer that the goods are available for the buyers disposal at the named place of
delivery, at which point the Company recognizes the sale. The majority of the remainder of the
Companys products are generally sold under free-on-board (FOB) shipping point terms, meaning
ownership and risk of loss are transferred to the buyer when the products are placed with the
buyers carrier, at which point title transfers to the buyer and the Company recognizes the sale.
The Company regularly reviews its customers financial positions to ensure that collectability
is reasonably assured. Customer acceptance, return policies, post shipment obligations,
warranties, credits and discounts, rebates, price protection and similar privileges have not
resulted in uncertainty that impacts revenue recognition. Sales agreements include ordinary course
of business commercial terms for return of non-conforming goods (which have not historically been
significant). Certain agreements include credits, discounts, rebates or price protection that have
not historically been significant and have not
50
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
required establishment of an accrual. The agreements do not include significant post shipping
obligations. The product sales agreements include a standard warranty, and the Company records a
warranty reserve based upon the Companys past experience and estimate of future warranty claims.
System Sales
The Company accounts for installed solar systems using the percentage of completion method.
Under this method, revenue arising from installed solar systems is recognized as work is performed
based on the percentage of incurred costs to estimated total forecasted costs at completion
utilizing the most recent estimates of forecasted costs. The Company records a receivable for
costs and estimated earnings in excess of billings and a liability for billings in excess of costs
incurred.
For smaller projects of shorter durations, generally three months or less, the Company records
revenue under the completed contract method when the project is complete.
Royalties
Most license agreements provide for the Company to receive royalties from the sale of products
which utilize the licensed technology. Typically, the royalties are incremental to and distinct
from the license fee and are recognized as revenue upon the sale of the respective licensed
product. In several instances, the Company has received cash payments for nonrefundable advance
royalty payments which are creditable against future royalties under the licenses. Advance royalty
payments are deferred and recognized in revenues as the creditable sales occur, the underlying
agreement expires, or when the Company has demonstrable evidence that no additional royalties will
be creditable and, accordingly, the earnings process is completed.
Business Agreements
Revenues are also derived through business agreements for the development and/or
commercialization of products based upon the Companys proprietary technologies. The Company has
two major types of business agreements.
The first type of business agreement relates to licensing the Companys proprietary
technology. Licensing activities are tailored to provide each licensee with the right to use the
Companys technology, most of which is patented, for a specific product application or, in some
instances, for further exploration of new product applications of such technologies. The terms of
such licenses, accordingly, are tailored to address a number of circumstances relating to the use
of such technology which have been negotiated between the Company and the licensee. Such terms
generally address whether the license will be exclusive or nonexclusive, whether the licensee is
limited to very narrowly defined applications or to broader-based product manufacture or sale of
products using such technologies, whether the license will provide royalties for products sold
which employ such licensed technology and how such royalties will be measured, as well as other
factors specific to each negotiated arrangement. In some cases, licenses relate directly to
product development that the Company has undertaken pursuant to product development agreements; in
other cases, they relate to product development and commercialization efforts of the licensee; and
other agreements combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the agreements are
consummated, which is the completion of the earnings process. Typically, such fees are
nonrefundable, do not obligate the Company to incur any future costs or require future performance
by the Company, and are not related to future production or earnings of the licensee. In some
instances, a portion of such
51
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
license fees is contingent upon the commencement of production or other uncertainties. In these cases,
license fee revenues are not recognized until commencement of production or the resolution of
uncertainties. Generally, there are no current or future direct costs associated with license
fees.
In the second type of agreement, product development agreements, the Company conducts
specified product development projects related to one of its principal technology specializations
for an agreed-upon fee. Some of these projects have stipulated performance criteria and
deliverables whereas others require best efforts with no specified performance criteria.
Revenues from product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract revenues to the costs
incurred on a project based on the relationship of costs incurred to estimated total project costs.
Accordingly, expenses related to product development agreements are recorded as cost of revenues
from product development agreements.
Prior to fiscal 2011, revenues from product development agreements, where there are no
specific performance terms, were recognized in amounts equal to the amounts expended on the
programs. Generally, the agreed-upon fees for product development agreements contemplate
reimbursing the Company, after its agreed-upon cost share, if any, for costs considered associated
with project activities including expenses for direct product development and research, patents,
operating, general and administrative expenses and depreciation. In July 2010, the Company began
recording government-funded best efforts research and development cost sharing arrangements as
research and development expense as incurred. The amounts funded by the customer are recognized as
an offset to the aggregate research and development expense rather than as contract revenues.
Other Operating Revenues
Other operating revenues consist principally of revenues related to services provided to
certain related parties and third-party service revenue realized by certain of the Companys
service departments. Revenues related to services are recognized upon completion of performance of
the applicable service.
Deferred Revenues
Deferred revenues represent amounts received under business agreements in excess of amounts
recognized as revenues.
Product Development, Patents and Technology
Product development and research costs are expensed as they are incurred and, as such, the
Companys investments in its technologies and patents are recorded at zero in its financial
statements, regardless of their values. The technology investments are the basis by which the
Company is able to enter into strategic alliances, joint ventures and license agreements.
Preproduction Costs
The Company recognizes in its Consolidated Statements of Operations costs in preparation for
its new manufacturing facilities and equipment as preproduction costs. These costs include
training of new employees, supplies and other costs for the new manufacturing facilities and
equipment in advance of the commencement of manufacturing.
52
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Nonoperating Income (Expense)
Other nonoperating income (expense) consists of gains and losses resulting from foreign
currency transactions, deferred gains, rental income, net losses on sales and valuations of
investments, insurance settlements, and other miscellaneous income and expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in short-term, highly liquid securities
maturing 90 days or less from the date of acquisition. The Company maintains cash balances with
high quality financial institutions and periodically evaluates the creditworthiness of such
institutions. Cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation. The Company had cash equivalents of $9.7 million and $59.4 million at June
30, 2011 and 2010, respectively.
Restricted Cash
In September 2010, the Company entered into a letter of credit facility with JPMorgan Chase
Bank, which requires cash collateral equal to 102% of any exposure under letters of credit issued
under the facility. Such collateral is recorded as Restricted Cash on the Companys Consolidated
Balance Sheets.
In December 2009, the Company entered into guaranty and pledge agreement with JPMorgan Chase
Bank in support of derivative financial instruments used to mitigate foreign currency risk exposure
at certain of its subsidiaries. As part of this agreement, the Company is required to provide cash
collateral equal to JPMorgan Chase Banks counterparty exposure with a minimum cash collateral
balance requirement of $1 million. Such collateral is recorded as Restricted Cash on the
Companys Consolidated Balance Sheets.
As part of the SIT acquisition, the Company acquired restricted cash. In connection with the
structured financing arrangement with GE Commercial Finance Energy Financial Services (GE EFS), a
business unit of General Electric Capital Corporation, SIT was required to deposit a portion of the
proceeds from the borrowings with GE EFS. If necessary, GE EFS may use such amount to offset any
shortfall in payments required from SIT under the structured finance arrangement. In addition,
payments received from customers under sales-type lease agreements are deposited directly into a
restricted bank account. Amounts deposited in the restricted bank account are used to fund the
debt owed under the structured finance arrangements with GE EFS. Upon termination of the
structured finance arrangement any remaining amounts in the restricted cash account will be
transferred to the Company.
Investments
Investments with a maturity of greater than three months to one year from date of acquisition
are classified as short-term investments. Investments with maturities beyond one year may be
classified as short-term if the Company reasonably expects the investment to be realized in cash,
sold or consumed during one year. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported as other comprehensive income as a separate component
of stockholders equity. Trading securities are carried at fair value, with unrealized holding
gains and losses included in Other nonoperating income (expense), net in the Companys
Consolidated Statements of Operations.
53
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Trade accounts receivable are stated net of allowance for uncollectible accounts. When
determining the allowance for uncollectible accounts, the Company evaluates the overall composition
of the accounts receivable by considering a number of factors, including the length of time trade
accounts receivable are past due, trade credit insurance coverage, previous payment and loss
history, the customers current ability to pay its obligation, and our knowledge of the customer
and the customers business. In addition, the Company will provide allowances for potential credit
losses when necessary. Two customers accounted for 11.3% and 11.1% of the total accounts receivable balance
as of June 30, 2011 and one customer accounted for 38.6% of the total accounts receivable balance
as of June 30, 2010.
Inventories
Inventories of raw materials, work in process and finished goods for the manufacture of solar
cells and nickel hydroxide are valued at the lower of cost or market. The Companys cost is
primarily determined on a first-in, first-out basis. Cost elements included in inventory are
materials, direct labor and manufacturing overhead. If the Company determines that its inventories
have become obsolete or are otherwise not saleable, the Company will record a reserve for such
loss. Unabsorbed fixed costs are calculated based on a formula of factory nameplate capacity and
are expensed as a component of cost of sales in the period incurred.
Property, Plant, and Equipment
All property, plant and equipment are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual assets as follows:
|
|
|
|
|
Years |
|
|
|
Buildings and improvements*
|
|
1 to 33 |
Machinery and other equipment
|
|
3 to 12.5 |
Assets under capitalized leases
|
|
3 to 20 |
|
|
|
* |
|
Includes leasehold improvements which are amortized
over the shorter of the balance of the lease term or the
life of the improvement, ranging from one to 20 years. |
Costs of machinery and other equipment acquired or constructed for a particular product
development project, which have no alternative future use (in other product development projects or
otherwise), are charged to product development and research costs as incurred.
Assets under capitalized leases are amortized over the term of the lease, usually three to 20
years.
Expenditures for maintenance and repairs are expensed as incurred. Expenditures for
enhancements or major renewals are capitalized and are depreciated over their estimated useful
lives. When assets are sold or otherwise retired, the cost and accumulated depreciation are
removed from the ledgers and the resulting gain or loss is separately disclosed and is included in
operating income (loss).
The Company periodically evaluates the carrying value of the long-lived assets held for use
whenever events or changes in circumstances indicate that the carrying value of those assets may
not be recoverable. Upon the identification of an event indicating potential impairment, the
Company compares the carrying value of its long-lived assets with the estimated undiscounted cash flows or fair
value
54
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
associated with these assets. If the carrying value of the long-lived assets is more than
the estimated undiscounted cash flows or fair value, then an impairment loss is recorded. The
impairment review is generally triggered when events such as a significant industry downturn,
product discontinuance, facility closures, product dispositions, or technological obsolescence
occur.
Capitalized Interest
Interest is capitalized during periods of active equipment construction. During the years
ended June 30, 2011, 2010 and 2009, the Company incurred total interest costs of $27.4 million,
$29.3 million and $15.1 million, respectively, of which $2.0 million, $0.6 million and $3.5
million, respectively, were capitalized.
Warranty Reserve
The Company generally provides a five-year product warranty on workmanship and a 20-25 year
product warranty on power output on all solar product sales. When the Company recognizes revenue
for product sales, it accrues a liability for the estimated costs of meeting its warranty
obligations for those products. The Company estimates its warranty liability based on past
experience of specific individual claims and claims paid as well as the Companys engineering and
laboratory tests of its product under different conditions.
For installed solar systems, the Company generally provides a 5-10 year workmanship warranty
in addition to the applicable standard product warranty. Reserves for warranty costs are
recognized at the date of sale of the relevant products, at managements best estimate of the
expenditure required to settle the liability, taking into account the specific arrangements of the
transaction and past experience.
Asset Retirement Obligations
The Company recognizes the fair value of a liability for an asset retirement obligation in the
period when a reasonable estimate of fair value can be made. The associated asset retirement cost
is capitalized as an asset and recognized as expense over the remaining useful life of the asset.
The Company has recognized asset retirement obligations related to certain leased facilities which
are near the end of their lease term and require the Company to return the facilities back to their
original states at the end of the leases.
Income Taxes
The Company accounts for income taxes under the asset and liability method which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements. Under this method, deferred tax assets
and liabilities are determined based on the temporary difference between the tax bases of assets
and liabilities and their reported amounts in the financial statements, using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
The Company records net deferred tax assets to the extent it believes that the realization of
such assets is more likely than not to occur. In making such determination, the Company considers
all available evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial operations. In the
event the Company were to determine that it would be able to realize its deferred income tax assets
in the future in excess of the net
55
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded amount, it would make an adjustment to the valuation allowance which would reduce the
provision for income taxes or goodwill to the extent that the valuation allowance was established
in purchase accounting.
Derivative Instruments
The Company primarily enters into derivative financial instruments to manage its foreign
currency risks. The Company accounts for these instruments in accordance with Financial Accounting
Standards Board Accounting Standards Codification (FASB ASC) Topic 815 Derivatives and Hedging
(ASC 815) which requires companies to recognize derivatives as either assets or liabilities in
the balance sheet at fair value. For derivative instruments that qualify as a hedge, the effective
portion of changes in the fair value is recorded in accumulated other comprehensive income (loss).
Any ineffective portion of the change in fair value is recognized in current earnings.
Recent Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04 which clarifies the
requirements for measuring fair value and for disclosing information about fair value measurements,
including a consistent meaning of the term Fair Value. ASU 2011-04 is effective prospectively
for the Companys interim reporting period beginning after December 15, 2011. The Company does not
believe the adoption of ASU 2011-04 will have a material impact on the Companys financial
position, results of operations or cash flows.
In June 2011, FASB issued ASU 2011-05 that amends the reporting requirements for comprehensive
income. The new requirements are intended to increase the prominence of other comprehensive income
and its components. This guidance requires a reporting entity to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. This update eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders equity. ASU 2011-05 is
effective retroactively for the Companys interim reporting periods beginning after December 15,
2011. The Company does not believe the adoption of ASU 2011-05 will have a material impact on the
Companys financial position, results of operations or cash flows.
Recently Adopted Accounting Pronouncements
On October 1, 2010, the Company adopted the provisions of the FASB ASU 2010-20, Disclosures
About the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU
2010-20), which amends Accounting Standards Codification (ASC) Topic 310 Receivables (ASC
310) by requiring more robust and disaggregated disclosures about the credit quality of an
entitys financing receivables and its allowance for credit losses. The objective of enhancing
these disclosures is to improve the understanding of (1) the nature of an entitys credit risk
associated with its financing receivables and (2) the entitys assessment of that risk in
estimating its allowance for credit losses as well as changes in the allowance and reasons for
those changes. The adoption of ASC 310 did not have a material effect on the Companys
consolidated financial statements.
On July 1, 2010, the Company adopted the provisions of the FASB ASC, which amends Topic 810
Consolidations (ASC 810) to change the consolidation guidance applicable to a variable interest
entity (VIE). It also amends the guidance governing the determination of whether an enterprise
is the primary beneficiary of a VIE (and is therefore required to consolidate the VIE), by
requiring a qualitative
56
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
analysis rather than a quantitative analysis. The qualitative analysis
includes, among other things, consideration of which enterprise has the power to direct the activities of the entity that
most significantly impact the entitys economic performance and which enterprise has the obligation
to absorb losses or the right to receive benefits of the VIE that could potentially be significant
to the VIE. This standard also requires continuous reassessments of whether an enterprise is the
primary beneficiary of a VIE. Previously, reconsideration of whether an enterprise was the primary
beneficiary of a VIE only was required when specific events had occurred. Qualifying special
purpose entities, which were previously exempt from the application of this standard, are subject
to the provisions of this standard when it becomes effective. ASC 810 also requires enhanced
disclosures about an enterprises involvement with a VIE. ASC 810 is effective as of the beginning
of the Companys first annual reporting period that begins after November 15, 2009. The adoption
of ASC 810 did not have a material effect on the Companys consolidated financial statements.
On July 1, 2010, the Company adopted FASB ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a Consensus of the FASB Emerging Issues Task Force
(ASU 2009-13), which amends ASC Subtopic 605-25 for separate consideration in
multiple-deliverable arrangements. ASU 2009-13 eliminates the use of the residual method for
allocating consideration, as well as the criteria that requires objective and reliable evidence of
fair value of undelivered elements in order to separate the elements in a multiple-element
arrangement. The delivered element(s) will be considered a separate unit of accounting only if
both of the following criteria are met: (i) the delivered item(s) has stand-alone value to the
customer and (ii) if a general right of return exists relative to the delivered item(s), delivery
or performance of the undelivered item(s) is substantially in the control of the vendor and is
considered probable. ASU 2009-13 is effective for fiscal years beginning on or after June 15,
2010. The adoption of ASU 2009-13 did not have any impact on the Companys consolidated financial
statements.
On July 1, 2010, the Company adopted FASB ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASU 2009-15),
which amends ASC 470-20 clarifying that share lending arrangements that are executed in connection
with convertible debt offerings or other financings should be measured at fair value and recognized
as a debt issuance cost which is amortized using the effective interest method over the life of the
financing arrangement as interest cost. In addition, ASU 2009-15 states that the loaned shares
should be excluded from basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the common and diluted
earnings per share calculation. The amended provisions of ASC 470-20 is effective for all
arrangements outstanding as of the fiscal year beginning on or after December 15, 2009, and
retrospective application is required for all periods presented. In addition, ASC 470-20 is
effective for arrangements entered into on or after the beginning of the first reporting period
that begins on or after June 15, 2009.
On July 1, 2009, the Company adopted the provisions of FASB ASC Subtopic 470-20, Debt with
Conversion and Other Options (ASC 470-20), which requires issuers of convertible debt securities
within its scope to recognize both the liability and equity components of convertible debt
instruments with cash settlement features. The debt component is required to be recognized at the
fair value of a similar instrument that does not have an associated equity component. The equity
component is recognized as the difference between the proceeds from issuance of the convertible
debt and the fair value of the liability, after adjusting for the deferred tax impact. ASC 470-20
also requires an accretion of the resulting debt discount over the expected life of the convertible
debt. ASC 470-20 is required to be applied retrospectively to prior periods presented, and
accordingly, the Statement of Operations and Statement of Cash Flows for the year ended June 30,
2009 have been adjusted to reflect its adoption.
57
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following tables summarize the effect of adopting ASC 470-20 for Own-Share Lending
Arrangements in Contemplation of Convertible Debt issuance or Other
Financing for the year ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations |
|
|
|
for the Year Ended June 30, 2010 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
ASC 470-20 |
|
|
As Reported |
|
|
|
(in thousands, except per share amounts) |
|
Interest expense |
|
$ |
(27,510 |
) |
|
$ |
(1,166 |
) |
|
$ |
(28,676 |
) |
Total Other Income (Expense) |
|
|
(22,897 |
) |
|
|
(1,166 |
) |
|
|
(24,063 |
) |
Loss before Income Taxes
and Equity Loss |
|
|
(457,998 |
) |
|
|
(1,166 |
) |
|
|
(459,164 |
) |
Loss before Equity Loss |
|
|
(455,750 |
) |
|
|
(1,166 |
) |
|
|
(456,916 |
) |
Net Loss |
|
|
(456,009 |
) |
|
|
(1,166 |
) |
|
|
(457,175 |
) |
Net loss attributable to
ECD Stockholders |
|
|
(455,896 |
) |
|
|
(1,166 |
) |
|
|
(457,062 |
) |
Loss per share |
|
|
(10.72 |
) |
|
|
(0.03 |
) |
|
|
(10.75 |
) |
Diluted loss per share |
|
|
(10.72 |
) |
|
|
(0.03 |
) |
|
|
(10.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet as of |
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
ASC 470-20 |
|
|
As Reported |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Other assets |
|
$ |
10,980 |
|
|
$ |
3,626 |
|
|
$ |
14,606 |
|
Total assets |
|
|
688,321 |
|
|
|
3,626 |
|
|
|
691,947 |
|
Additional paid-in capital |
|
|
1,074,410 |
|
|
|
5,500 |
|
|
|
1,079,910 |
|
Accumulated deficit |
|
|
(772,514 |
) |
|
|
(1,874 |
) |
|
|
(774,388 |
) |
Total ECD stockholders equity |
|
|
298,112 |
|
|
|
3,626 |
|
|
|
301,738 |
|
Total stockholders equity |
|
|
297,999 |
|
|
|
3,626 |
|
|
|
301,625 |
|
Total liabilities and stockholders equity |
|
|
688,321 |
|
|
|
3,626 |
|
|
|
691,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows |
|
|
|
for the Year Ended June 30, 2010 |
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
ASC 470-20 |
|
|
As Reported |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net loss |
|
$ |
(456,009 |
) |
|
$ |
(1,166 |
) |
|
$ |
(457,175 |
) |
Amortization of debt
discount and deferred
financing fees |
|
|
15,991 |
|
|
|
1,166 |
|
|
|
17,157 |
|
58
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the effects of adopting ASC 470-20 for Debt with Conversion and
Other Options and ASC 470-20 for Own-Share Lending Arrangements in Contemplation of Convertible Debt issuance or Other Financing for the year ended June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations for the |
|
|
|
|
|
|
|
Year Ended June 30, 2009 |
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
ASC 470-20 |
|
|
As Reported |
|
|
|
(in thousands, except per share amounts) |
|
Cost of product sales |
|
$ |
208,285 |
|
|
$ |
90 |
|
|
$ |
208,375 |
|
Total Expense |
|
|
295,607 |
|
|
|
90 |
|
|
|
295,697 |
|
Operating income |
|
|
20,686 |
|
|
|
(90 |
) |
|
|
20,596 |
|
Interest expense |
|
|
(10,863 |
) |
|
|
(4,527 |
) |
|
|
(15,390 |
) |
Total other expense |
|
|
(6,755 |
) |
|
|
(4,527 |
) |
|
|
(11,282 |
) |
Net income before income taxes |
|
|
13,931 |
|
|
|
(4,617 |
) |
|
|
9,314 |
|
Net income |
|
|
12,456 |
|
|
|
(4,617 |
) |
|
|
7,839 |
|
Earnings per share |
|
|
0.29 |
|
|
|
(0.10 |
) |
|
|
0.19 |
|
Diluted earnings per share |
|
|
0.29 |
|
|
|
(0.11 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows for the |
|
|
|
|
|
|
|
Year Ended June 30, 2009 |
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
ASC 470-20 |
|
|
As Reported |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net income |
|
$ |
12,456 |
|
|
$ |
(4,617 |
) |
|
$ |
7,839 |
|
Depreciation and amortization |
|
|
33,515 |
|
|
|
90 |
|
|
|
33,605 |
|
Amortization of debt discount
and deferred financing fees |
|
|
|
|
|
|
15,380 |
|
|
|
15,380 |
|
On July 1, 2009, the Company adopted the provisions of FASB ASC 805, Business Combinations,
(ASC 805) which retains the fundamental requirements in that the acquisition method of accounting
(which previously was called the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. ASC 805 requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree at
the acquisition date, measured at their fair values as of that date, with limited exceptions. ASC
805 retains the guidance for identifying and recognizing intangible assets separately from goodwill
and applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008. The
Company applied the provisions of ASC 805 when it acquired SIT on August 19, 2009.
Note 2 Liquidity and Continued Listing Requirements
We have reported cash and cash equivalents and short-term investments of $130.7 million as of
June 30, 2011. We reported losses from operations of $288.1 million and $435.1 million
(includes non-cash impairment losses of $228.8 million and $359.2 million), respectively, while
reporting a decrease in cash and cash equivalents and short-term
investments of $62.2 million and $108.6 million, respectively,
for the years ended June 30, 2011 and 2010.
59
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has taken actions to better align operating expenses to near-term revenue
expectations and we believe that cash, cash equivalents and short-term investments will be
sufficient to meet our liquidity needs for our current operations and planned capital expenditures
during the fiscal year ended 2012.
The Company is subject to risks common in the high technology and emerging energy industries
including increased competition, reduced selling prices for solar energy, continued ability to
research and develop our products and manufacturing technologies and reliance on government
regulations to provide incentives for alternative energy solutions, including our products, as well
as risks associated with the economies in our target markets. Changes to the Companys business
plan to respond to these and other potential risks could result in decreased sales or increased
costs and changes in production requirements, which could impact business operations. The Company
will continually monitor its operating results against the plan and, if required, further restrict
operating costs and capital expenditures and take other actions as required to enable it to meet
its cash needs for continued operations. If we do not achieve our business plan or we are not
successful in responding to changes in the external environment, our results of operations,
financial condition and cash flows could be materially adversely affected.
The Companys outstanding Senior Convertible Notes (Notes) do not come due until June 15,
2013. The Company may consider various financing or refinancing options for the Notes before June
15, 2013. If these options are not successful, there is no assurance that sufficient cash will be
generated from operations to enable the Company to repay this debt when it comes due.
Our common stock is currently listed for trading on the NASDAQ Global Select Market. The
continued listing of our common stock is subject to the satisfaction of certain ongoing conditions
pertaining to our financial performance and marketability of our stock, including the requirement
that the minimum bid price of our common stock equal or exceed $1.00 at least once over any period
of 30 consecutive trading days. The trading price of our stock is affected by numerous market
factors apart from our financial performance and prospects that make it difficult to predict future
stock prices. As of August 19, 2011, our common stock last exceeded the minimum bid requirement on
August 2, 2011. If we are unable to meet the minimum bid price requirement, NASDAQ would promptly
notify us of such deficiency and we generally would have a 180-day period to meet this requirement
before our stock could be suspended from trading or delisted, although such period may be extended
for appeals and, in the discretion of NASDAQ, for an additional compliance period of up to 180
days. During the 180-day compliance period, we would regain compliance with this listing standard
if the minimum bid price exceeds $1.00 for 10 consecutive trading days (which may be extended to no
more than 20 consecutive trading days at the election of NASDAQ staff). In addition, during any
such period or any extension granted by NASDAQ we could seek to regain compliance with the minimum
bid price requirement by obtaining shareholder approval of a reverse stock split. Due to the
NASDAQ procedures and other methods of regaining compliance with the minimum bid criteria that are
described above, we do not presently expect non-compliance with the minimum bid criteria to cause
our common stock to be delisted. However, there can be no assurance that we will be able to
maintain compliance with the minimum conditions for continued listing. If our common stock ceases
to be listed on the NASDAQ Global Select Market and is not listed on another U.S. national
securities exchange, such event would constitute a fundamental change under the terms of our Notes.
In the event of such a fundamental change, the holders of the Notes would have the right to
require us to repurchase their Notes within 35 days, which would have a material adverse effect on
our liquidity. There is no assurance that additional sources of liquidity to repay the notes can
be obtained on terms acceptable to the Company, or at all. If we were unable to repurchase Notes
under such circumstances, we would be in default under our indenture.
60
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 Earnings (Loss) Per Share
Basic earnings (loss) per common share attributable to ECD stockholders is computed by
dividing the net income (loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share attributable to ECD stockholders reflect the potential
dilution that could occur if securities or other contracts to issue common stock were exercised and
converted into common stock or resulted in the issuance of common stock that then shared in the net
income (loss) attributable to ECD stockholders. The following table reconciles the numerator and
denominator to calculate basic and diluted earnings (loss) per share attributable to ECD
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
|
|
|
|
|
|
Attributable to ECD |
|
|
|
|
|
Earnings |
|
|
Stockholders |
|
Shares |
|
(Loss) Per |
|
|
(Numerator) |
|
(Denominator) |
|
Share |
|
|
(in thousands, except per share amounts) |
Year Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
(306,072 |
) |
|
|
47,827 |
|
|
$ |
(6.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted(1) |
|
$ |
(457,062 |
) |
|
|
42,533 |
|
|
$ |
(10.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1) |
|
$ |
7,839 |
|
|
|
42,277 |
|
|
$ |
0.19 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants |
|
|
|
|
|
|
133 |
|
|
|
|
|
Stock options |
|
|
|
|
|
|
301 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted(1) |
|
$ |
7,839 |
|
|
|
42,711 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As adjusted due to the implementation of FASB 470-20. |
As part of the agreement for the Convertible Senior Notes (Notes) issued in June 2008,
the Company also issued 3,444,975 shares as part of a share-lending agreement with the underwriter.
The purpose of the share-lending agreement is to facilitate transactions which allow the investors
in the Notes to hedge their investments in the Notes.
The underwriter received all proceeds from any sale of shares pursuant to the share-lending
agreement. The shares must be returned to the Company no later than the maturity date of the
Notes. These shares are considered issued and outstanding and have all the rights of any holder of
the Companys common stock. However, because the shares must be returned to the Company, the
shares are not considered outstanding for purposes of calculating earnings per share.
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Companys common stock, the price of the Notes, and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, with respect to any amounts in excess of the principal amount, if
applicable, shares of the Companys common
stock initially at a conversion rate of 10.8932 shares (equivalent to an initial conversion
price of
61
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $91.80 per share) per $1,000 principal amount of the Notes. The holders of
the Notes are only entitled to amounts in excess of the principal amount if shares of the Companys
common stock exceed a market price of $91.80 for a period of 20 consecutive trading days during the
applicable cash settlement averaging period. (See Note 15, Long-Term Debt, for additional
information.) During the years ended June 30, 2011 and 2010, the Companys common stock price did
not exceed the conversion price. Therefore, there are no contingently issuable shares to include
in the diluted earnings-per-share calculation.
The following securities would have had an anti-dilutive effect on earnings per share and are
therefore excluded from the computations above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
|
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
(in thousands) |
|
|
Share-based payment arrangements
|
|
|
1,451 |
|
|
|
1,089 |
|
|
160 |
Note 4 Supplemental Cash Flow Information
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, including capitalized interest |
|
$ |
10,661 |
|
|
$ |
11,833 |
|
|
$ |
11,605 |
|
Cash paid for income taxes |
|
|
548 |
|
|
|
342 |
|
|
|
809 |
|
Increase (decrease) in accounts payable for capital expenditures |
|
|
(10,094 |
) |
|
|
6,989 |
|
|
|
(4,439 |
) |
Non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities rights |
|
|
|
|
|
|
|
|
|
|
3,938 |
|
Note 5 Acquisition
On August 19, 2009, the Company acquired 100% of the outstanding common shares of SIT, a Los
Angeles-based company that manufactures, designs and installs building integrated photovoltaic
roofing systems for commercial rooftops.
The Company paid 6.75 pence per share, or approximately $11.3 million cash consideration for
all of outstanding shares of SIT. The Company also recognized a gain of $0.4 million due to the
effective settlement of the Companys and SITs preexisting contractual supply relationship. The
gain was determined using a discounted cash flow analysis and was recorded in Selling, general and
administrative expenses in the Companys Consolidated Statements of Operations. The Company
incurred $3.0 million of acquisition-related costs during the year ended June 30, 2010 which are
included in Selling, general and administrative expenses in the Companys Consolidated Statements
of Operations.
Purchase Price Allocation
The following table summarizes the final amounts of assets acquired and liabilities assumed
recognized at the acquisition date:
62
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
(in thousands) |
|
Cash |
|
$ |
9,180 |
|
Accounts receivable |
|
|
9,962 |
|
Inventory |
|
|
24,031 |
|
Other current assets |
|
|
2,372 |
|
Long-term receivables |
|
|
11,769 |
|
Property, plant and equipment |
|
|
2,030 |
|
Other long-term assets |
|
|
2,010 |
|
Identifiable intangible assets |
|
|
2,780 |
|
Goodwill |
|
|
35,299 |
|
Warranty liability |
|
|
(38,548 |
) |
Current liabilities |
|
|
(27,293 |
) |
Long-term liabilities |
|
|
(21,913 |
) |
|
|
|
|
Total net assets acquired |
|
$ |
11,679 |
|
|
|
|
|
The fair value of the accounts receivable acquired was $10.0 million. The gross contractual
amount due is $10.0 million, of which an insignificant amount is expected to be uncollectible. In
addition, sales-type lease receivables with a fair value of $12.7 million were acquired. The gross
contractual amount due is $18.8 million. A liability of $38.5 million has been recognized for
estimated warranty claims on products sold by SIT.
Results of operations for SIT are included in the Companys consolidated financial statements
beginning August 19, 2009. The unaudited pro forma combined historical results for the amounts of
SITs revenue and earnings that would have been included in the Companys Consolidated Statements
of Operations had the acquisition date been July 1, 2009 or July 1, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 30, |
|
|
|
2010(1) |
|
|
2009(1) |
|
|
|
(in thousands) |
|
Actual Amounts |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
43,916 |
|
|
|
N/A |
|
Net loss attributable to ECD stockholders |
|
|
(57,821 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Pro Forma Information |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
259,310 |
|
|
$ |
358,154 |
|
Net (loss) income attributable to ECD
stockholders |
|
|
(460,729 |
) |
|
|
(42,843 |
) |
(Loss) earnings per share |
|
|
(10.83 |
) |
|
|
(1.01 |
) |
Diluted (loss) earnings per share |
|
|
(10.83 |
) |
|
|
(1.00 |
) |
|
|
|
(1) |
|
As adjusted due to the implementation of FASB ASC 470-20. |
The pro forma information includes adjustments for depreciation and the effect of the
amortization of intangible assets recognized in the acquisition, along with intercompany
elimination entries. This pro forma information is not necessarily indicative of future operating
results.
Goodwill
The goodwill of approximately $35.3 million arising from the SIT acquisition consisted largely
of the synergies and economies of scale from combining the operations of the Company and SIT. All
of the goodwill has been allocated to the Companys United Solar Ovonic Segment. It is estimated
that none of
63
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the goodwill recognized will be deductible for income tax purposes. The changes in goodwill
are as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Balance at June 30, 2009 |
|
$ |
|
|
SIT acquisition |
|
|
35,299 |
|
Foreign currency impact |
|
|
54 |
|
Impairment loss |
|
|
(35,353 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
|
|
|
|
|
|
See Note 17, Impairment Loss, for additional information regarding the goodwill impairment.
Intangible Assets
In conjunction with the SIT acquisition, intangible assets with a fair value of $2.8 million
were recorded including trade name intangible assets with an indefinite life of $1.1 million.
Amortization expense was $0.5 million for the year ended June 30, 2010.
See Note 17, Impairment Loss, for additional information regarding the intangible asset
impairment. Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
Impairment |
|
|
|
|
|
|
Value |
|
|
Amortization |
|
|
Loss |
|
|
Net Value |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Customer contracts |
|
$ |
842 |
|
|
$ |
(379 |
) |
|
$ |
(463 |
) |
|
$ |
|
|
Proprietary
processes |
|
|
190 |
|
|
|
(13 |
) |
|
|
(177 |
) |
|
|
|
|
Order backlog |
|
|
276 |
|
|
|
(129 |
) |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,308 |
|
|
$ |
(521 |
) |
|
$ |
(787 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Investments
Short-Term Investments
The following schedule summarizes the unrealized gains and losses on the Companys short-term
investments:
64
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
102,730 |
|
|
$ |
223 |
|
|
$ |
(1,028 |
) |
|
$ |
101,925 |
|
U.S. government securities |
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,731 |
|
|
$ |
223 |
|
|
$ |
(1,028 |
) |
|
$ |
102,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
89,935 |
|
|
$ |
5 |
|
|
$ |
(1,377 |
) |
|
$ |
88,563 |
|
U.S. government securities |
|
|
11,001 |
|
|
|
4 |
|
|
|
|
|
|
|
11,005 |
|
Auction rate certificates |
|
|
14,200 |
|
|
|
|
|
|
|
(1,731 |
) |
|
|
12,469 |
|
Auction rate securities rights |
|
|
|
|
|
|
1,734 |
|
|
|
|
|
|
|
1,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,136 |
|
|
$ |
1,743 |
|
|
$ |
(3,108 |
) |
|
$ |
113,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes the contractual maturities of the Companys short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
|
|
Cost |
|
|
value |
|
|
Cost |
|
|
Value |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Due in less than one year |
|
$ |
68,091 |
|
|
$ |
67,260 |
|
|
$ |
38,586 |
|
|
$ |
39,189 |
|
Due after one year
through five years |
|
|
35,640 |
|
|
|
35,666 |
|
|
|
76,550 |
|
|
|
74,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,731 |
|
|
$ |
102,926 |
|
|
$ |
115,136 |
|
|
$ |
113,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The corporate bonds and U.S. government securities are classified as available for
sale. On June 30, 2010, the Company elected its right to sell the remaining auction rate
certificates and liquidate its auction rate securities rights. These transactions settled in July
2010.
65
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Accounts Receivable
Accounts Receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Billed |
|
|
|
|
|
|
|
|
Trade |
|
$ |
33,715 |
|
|
$ |
62,796 |
|
Related parties |
|
|
|
|
|
|
269 |
|
Other |
|
|
198 |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
33,913 |
|
|
|
64,498 |
|
Unbilled |
|
|
|
|
|
|
|
|
Royalties under license agreements |
|
|
4,646 |
|
|
|
4,557 |
|
Government contracts |
|
|
208 |
|
|
|
1,179 |
|
Government grants |
|
|
2,480 |
|
|
|
1,866 |
|
Related parties |
|
|
2 |
|
|
|
24 |
|
Other |
|
|
1,838 |
|
|
|
1,660 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
9,174 |
|
|
|
9,286 |
|
Less allowance for uncollectible accounts |
|
|
(3,934 |
) |
|
|
(1,763 |
) |
|
|
|
|
|
|
|
|
|
$ |
39,153 |
|
|
$ |
72,021 |
|
|
|
|
|
|
|
|
Unbilled receivables represent amounts for goods sold or services performed for the end
customer that have not been invoiced as of the balance sheet date. Royalties under license
agreements represent current estimated royalties earned but not yet received under long-term
license agreements (up to 20 years). Amounts due under government contracts represent current
estimated earnings not yet received under long-term government contracts (three to five years).
Amounts due under government grants represent current estimated earnings not yet received under
long-term government grants which span several years. Other unbilled receivables represent
interest and insurance claim receivables. All unbilled receivables are billed and received within
12 months of the balance sheet date.
Note 8 Sales-Type Lease Receivables
In conjunction with the SIT acquisition, the Company acquired sales-type lease receivables.
In 2005 and 2006, SIT entered into Energy Services Agreements whereby customers agreed to pay SIT,
on a monthly basis over a 20-year period, for the electricity generated from the BIPV roofing
systems installed on their buildings. The customers pay for the energy produced by solar systems
at a rate specified in each contract. SIT recorded a lease receivable to reflect the future stream
of energy services payments from customers over the 20-year period.
Sales-type lease receivables consisted of the following:
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
(in thousands) |
|
Total minimum lease payments receivable |
|
$ |
17,002 |
|
Less: Unearned income |
|
|
(6,005 |
) |
|
|
|
|
Net investment in sales-type leases |
|
$ |
10,997 |
|
|
|
|
|
66
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Executory costs included in total minimum lease payments were not significant. In addition,
no value was assigned to the estimated residual value of the leased equipment due to the 20-year
lease term. Future minimum receivables under all noncancelable sales-type leases as of June 30,
2011 are as follows:
|
|
|
|
|
Fiscal Year |
|
(in thousands) |
|
2012 |
|
$ |
1,013 |
|
2013 |
|
|
1,034 |
|
2014 |
|
|
1,054 |
|
2015 |
|
|
1,075 |
|
2016 |
|
|
1,096 |
|
Thereafter |
|
|
11,571 |
|
|
|
|
|
|
|
$ |
16,843 |
|
|
|
|
|
Note 9 Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Finished products |
|
$ |
40,429 |
|
|
$ |
27,690 |
|
Work in process |
|
|
17,578 |
|
|
|
13,905 |
|
Raw materials |
|
|
10,492 |
|
|
|
19,900 |
|
|
|
|
|
|
|
|
|
|
$ |
68,499 |
|
|
$ |
61,495 |
|
|
|
|
|
|
|
|
Substantially all of the Companys inventories are included in its United Solar Ovonic
Segment. The above amounts are net of inventory reserves of $11.8 million and $15.9 million as of
June 30, 2011 and 2010, respectively.
Note 10 Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Machinery and equipment |
|
$ |
41,143 |
|
|
$ |
187,546 |
|
Machinery and equipment under capital leases |
|
|
261 |
|
|
|
305 |
|
Buildings and improvements |
|
|
15,892 |
|
|
|
36,175 |
|
Buildings under capital leases |
|
|
9,146 |
|
|
|
16,880 |
|
Land |
|
|
1,260 |
|
|
|
1,260 |
|
Construction in progress |
|
|
40,101 |
|
|
|
122,276 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
107,803 |
|
|
|
364,442 |
|
Less accumulated depreciation and amortization |
|
|
(16,528 |
) |
|
|
(63,386 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
91,275 |
|
|
$ |
301,056 |
|
|
|
|
|
|
|
|
Certain prior-period amounts have been reclassified to conform to the current period
presentation.
67
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated amortization on assets under capital leases as of June 30, 2011 and 2010 was $0.9
million and $6.7 million, respectively.
See Note 17, Impairment Loss, for additional information regarding the property, plant and
equipment impairment.
Note 11 Investments in Affiliates
Ovonyx, Inc.
Ovonyx, Inc. (Ovonyx) was formed in 1999 as a joint venture between the Company, Mr. Tyler
Lowrey, Intel Capital, and other investors and the Company currently has a 38.6% ownership (or
33.3% on a fully diluted basis after giving effect to the potential exercise of stock options and
warrants). Ovonyx was formed to commercialize the Companys Ovonic Universal Memory (OUM)
technology through licensing and product development arrangements. OUM is a type of nonvolatile
memory that can replace conventional nonvolatile or FLASH memory in applications requiring
retention of stored data when power is turned off. As part of this joint venture arrangement, the
Company has licensed all OUM and Ovonic Threshold Switch (OTS) technology to Ovonyx on an
exclusive, worldwide basis and contributed intellectual property, licenses, production processes
and know-how. The Company has made cash investments of $1.5 million for the ownership interest.
The Company initially applied the equity method of accounting for its investment in Ovonyx. The
Company discontinued applying the equity method of accounting as the Company had written down its
investment to zero as its respective share of the losses of this joint venture exceeded its
investment and the Company has not guaranteed any obligations or committed to provide financial
support to Ovonyx.
In addition to its equity interest, the Company also receives 0.5% of the Ovonyx annual gross
revenues which it recognizes as royalty revenue. Royalty revenue was insignificant for each of the
years ended June 30, 2011, 2010 and 2009.
The Company recorded non-royalty revenue from Ovonyx of $0.1 million for the year ended June
30, 2011 and $0.2 million for each of the years ended June 30, 2010 and 2009, representing services
provided to this joint venture.
United Solar Ovonic Jinneng Limited
United Solar Ovonic Jinneng Limited (USO Jinneng or the entity) was formed in September
2008 as a joint venture between United Solar Ovonic LLC (USO) and Tianjin Jinneng Investment Co.
(TJIC) and gave the Company a 25% equity interest. The entity was organized under the laws of
the Peoples Republic of China (PRC) to manufacture solar products in China for sale in the
Chinese market using solar cells purchased from, and technology licensed by, USO. TJIC owns the
other 75% equity interest and has the right to appoint a majority of the entitys board of
directors. Profits and losses of the joint venture will be allocated based on the parties
respective ownership percentages. The Companys equity interest can be increased up to 51% if
sales of 10MW of PV modules in the PRC for a full fiscal year are achieved. Such an increase would
also require additional capital contributions and loan guarantees. The Company has not decided if
it will increase its ownership percentage. Currently the Company has no additional funding
requirements under the agreement. During the year ended June 30, 2009, the Company made initial
cash investments totaling $1.0 million to the joint venture and provided $1.5 million in value in
the form of royalty-free license technology for which no investment was recorded. The joint
venture commenced operations in the fourth quarter of fiscal year 2010. The Company applies the
equity method of accounting for this investment and recognized a loss of $0.1
68
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million, $0.3 million and an insignificant amount for the years ended June 30, 2011, 2010 and 2009,
respectively. Sales from USO to USO Jinneng were $3.4 million, $2.8 million and $0.1 million for
the years ended June 30, 2011, 2010 and 2009, respectively.
Note 12 Liabilities
Warranty Liability
The following is a summary of the changes in the product warranty liability during the year
ended June 30, 2011:
|
|
|
|
|
|
|
(in thousands) |
|
Liability at June 30, 2010 |
|
$ |
41,335 |
|
Warranty expense |
|
|
4,322 |
|
Warranty claims |
|
|
(9,210 |
) |
Foreign currency impact |
|
|
1,533 |
|
|
|
|
|
Liability at June 30, 2011 |
|
$ |
37,980 |
|
|
|
|
|
Government Contracts, Reserves and Liabilities
The Companys contracts with the U.S. government and its agencies are subject to audits by the
Defense Contract Audit Agency (DCAA). DCAA has audited the Companys contracts, specifically its
indirect rates, including its methodology of computing these rates, for the years through June 30,
2004. In its reports, DCAA challenged the allowability and the allocability of certain costs to
its indirect cost pools and in fiscal 2011 the Company settled these matters. The Company has a
reserve of $0.6 million and $1.0 million at June 30, 2011 and 2010, respectively, for its estimated
obligation for these contracts and is included in Accounts payable and accrued expenses in the
Companys Consolidated Balance Sheets.
Other Long-Term Liabilities
A summary of the Companys other long-term liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Structured financing |
|
$ |
12,140 |
|
|
$ |
12,929 |
|
Long-term retirement |
|
|
1,420 |
|
|
|
1,663 |
|
Customer deposits |
|
|
|
|
|
|
120 |
|
Deferred patent license fees |
|
|
2,381 |
|
|
|
3,333 |
|
Deferred revenue and royalties |
|
|
297 |
|
|
|
297 |
|
Rent payable |
|
|
826 |
|
|
|
1,145 |
|
Other |
|
|
286 |
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
$ |
17,350 |
|
|
$ |
19,872 |
|
|
|
|
|
|
|
|
See Note 15, Long-Term Debt, for additional information about the structured financing
liability.
Long-Term Retirement
Pursuant to agreements between the Company and two former employees, the Company is obligated
to pay the former employees periodic payments for the remainder of their lives. The total amount
of
69
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments due is based on the periodic payments and their life expectancy applying mortality
tables in effect at the time of their retirement. The liability is then discounted to a present
value using an AA-rated bond that most closely represents the remaining life expectancy of the
former employees.
Note 13 Employee Benefit Plans
The Company has a qualified 401(k) Plan for substantially all U.S. employees of the Company.
The Company contributions are voluntary and established as a percentage of each participants
salary up to a certain amount per employee. Historically, the Company matched participants
contributions at a rate of 100% of the first 3% of the participants compensation and 50% of the
next 2% of the participants compensation. The Companys matching contributions to the 401(k) Plan
were $0.9 million and $1.6 million for the years ended June 30, 2010, and 2009, respectively. In
March 2010, the Company suspended matching contributions for all employees.
Note 14 Derivative and Hedging Activities
The Company is exposed in the normal course of business to foreign currency risks that affect
the Companys assets, financial position, results of operations and cash flows. The primary
exposure to foreign currency risk is forecasted transactions denominated in Pesos and Euros. The
Company uses forward contracts to hedge the cost of operations in Pesos and committed transactions
denominated in Euros. The Company does not use forward contracts for speculative or trading
purposes.
The Company held derivative financial instruments totaling $3.0 million in notional value and
$0.2 million in fair value as of June 30, 2011. The Company accounts for these derivative
financial instruments using cash-flow-hedge accounting treatment and recognizes the effective
portion of the changes in fair value of the forward contracts as a component of Accumulated other
comprehensive loss, net in the Companys Consolidated Balance Sheets. As of June 30, 2011, the
net unrealized gains on these contracts recorded in Accumulated other comprehensive loss, net was
$0.2 million.
In addition, the Company held derivative financial instruments totaling $4.4 million notional
value and an insignificant amount in fair value as of June 30, 2011. These derivative financial
instruments are not designated as cash-flow-hedges and the Company recognizes the changes in the
fair value in Other nonoperating expense, net in the Companys Consolidated Statements of
Operations. For the year ended June 30, 2011, the Company recorded $2.3 million in Other
nonoperating expense, net.
Note 15 Long-Term Debt
Lines of Credit
As of June 30, 2010, the Company had a secured credit facility, with an aggregate commitment
of up to $55.0 million. The credit was pursuant to a Credit Agreement and a Fast Track Export Loan
Agreement with JP Morgan Chase Bank, N.A. and was comprised of two separate lines of credit, a
$30.0 million line (the Asset-Based Revolver) and a $25.0 million line (the Ex-Im Revolver).
Both lines were secured by inventory and receivables of the borrowers.
During September 2010, the Company terminated the secured revolving credit facility. The
security provided under the secured revolving credit facility has been released. The secured
revolving credit facility was replaced with a Letter of Credit Facility, also with JP Morgan Chase
Bank, N.A. Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of
credit, which will be secured by cash equal to 102% of the letters of credit exposure. The Letter
of Credit Facility matures on February 4,
70
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013. Letters of credit totaling approximately $8.6 million as of September 30, 2010 were
transferred from the cancelled secured revolving credit facility to the new Letter of Credit
Facility. As of June 30, 2011, outstanding letters of credit totaled $7.0 million.
Convertible Senior Notes
In June 2008, the Company completed an offering of $316.3 million of Convertible Senior Notes
(Notes). The Notes bear interest at a rate of 3.0% per year, payable semi-annually on June 15
and December 15 of each year, commencing on December 15, 2008. If the Notes are not converted,
they will mature on June 15, 2013.
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Companys common stock, the price of the Notes and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, if applicable, shares of the Companys common stock initially at a
conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately
$91.80 per share) per $1,000 principal amount of the Notes. The holders of the Notes are only
entitled to amounts in excess of the principal amount if shares of the Companys common stock
exceed a market price of $91.80 for a period of 20 consecutive trading days during the applicable
cash settlement averaging period.
During the year, the Company entered into exchange agreements with certain holders of the
Companys Notes whereby the Company issued an aggregate of 4,710,618 shares of its common stock in
exchange for an aggregate principal amount of $30.1 million held by the holders of the Notes. In
connection with this exchange the Company recorded a gain on debt extinguishment of $3.3 million.
On July 1, 2010, the Company adopted the FASB ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (ASU 2009-15)
which amends ASC 470-20 clarifying that share-lending arrangements executed in connection with
convertible debt offerings or other financing should be measured at fair value and recognized as a
debt issuance cost which is amortized using the effective interest method over the life of the
financing arrangements as an interest cost. ASC 470-20 is effective for arrangements entered into
during the fiscal year. The Company estimated that the effective interest rate at the time of the
offering for similar debt without the conversion feature was 9.9%. The effective interest rate for
the years ended June 30, 2011 and 2010 was 10.2% and 10.4%, respectively. At June 30, 2011 and
2010, the carrying amount of the conversion option recorded in stockholders equity for both
periods was $81.9 million.
The net carrying amount of the Notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Outstanding principal |
|
$ |
263,153 |
|
|
$ |
293,250 |
|
Less: unamortized discount |
|
|
30,927 |
|
|
|
49,596 |
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
232,226 |
|
|
$ |
243,654 |
|
|
|
|
|
|
|
|
71
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gross interest expense recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Contractual interest |
|
$ |
8,337 |
|
|
$ |
9,043 |
|
Amortization of discount |
|
|
14,228 |
|
|
|
18,680 |
|
Amortization of debt issue costs |
|
|
2,318 |
|
|
|
2,878 |
|
|
|
|
|
|
|
|
Gross interest expense recognized |
|
$ |
24,883 |
|
|
$ |
30,601 |
|
|
|
|
|
|
|
|
The Company adopted the provisions of ASC 470-20 on July 1, 2010, with retrospective
application to prior periods. (See Note 1, Nature of Operations, Basis of Presentation and
Summary of Significant Accounting Policies, for additional information.) As part of the agreement
for the Notes issued in June 2008, the Company also issued 3,444,975 shares as part of a
share-lending agreement with the underwriter. The purpose of the share-lending agreement is to
facilitate transactions which allow the investors in the Notes to hedge their investments in the
Notes. The term of the share-lending agreement coincides with the Notes term and will terminate no
later than June 15, 2013. The underwriter received all proceeds from any sale of shares pursuant
to the share-lending agreement. The shares must be returned to ECD no later than the maturity date
of the Convertible Senior Notes. These shares are considered issued and outstanding and have all
the rights of any holder of the Companys common stock. The fair value of the outstanding loaned
shares as of June 30, 2011 and June 30, 2010 was $4.0 million and $14.1 million, respectively. The
Company recognized debt issuance costs of $5.5 million which are amortized using the effective
interest method over the life of the share-lending agreement as interest cost and are included in
Other assets in the Companys Consolidated Balance Sheets. The Company has $2.6 million and $3.6
million of unamortized issuance costs associated with the share-lending agreement as of June 30,
2011 and June 30, 2010, respectively. In addition, the Company recognized an additional $1.0
million and $1.2 million of interest costs relating to the amortization of the issuance costs
associated with the share-lending agreement for the years ended June 30, 2011 and 2010,
respectively. The counterparty to the share-lending agreement is required to provide collateral at
least equal to 100% of the market value of the loaned shares when the rating from Standard and
Poors Ratings Group for its indebtedness falls below A-. No collateral was required as of June
30, 2011.
See Note 2, Liquidity and Continued Listing Requirements, for additional information about
our common stock listing requirements in relationship to our Notes.
Structured Financing
In conjunction with the SIT acquisition, the Company assumed a structured financing liability.
In April 2005, SIT, through a subsidiary, entered into a Master Purchase and Lease Agreement and
related agreements with a subsidiary of GE EFS, a unit of General Electric Capital Corporation, to
provide structured financing for the installation of its BIPV projects on certain buildings owned
by certain qualified customers. The structured financing liability has a 20-year term and bears
interest at varying rates from 0.6% to 3.1%, with quarterly principal and interest payments.
Convertible Notes
In conjunction with the SIT acquisition, the Company assumed SITs outstanding 6.5%
convertible notes due November 1, 2010. The principal balance of $8.0 million was subsequently
repaid in October 2009.
72
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate maturities of long-term debt and capital lease obligations by year as of June
30, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Long-Term Debt |
|
|
Capital Lease Obligations |
|
|
Total |
|
|
|
(in thousands) |
|
2012 |
|
$ |
630 |
|
|
$ |
1,278 |
|
|
$ |
1,908 |
|
2013 |
|
|
263,809 |
|
|
|
1,411 |
|
|
|
265,220 |
|
2014 |
|
|
683 |
|
|
|
1,647 |
|
|
|
2,330 |
|
2015 |
|
|
704 |
|
|
|
1,926 |
|
|
|
2,630 |
|
2016 |
|
|
734 |
|
|
|
1,736 |
|
|
|
2,470 |
|
Thereafter |
|
|
8,250 |
|
|
|
12,298 |
|
|
|
20,548 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
274,810 |
|
|
$ |
20,296 |
|
|
$ |
295,106 |
|
|
|
|
|
|
|
|
|
|
|
Note 16 Commitments and Contingencies
Operating Leases
The Company has operating lease agreements, principally for production, office and research
facilities and equipment. These leases have remaining terms ranging from a month-to-month basis to
six years and, in some instances, include renewal provisions at the option of the Company. Rent
expense under such lease agreements for the years ended June 30, 2011, 2010 and 2009 was
approximately $6.5 million, $6.5 million and $4.7 million, respectively.
Future minimum payments on obligations under noncancellable operating leases expiring
subsequent to June 30, 2011 are as follows:
|
|
|
|
|
|
|
(in thousands) |
|
2012 |
|
$ |
5,307 |
|
2013 |
|
|
4,168 |
|
2014 |
|
|
3,572 |
|
2015 |
|
|
3,272 |
|
2016 |
|
|
3,350 |
|
Thereafter |
|
|
4,603 |
|
|
|
|
|
|
|
|
24,272 |
|
Less sublease income |
|
|
(146 |
) |
|
|
|
|
Net future minimum payments |
|
$ |
24,126 |
|
|
|
|
|
Note 17 Impairment Loss
The Company periodically evaluates the carrying value of its assets whenever events or changes
in circumstances indicate that the carrying value of those assets may not be recoverable.
Due to changing market conditions in the quarter ended March 31, 2011, losses incurred to date
and a dramatic and abrupt shift in the Italian and French solar incentives structures, the Company
concluded that the carrying values of its assets may not be recoverable. Accordingly, the Company
commenced with an impairment analysis of the assets included in its United Solar Ovonic segment as
of March 31, 2011. The Companys assessment utilized quoted market prices, fair value appraisals,
management forecasts and discounted cash flow analyses. The impairment analysis is highly
judgmental and involves the use of
73
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
significant estimates and assumptions. These estimates and assumptions have a substantial
impact on the amount of any impairment loss recorded. Discounted cash flow analyses are dependent
upon management estimates and assumptions of future sales trends, current and expected future
economic trends, market conditions and the effects of new technologies. The estimates and
assumptions used in the impairment analysis are consistent with the Companys business plan;
however, actual cash flows in the future may differ significantly from those previously forecasted.
Based on the results of the analysis, the Company recorded an impairment loss of $221.7
million in the carrying value of the Companys property, plant
and equipment. In addition, we recorded a reserve of $7.1
million on the development loan to Winch Energia S.R.L and its affiliates (collectively, Winch)
(see Note 24, Variable Interest Entity, for additional information).
In the quarter ended March 31, 2010, due to changing market conditions, losses incurred to
date and the increased near-term capacity anticipated from the Companys technology roadmap, the
Company concluded that the carrying values of its long-lived assets, including goodwill, may not be
recoverable, and the Company recorded an impairment loss of $358.0 million.
Note 18 Royalties, Nonrefundable Advance Royalties and License Agreements
The Company has business agreements with third parties and with related parties for which
royalties and revenues are included in the Consolidated Statements of Operations.
The Company deferred recognition of revenue in the amount of $0.2 million relating to
nonrefundable advance royalty payments for both fiscal years ended June 30, 2011 and 2010.
Fiscal years 2011, 2010 and 2009 included license fees of approximately $1.0 million resulting
from the amortization over 10.5 years of the $10.0 million payment received in July 2004 in
connection with a settlement of a patent infringement dispute with Panasonic EV Energy Co., Ltd.
Note 19 Restructuring Charges
The Company has incurred ongoing restructuring charges to better align operating expenses with
near-term revenue expectations. In December 2009, June 2010 and throughout 2011, the Company
incurred restructuring charges as part of its business realignment. The Company estimates that it
will incur restructuring costs of $6.7 million, all of which were recognized during fiscal year
ended June 30, 2011, and of which $6.4 million related to employee severance and $0.3 related to
equipment and headquarters relocation. The restructuring is expected to be completed in fiscal
2012. The restructuring charges were primarily incurred in the United Solar Ovonic segment.
74
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related |
|
|
Other |
|
|
|
|
|
|
Expenses |
|
|
Expenses |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance June 30, 2009 |
|
$ |
840 |
|
|
$ |
|
|
|
$ |
840 |
|
Liability assumed in SIT acquisition |
|
|
122 |
|
|
|
|
|
|
|
122 |
|
Charges |
|
|
4,527 |
|
|
|
209 |
|
|
|
4,736 |
|
Utilization or payment |
|
|
(2,178 |
) |
|
|
(209 |
) |
|
|
(2,387 |
) |
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010 |
|
$ |
3,311 |
|
|
$ |
|
|
|
$ |
3,311 |
|
Charges |
|
|
6,431 |
|
|
|
269 |
|
|
|
6,700 |
|
Utilization or payment |
|
|
(4,880 |
) |
|
|
(269 |
) |
|
|
(5,149 |
) |
Currency Translation |
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2011 |
|
$ |
4,848 |
|
|
$ |
|
|
|
$ |
4,848 |
|
|
|
|
|
|
|
|
|
|
|
In addition, during the fiscal year ended June 30, 2009, the Company was unable to sell
certain assets previously classified as assets held for sale and determined these assets no longer
met the criteria for classification as an asset held for sale. As a result, the Company
reclassified these assets as held and used and recognized a loss of $1.3 million, which was
recorded in Net loss on disposal of property, plant and equipment in the Companys Consolidated
Statements of Operations.
Note 20 Share-Based Compensation
The Company records the fair value of share-based compensation grants as an expense. Total
share-based compensation expense for the years ended June 30, 2011, 2010, and 2009 was $5.3
million, $4.4 million, and $5.3 million, respectively. For the year ended June 30, 2011, $0.8
million of share-based compensation expense was included in restructuring charges.
In December 2010, our stockholders approved the 2010 Omnibus Incentive Compensation Plan (the
Omnibus Plan), which replaced the 2006 Stock Incentive Plan (2006 SIP) and the Annual Incentive
Plan. The Omnibus Plan provides for the grant of options intended to qualify as incentive stock
options under Section 422 of the Code, nonqualified stock options, stock appreciation rights,
restricted shares, restricted stock units, performance units, cash incentive awards, performance
compensation awards and other equity-based and equity-related awards that the Compensation
Committee of the Board of Directors determines are consistent with the purpose of the Omnibus Plan
and the interests of the Company. Awards may be granted in tandem with other awards. Subject to
adjustment for changes in capitalization, the maximum aggregate number of shares available under
the Plan is equal to the sum of (i) 4,100,000, plus (ii) any of the awards outstanding under the
Companys terminated plans (the 1995 and 2000 Non-Qualified Stock Option Plans and the 2006 Stock
Incentive Plan), but only to the extent that such outstanding awards are forfeited, expire, or
otherwise terminate without the issuance of shares on or after December 14, 2010.
The Company has Common Stock authorized for future issuance as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
Stock options |
|
|
519,699 |
|
|
|
864,849 |
|
Restricted stock units |
|
|
4,978,010 |
|
|
|
598,396 |
|
Convertible Investment Certificates |
|
|
5,094 |
|
|
|
5,210 |
|
|
|
|
|
|
|
|
Total shares authorized |
|
|
5,502,803 |
|
|
|
1,468,455 |
|
|
|
|
|
|
|
|
75
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
In order to determine the fair value of stock options on the date of grant, the Company
applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to
expected stock-price volatility, option life, risk-free interest rate and dividend yield. While
the risk-free interest rate and dividend yield are less subjective assumptions, typically based on
factual data derived from public sources, the expected stock-price volatility and option life
assumptions require a greater level of judgment.
The Company uses an expected stock-price volatility assumption that is based on historical
implied volatilities of the underlying stock which is obtained from public data sources. The
risk-free interest rate is based on the yield of U.S. Treasury securities with a term equal to that
of the option. With regard to the weighted-average option life assumption, the Company considers
the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are
determined on specific criteria of the aggregate pool of optionees. Forfeiture rates are based on
the Companys historical data for stock option forfeitures.
The Company did not grant any options in the year ended June 30, 2011. The weighted-average
fair value of the options granted during the years ended June 30, 2010 and 2009 were estimated
based on the date of grant using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Estimated fair value |
|
$ |
9.24 |
|
|
$ |
35.43 |
|
Assumptions |
|
|
|
|
|
|
|
|
Dividend Yield |
|
|
0 |
% |
|
|
0 |
% |
Volatility % |
|
|
73.47 |
% |
|
|
65.04 |
% |
Risk-Free Interest Rate |
|
|
3.13 |
% |
|
|
2.95 |
% |
Expected Life |
|
7.26 years |
|
7.03 years |
A summary of the transactions during the fiscal years 2011, 2010 and 2009 with respect to the
Companys stock options is as follows:
76
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted- |
|
|
Intrinsic |
|
|
|
|
|
|
|
Average |
|
|
Value(1) |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in thousands) |
|
Outstanding at June
30, 2008 |
|
|
964,586 |
|
|
$ |
21.24 |
|
|
$ |
50,541 |
|
Granted |
|
|
94,870 |
|
|
$ |
56.00 |
|
|
|
|
|
Exercised |
|
|
(158,166 |
) |
|
$ |
12.52 |
|
|
$ |
6,817 |
|
Expired |
|
|
(3,190 |
) |
|
$ |
23.63 |
|
|
|
|
|
Forfeited |
|
|
(3,596 |
) |
|
$ |
54.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2009 |
|
|
894,504 |
|
|
$ |
26.33 |
|
|
$ |
387 |
|
Granted |
|
|
19,500 |
|
|
$ |
12.98 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(37,151 |
) |
|
$ |
36.38 |
|
|
|
|
|
Forfeited |
|
|
(12,004 |
) |
|
$ |
65.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2010 |
|
|
864,849 |
|
|
$ |
25.06 |
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(320,380 |
) |
|
$ |
22.84 |
|
|
|
|
|
Forfeited |
|
|
(24,770 |
) |
|
$ |
24.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2011 |
|
|
519,699 |
|
|
$ |
26.45 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The intrinsic value of a stock option is the amount by which the current market
value of the underlying stock exceeds the exercise price of the option. |
The table below sets forth stock options exercisable during the three years ended June
30, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual Life |
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
Remaining |
|
|
|
Shares |
|
|
Price |
|
|
Value(1) |
|
|
in Years |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Exercisable at June 30, 2011 |
|
|
487,595 |
|
|
$ |
24.89 |
|
|
$ |
|
|
|
|
2.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010 |
|
|
726,944 |
|
|
$ |
22.75 |
|
|
$ |
|
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
709,074 |
|
|
$ |
21.85 |
|
|
$ |
376 |
|
|
|
3.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The intrinsic value of a stock option is the amount by which the current market
value of the underlying stock exceeds the exercise price of the option. |
As of June 30, 2011, there was $0.3 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the Plan. The cost is
expected to be recognized over a weighted-average period of less than one year.
Restricted Stock Awards
Restricted stock awards (RSAs) consist of shares of common stock the Company issued to
employees and nonemployee directors. Upon issuance, RSAs become outstanding and have voting
rights. The shares issued to employees are subject to forfeiture and to restrictions which limit
the sale or transfer during the restriction period. The fair value of the RSAs is determined on
the date of grant based on the market price of the Companys common stock and is recognized as
compensation expense. The value of RSAs granted to employees is amortized over their three-year vesting period, while the value
of RSAs granted to nonemployee directors is amortized over a two- to nine-year vesting period.
77
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information concerning RSAs awarded under the 2006 SIP during the years ended June 30, 2011,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at June 30, 2008 |
|
|
89,834 |
|
|
$ |
31.49 |
|
Awarded |
|
|
26,500 |
|
|
$ |
43.03 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,568 |
) |
|
$ |
35.92 |
|
Released from restriction |
|
|
(13,348 |
) |
|
|
33.46 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009 |
|
|
97,418 |
|
|
$ |
34.10 |
|
Awarded |
|
|
13,290 |
|
|
$ |
9.58 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(525 |
) |
|
$ |
9.58 |
|
Released from restriction |
|
|
(8,515 |
) |
|
$ |
32.76 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2010 |
|
|
101,668 |
|
|
$ |
31.14 |
|
Awarded |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(3,380 |
) |
|
$ |
20.23 |
|
Released from restriction |
|
|
(55,805 |
) |
|
$ |
29.64 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2011 |
|
|
42,483 |
|
|
$ |
33.96 |
|
|
|
|
|
|
|
|
|
As of June 30, 2011, there was $0.3 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted-average period of less than one year.
Restricted Stock Units
Restricted stock units (RSUs) settle on a one-for-one basis in shares of the Companys
common stock and vest in accordance with the terms of the plan pursuant to which they were granted
(the 2006 Stock Incentive Plan and the Omnibus Plan) or the Executive Severance Plan, as
applicable. On September 30, 2009, the Companys Board of Directors approved an offer to exchange
approximately 98,000 previously issued RSUs for new RSUs on a one-for-one basis. The fair value of
the RSUs is determined on the date of grant based on the market price of the Companys common stock
and is recognized as compensation expense.
78
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information concerning RSUs awarded during the year ended June 30, 2011, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at June 30, 2008 |
|
|
2,500 |
|
|
$ |
73.64 |
|
Awarded |
|
|
208,428 |
|
|
$ |
52.70 |
|
Vested |
|
|
(760 |
) |
|
$ |
76.74 |
|
Forfeited |
|
|
(5,700 |
) |
|
$ |
60.49 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009 |
|
|
204,468 |
|
|
$ |
52.63 |
|
Awarded |
|
|
289,524 |
|
|
$ |
11.07 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(73,372 |
) |
|
$ |
39.78 |
|
Exchanged |
|
|
(95,234 |
) |
|
$ |
52.36 |
|
Released from restriction |
|
|
(15,764 |
) |
|
$ |
20.13 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2010 |
|
|
309,622 |
|
|
$ |
18.57 |
|
Awarded |
|
|
1,803,754 |
|
|
$ |
3.95 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(206,319 |
) |
|
$ |
10.35 |
|
Released from restriction |
|
|
(53,100 |
) |
|
$ |
10.21 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2011 |
|
|
1,853,957 |
|
|
$ |
5.49 |
|
|
|
|
|
|
|
|
|
As of June 30, 2011, there was $5.3 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 1.81 years. The total fair value of shares vested
during the year ended June 30, 2010 was insignificant.
Warrants
As of June 30, 2009, the Company had outstanding warrants for the purchase of 400,000 shares
of Common Stock granted pursuant to a Common Stock Warrant Agreement entered into in March 2000.
These warrants were exercisable on or prior to March 10, 2010 at $22.93 per share. In March 2010,
all outstanding warrants expired unexercised.
Note 21 Fair Value Measurements
Financial instruments held by the Company include corporate bonds, U.S. government
securities, and money market funds. The Company measures certain financial assets at fair value on
a recurring basis, including cash equivalents and available-for-sale securities. The fair value of
these financial assets was determined based on observable and unobservable inputs.
Observable inputs consist of market data obtained from independent sources while unobservable
inputs reflect the Companys own market assumptions. These inputs create the following fair value
hierarchy:
79
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities |
|
|
|
|
Level 2 Valuations based on quoted prices in markets that are not active,
quoted prices for similar assets or liabilities or all other inputs that are
observable |
|
|
|
|
Level 3 Unobservable inputs for which there is little or no market data which
require the Company to develop its own assumptions |
If the inputs used to measure the fair value of a financial instrument fall within different
levels of the hierarchy, the financial instrument is categorized based upon the lowest level input
that is significant to the fair value measurement.
Whenever possible, the Company uses quoted market prices to determine fair value. In the
absence of quoted market prices, the Company uses independent sources and data to determine fair
value. At June 30, 2011, the fair value of the Companys investments in corporate bonds, U.S.
government securities, and money market funds was determined using quoted prices in active markets.
The Company calculates the fair value of its derivative assets and liabilities using Level 2
inputs of quoted currency forward rates. The fair value of the derivative instruments recorded in
the Companys Consolidated Balance Sheets as of June 30, 2011 was not significant. The carrying
values of the Companys cash, cash equivalents, short-term investments, accounts receivable and
accounts payable approximate their fair values. The fair value of the Companys convertible senior
notes was estimated at $139.8 million as of June 30, 2011 using Level 2 inputs.
At June 30, 2011 and 2010, information about inputs into the fair value measurements of our
assets that we make on a recurring basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
Reporting Date Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
on our Balance Sheet |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Investments in corporate bonds |
|
$ |
87,426 |
|
|
$ |
14,499 |
|
|
|
|
|
|
$ |
101,925 |
|
Investments in U.S. government
securities |
|
|
|
|
|
|
1,001 |
|
|
|
|
|
|
|
1,001 |
|
Investments in money market funds |
|
|
9,733 |
|
|
|
|
|
|
|
|
|
|
|
9,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
Reporting Date Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
on our Balance Sheet |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Auction rate certificates |
|
|
|
|
|
|
|
|
|
$ |
12,469 |
|
|
$ |
12,469 |
|
Auction rate securities rights |
|
|
|
|
|
|
|
|
|
|
1,734 |
|
|
|
1,734 |
|
Investments in corporate bonds |
|
$ |
84,378 |
|
|
$ |
4,185 |
|
|
|
|
|
|
|
88,563 |
|
Investments in U.S. government
securities |
|
|
|
|
|
|
11,005 |
|
|
|
|
|
|
|
11,005 |
|
Investments in money market funds |
|
|
59,375 |
|
|
|
|
|
|
|
|
|
|
|
59,375 |
|
80
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have reclassified our investments in corporate bonds and U.S. government securities as of
June 30, 2010 from Level 1 to Level 2 to be consistent with our classification as of June 30, 2011.
This reclassification is not a result of any changes in our investment policy.
The following table presents the changes in Level 3 assets for the year ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate |
|
|
|
Auction Rate |
|
|
Securities |
|
|
|
Certificates |
|
|
Rights |
|
|
|
(in thousands) |
|
Balance at July 1, 2010 |
|
$ |
12,469 |
|
|
$ |
1,734 |
|
Redeemed by UBS |
|
|
(14,200 |
) |
|
|
|
|
Net gain (loss) recognized in earnings |
|
|
1,731 |
|
|
|
(1,734 |
) |
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Net (loss) gains recognized in earnings are included in Other nonoperating income (expense),
net in the Companys Consolidated Statements of Operations.
In addition to the items that are measured at fair value on a recurring basis, the Company
also measured certain assets at fair value on a nonrecurring basis. As a result of an impairment
analysis, the Company recorded an impairment loss of $228.8 million to write its assets down to
fair value (see Note 17, Impairment Loss, for additional information). The Company has
determined that these fair value measurements rely primarily on Company-specific inputs and the
Companys assumptions about the use of the assets, as observable inputs are not available.
Accordingly, the Company determined that these fair value measurements reside primarily within
Level 3 of the fair value hierarchy.
Information regarding the Companys assets included in its United Solar Ovonic Segment that
were measured at fair value on a nonrecurring basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
As of June 30, 2010 |
|
|
|
Level 3 |
|
|
|
(in thousands) |
|
Property, plant and equipment, net |
|
$ |
86,709 |
|
|
$ |
296,007 |
|
Goodwill |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
Note 22 Income Taxes
The Company files U.S. federal, state and foreign income tax returns. Due to its net
operating loss carryforwards, federal income tax returns from fiscal 1997 forward are still subject
to examination. In addition, open tax years related to various state and foreign jurisdictions
remain subject to examination.
The Companys income tax (benefit) expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
(in thousands) |
|
Federal Income Tax |
|
$ |
(11 |
) |
|
$ |
(2,598 |
) |
State Income Tax |
|
|
31 |
|
|
|
(44 |
) |
Foreign Income Tax |
|
|
374 |
|
|
|
394 |
|
|
|
|
|
|
|
|
Total Income Taxes |
|
$ |
394 |
|
|
$ |
(2,248 |
) |
|
|
|
|
|
|
|
81
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax expense primarily relates to foreign subsidiaries located in Mexico and Germany. The
Company pays minimum taxes in various state jurisdictions and has claimed a benefit related to
certain refundable federal tax credits.
A reconciliation of the Companys effective tax rate for the year ended June 30, 2011 is as
follows:
|
|
|
|
|
Statutory rate (benefit) |
|
|
(34.00 |
%) |
State taxes |
|
|
0.01 |
% |
Permanent adjustments |
|
|
0.98 |
% |
Foreign taxes |
|
|
0.12 |
% |
Change-in-valuation allowance |
|
|
33.02 |
% |
|
|
|
|
Effective rate |
|
|
0.13 |
% |
Temporary differences and carryforwards that give rise to deferred tax assets and
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Basis difference in intangibles |
|
$ |
9,405 |
|
|
$ |
9,885 |
|
U.S. NOL carryforwards |
|
|
169,610 |
|
|
|
138,849 |
|
Foreign NOL carryfowards |
|
|
7,261 |
|
|
|
|
|
R&D credit carryforwards |
|
|
6,337 |
|
|
|
8,021 |
|
AMT credit carryforwards |
|
|
875 |
|
|
|
1,968 |
|
Capital loss |
|
|
|
|
|
|
663 |
|
Warranty reserve |
|
|
6,455 |
|
|
|
11,470 |
|
Basis and depreciation differences of property |
|
|
178,015 |
|
|
|
109,800 |
|
Employee stock options |
|
|
12,237 |
|
|
|
10,655 |
|
All other |
|
|
23,545 |
|
|
|
23,861 |
|
|
|
|
|
|
|
|
|
|
|
413,740 |
|
|
|
315,172 |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Convertible debt |
|
|
(10,515 |
) |
|
|
(16,862 |
) |
All other |
|
|
(76 |
) |
|
|
(544 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
|
403,149 |
|
|
|
297,766 |
|
Valuation allowance |
|
|
(403,149 |
) |
|
|
(296,681 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
1,085 |
|
|
|
|
|
|
|
|
The Companys valuation allowance increased by $106.5 million and $166.1 million in fiscal
year 2011 and 2010, respectively. The changes in the valuation allowance are mainly due to the
addition of federal and state net operating losses (NOLs), R&D tax credits, impairment of
long-lived assets, as well as certain state deferred taxes.
Included in the net operating loss deferred tax asset above are certain deferred tax assets
attributable to excess stock option deductions. Due to a provision within ASC Topic 718
Compensation Stock Compensation concerning when tax benefits related to excess stock option
deductions can be credited to paid in capital, the related valuation allowance cannot be reversed
even if the facts and circumstances
82
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
indicate that it is more likely than not that the deferred tax asset can be realized. The
valuation allowance will only be reversed as the related deferred tax asset is applied to reduce
current taxes payable.
At June 30, 2011, the Companys remaining U.S. net tax operating loss carryforwards and tax
credit carryforwards expire as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Net Tax |
|
|
|
|
|
|
Operating Loss |
|
|
U.S. R&D Credit |
|
|
|
Carryforward |
|
|
Carryforward |
|
|
|
(in thousands) |
|
2012 |
|
$ |
21,183 |
|
|
$ |
720 |
|
2013 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
2018 |
|
|
19,272 |
|
|
|
563 |
|
2019 |
|
|
8,212 |
|
|
|
1,267 |
|
2020 |
|
|
10,170 |
|
|
|
987 |
|
2021 |
|
|
4,674 |
|
|
|
164 |
|
2022 |
|
|
24,353 |
|
|
|
|
|
2023 |
|
|
36,846 |
|
|
|
|
|
2024 |
|
|
71,840 |
|
|
|
463 |
|
2025 |
|
|
9,394 |
|
|
|
415 |
|
2026 |
|
|
64,629 |
|
|
|
569 |
|
2027 |
|
|
58,117 |
|
|
|
638 |
|
2028 |
|
|
9,248 |
|
|
|
551 |
|
2029 |
|
|
83,175 |
|
|
|
|
|
2030 |
|
|
77,737 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
498,850 |
|
|
$ |
6,337 |
|
In addition, the Company has $0.9 million in Alternative Minimum Tax Credit carryforwards that
do not expire.
Included within the Companys U.S. NOLs of $498.9 million are acquired NOLs of approximately
$61.7 million in connection with the acquisition of SIT. Section 382 and 383 of the Internal
Revenue Code limits the utilization of these NOLs and certain other tax attributes. These
provisions apply after a Company has undergone an ownership change and is based on the value of the
stock of the acquired loss corporation before the ownership change times a long-term tax exempt
rate, a rate published by the Internal Revenue Service. The estimated annual limitation of the
acquired SIT NOLs is approximately $0.5 million. Additionally, SIT has foreign NOLs with a full
valuation allowance totaling approximately $22.0 million.
As of the end of fiscal 2011, a full valuation allowance has been recorded against the
Companys net deferred tax assets of $403.1 million (consisting primarily of U.S. net operating
loss carryforwards which expire in various amounts between 2012 and 2030, reserves and basis
differences in fixed assets and intangible assets recognized for book purposes and not tax
purposes).
83
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In assessing whether or not the deferred tax assets are realizable the Company considers both
positive and negative evidence using a more likely than not standard when measuring the need for a
valuation allowance. In making such judgments, significant weight is given to evidence that can be
objectively verified, including the ability to demonstrate recent cumulative profitability over the
past several years. Future realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to the expected reversal of the deferred tax assets, including loss
carryforwards. In addition, the expiration dates of tax attribute carryforwards need to be
evaluated.
Note 23 Tax Benefits Preservation Plan
On September 30, 2009, the Companys Board of Directors adopted a tax benefits preservation
plan to preserve its ability to fully use certain tax assets, including its substantial net
operating loss carryforwards, which could be substantially limited if the Company experiences an
ownership change, as defined by Section 382 of the Internal Revenue Code. As part of the plan,
on September 30, 2009, the Board of Directors declared a dividend of one common stock purchase
right (a Right) for each outstanding share of common stock held of record as of the close of
business on October 15, 2009. Shares of common stock issued after that date also will receive
Rights.
The Rights will be triggered if any person or group (subject to certain exceptions specified
in the tax benefits preservation plan) acquires 4.9% or more of the outstanding shares of the
Companys common stock, thereby becoming an Acquiring Person for purposes of the tax benefits
preservation plan. If triggered, each Right entitles the holder (other than the Acquiring Person
or any transferee of shares of the Companys stock held by the Acquiring Person) to purchase shares
of common stock at a 50 percent discount to the then market price of the Companys common stock,
and the Rights owned by the Acquiring Person (or any transferee of the Acquiring Person) become
void. Alternatively, if the Rights are triggered, the Companys Board of Directors may decide to
exchange all or part of the exercised Rights (other than those held by the Acquiring Person or any
transferee of the Acquiring Person) for shares of common stock.
The Companys Board of Directors has the discretion to exempt any acquisition of common stock
from the provisions of the tax benefits preservation plan. The plan may be terminated by the Board
of Directors at any time prior to the share purchase rights being triggered. Further, unlike a
traditional shareholder rights plan that typically endures for ten years, the tax benefits
preservation plan will expire prior to the end of its ten-year term if the Board of Directors
determines that the tax benefits preservation plan is no longer needed to preserve the Companys
ability to fully use its tax benefits due to the repeal of Section 382 of the Internal Revenue
Code, or that it cannot carry forward any more of its tax benefits.
Note 24 Variable Interest Entity
A variable interest entity (VIE) is an entity that has (i) insufficient equity to permit it
to finance its activities without additional subordinated financial support or (ii) equity holders
that lack the characteristics of a controlling financial interest. VIEs are consolidated by the
primary beneficiary, which is the entity that has both the power to direct the activities that most
significantly impact the entitys economic performance and the obligation to absorb losses of the
entity or the right to receive benefits from the entity that potentially could be significant to
the entity. Variable interests in a VIE are contractual, ownership, or other financial interests
in a VIE that change with changes in the fair value of the VIEs net assets.
In 2010, the Company entered into a development loan agreement and a development services
agreement with Winch Energia S.R.L and its affiliates (collectively, Winch) whereby the Company
84
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would fund Winchs acquisition of development rights for solar installation projects in Italy.
As part of these agreements, the Company provided Winch with the funding necessary to procure the
development rights and fund third-party development expenditures until permanent financing is
obtained. The Company will also supply the solar modules for the projects. Winch manages the
development of the solar projects, arranges the construction debt financing and procures the
turnkey Engineering, Procurement and Construction (EPC) contractor, who will install the solar
modules supplied by the Company. The development loan is secured by a pledge in equity in the
Winch entities holding the projects. In the event of a loan default, the Company may request that
the Winch shareholders transfer 100% of their equity interests to it for a fee of 1 Euro. If this
provision is enforced and the Company realizes the value of its loan by selling or otherwise
monetizing the development rights, the net proceeds (after deducting costs, interest, and other
amounts owed to it) are to be remitted to Winch.
During the second quarter of fiscal year 2011, Winch secured third-party financing for the
first group of projects, which were allocated into a separate legal entity, and initiated the
construction of these projects. The Companys development loan attributed to these projects was
$5.2 million and, in connection with the third-party financing, $3.1 million was repaid along with
$0.4 million in interest and services to the Company and $2.1 million was converted into an
unsecured vendor loan, which is subordinate to the new third-party financing. Further, the Company
sold $11.0 million of products to the EPC contractor during the second quarter of 2011 for the
projects in this separate legal entity.
During the third quarter of fiscal year 2011, Winch secured third-party financing for the
second group of projects, which were allocated into a separate legal entity and initiated
construction of these projects using the Company as the EPC contractor. The Companys development
loan attributed to these projects was $5.8 million which was repaid to the Company along with $0.8
million of accrued interest and services. In the third quarter of fiscal year 2011, the Company
began shipping products for this group of projects and in accordance with the Companys accounting
policies for system sales, the Company recognized $34.0 million of system revenue using the
percentage-of-completion method related to these projects and will continue to recognize system
revenue as these projects progress.
In connection with the repayment of the development loans in the second and third quarters of
fiscal year 2011, the Company has released that portion of the pledge attributable to these
portions of the development loans.
As of June 30, 2011 and 2010, the outstanding balance of the development loan was $7.1 million
and $14.2 million, respectively. The development loan bears interest at 5% per annum and the
Company will also receive a fee equivalent to a 10% annual interest rate on the outstanding
borrowings under the loan as compensation for services provided to support the development of the
projects. These amounts are payable upon maturity of the development loan. Additionally, as of
June 30, 2011, the outstanding balance of the vendor loan to the separate legal entity was $2.2
million. The vendor loan bears interest at 5.5% per annum and the interest is payable upon
repayment of the vendor loan.
As a result of the change in market conditions in Italy in the third quarter for 2011 (see
Note 17, Impairment Loss, for additional information) the Company performed an assessment of the
recoverability of the development loan to Winch and recorded a reserve of $1.3 million in the
quarter ended March 31, 2011. In the fourth quarter of fiscal 2011, Winch experienced difficulty
in obtaining governmental approval for the remaining projects in Italy. Consequently, the ability
to develop these remaining projects and enable Winch to repay the development loans to the Company
is in doubt. As a result, the Company provided an additional reserve of $5.8 million as of June
30, 2011.
85
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continuously reassesses whether (i) entities we are associated with are still VIEs
and (ii) whether we are the primary beneficiary of those entities. Previously, because the
Companys interest was the sole source of financial support to Winch, the Company determined that
all of Winch was a VIE and should be consolidated in the Companys consolidated results of
operations. As the separate legal entities obtained third-party financing and commenced
operations, the Company is no longer required to consolidate the separate legal entities because we
neither direct the significant activities of nor provide significant financial support to any of
these legal entities. Although the Company is the primary beneficiary of the remainder of Winch,
it has not been consolidated because it is not material to the Companys results of operations,
financial condition, or liquidity as of and for the period ended June 30, 2011. The Winch VIE had
net assets of $6.9 million consisting primarily of development rights on the properties that are
yet to be developed, excluding the development loan due to the Company.
Note 25 Business Segments
The Company has two segments, United Solar Ovonic and Ovonic Materials. The Company includes
SIT in its United Solar Ovonic segment.
The following table lists the Companys segment information and reconciliation to the amounts
in the Companys consolidated financial statements. The grouping Corporate and Other below does
not meet the definition of a segment as it contains the Companys headquarters costs, consolidating
entries, and the Companys investments in joint ventures, which are not allocated to the above
segments; however, it is included below for reconciliation purposes only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
|
|
|
Solar |
|
|
Ovonic |
|
|
Corporate |
|
|
|
|
|
|
Ovonic |
|
|
Materials |
|
|
and Other |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Year Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
221,899 |
|
|
$ |
10,593 |
|
|
$ |
54 |
|
|
$ |
232,546 |
|
Depreciation and
amortization |
|
|
17,407 |
|
|
|
272 |
|
|
|
366 |
|
|
|
18,045 |
|
Operating (loss) income |
|
|
(269,449 |
) |
|
|
4,273 |
|
|
|
(22,891 |
) |
|
|
(288,067 |
) |
Year Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
237,437 |
|
|
|
16,810 |
|
|
|
169 |
|
|
|
254,416 |
|
Depreciation and
amortization |
|
|
31,557 |
|
|
|
239 |
|
|
|
912 |
|
|
|
32,708 |
|
Operating (loss) income |
|
|
(418,001 |
) |
|
|
8,666 |
|
|
|
(25,766 |
) |
|
|
(435,101 |
) |
Year Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
302,758 |
|
|
|
13,317 |
|
|
|
218 |
|
|
|
316,293 |
|
Depreciation and
amortization |
|
|
32,557 |
|
|
|
296 |
|
|
|
752 |
|
|
|
33,605 |
|
Operating income (loss) |
|
|
44,447 |
|
|
|
3,912 |
|
|
|
(27,763 |
) |
|
|
20,596 |
|
As of June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
38,418 |
|
|
|
|
|
|
|
|
|
|
|
38,418 |
|
Total assets |
|
|
257,459 |
|
|
|
5,824 |
|
|
|
125,195 |
|
|
|
388,478 |
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
31,992 |
|
|
|
|
|
|
|
|
|
|
|
31,992 |
|
Total assets |
|
|
530,554 |
|
|
|
6,442 |
|
|
|
154,951 |
|
|
|
691,947 |
|
86
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues by country based on the invoicing location of the
customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30 |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
(in thousands) |
|
Italy |
|
$ |
112,875 |
|
|
$ |
94,976 |
|
|
$ |
66,859 |
|
United States |
|
|
57,241 |
|
|
|
40,473 |
|
|
|
82,564 |
|
France |
|
|
19,456 |
|
|
|
27,344 |
|
|
|
69,282 |
|
Germany |
|
|
18,973 |
|
|
|
22,860 |
|
|
|
60,254 |
|
Japan |
|
|
7,698 |
|
|
|
10,159 |
|
|
|
6,244 |
|
China |
|
|
4,657 |
|
|
|
6,497 |
|
|
|
3,770 |
|
Saudi Arabia |
|
|
2,767 |
|
|
|
|
|
|
|
|
|
Spain |
|
|
1,779 |
|
|
|
29,493 |
|
|
|
1,694 |
|
Canada |
|
|
1,301 |
|
|
|
|
|
|
|
12 |
|
South Korea |
|
|
1,098 |
|
|
|
1,876 |
|
|
|
6,410 |
|
Austria |
|
|
1,083 |
|
|
|
505 |
|
|
|
517 |
|
Belgium |
|
|
442 |
|
|
|
18,420 |
|
|
|
|
|
Switzerland |
|
|
50 |
|
|
|
513 |
|
|
|
16,704 |
|
Other Countries |
|
|
3,126 |
|
|
|
1,300 |
|
|
|
1,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
232,546 |
|
|
$ |
254,416 |
|
|
$ |
316,293 |
|
|
|
|
|
|
|
|
|
|
|
The Companys property, plant and equipment, net of accumulated depreciation, is located
principally in the United States and Mexico.
The following table presents major customers as a percentage of total Company revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
Significant Customer |
|
Segment |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Affiliates of the Winch
Energy Group |
|
United Solar Ovonic |
|
|
15 |
% |
|
|
|
|
|
|
|
|
Enel Green Power |
|
United Solar Ovonic |
|
|
* |
|
|
|
20 |
% |
|
|
|
|
EDF En Development |
|
United Solar Ovonic |
|
|
* |
|
|
|
* |
|
|
|
12 |
% |
|
|
|
* |
|
denotes less than 10% during the period |
Note 26 Litigation
On July 13, 2009, Ovonic Battery Company (OBC), a majority-owned subsidiary of the
Company, and Chevron Technology Ventures LLC (CTV) completed a sale of 100% of the membership
interests in Cobasys to SB LiMotive Co. Ltd. for $1. In connection with the sale of Cobasys, the
Amended and Restated Operating Agreement, dated July 2, 2004, was terminated effective as of the
transaction date. Termination of the Operating Agreement was effectuated by a Termination
Agreement dated as of the transaction date. This transaction coincides with settlement of a
pending lawsuit against Cobasys filed in August 2008 by Mercedes-Benz U.S. International, Inc.
(MBUSI). In connection with settling the lawsuit, OBC paid MBUSI $1.1 million from the $1.3
million in royalties distributed to it by Cobasys and entered into a mutual release with MBUSI of
all Cobasys-related claims. In addition, Cobasys restructured its intellectual property licenses
with the Company and OBC so that OBC has royalty-free, exclusive rights to the technology for defined non-transportation uses and Cobasys has
royalty-free exclusive rights for defined transportation uses.
87
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with these transactions, OBC, CTV and the Company settled and jointly
dismissed their pending arbitration without any finding of financial liability. These parties
entered into mutual releases and agreed to the terms of the Cobasys sale transaction. In July
2009, the Company recorded the $1.3 million received in connection with this settlement as a
Distribution from joint venture and the $1.1 million paid to MBUSI as Selling, general and
administrative expenses.
On March 2, 2010, the Company transferred its right in patents and licenses related to optical
memory storage to Acacia Patent Acquisition LLC (Acacia). A related party of Acacia filed a
lawsuit in November 2010 against 14 defendants alleging infringement of the optical memory storage
patents. If Acacia is successful in pursuing licensing and enforcement of the patents and existing
licenses related to the patents, the Company will share in 50% of the net proceeds (after costs)
recovered as a result of the lawsuits or settlements.
Other than the information provided above, the Company is involved in certain legal actions
and claims arising in the ordinary course of business, including, without limitation, commercial
disputes, intellectual property matters, personal injury claims, tax claims and employment matters.
Although the outcome of any legal matter cannot be predicted with certainty, management does not
believe that any of these legal proceedings or matters will have a material adverse effect on the
consolidated financial position, results of operations, or liquidity of the Company.
Note 27 Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Total |
|
|
|
(in thousands, except for per share amounts) |
|
Year ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
68,397 |
|
|
$ |
69,547 |
|
|
$ |
21,494 |
|
|
$ |
73,108 |
|
|
$ |
232,546 |
|
Operating (Loss) |
|
|
(8,025 |
) |
|
|
(3,579 |
) |
|
|
(239,327 |
) |
|
|
(37,136 |
) |
|
|
(288,067 |
) |
Net (Loss) Attributable to ECD Stockholders |
|
|
(13,456 |
) |
|
|
(7,513 |
) |
|
|
(243,103 |
) |
|
|
(42,000 |
) |
|
|
(306,072 |
) |
(Loss) Per Share, Attributable to ECD Stockholders |
|
|
(0.29 |
) |
|
|
(0.16 |
) |
|
|
(4.88 |
) |
|
|
(.84 |
) |
|
|
(6.40 |
) |
Diluted (Loss) Per Share, Attributable to ECD Stockholders |
|
|
(0.29 |
) |
|
|
(0.16 |
) |
|
|
(4.88 |
) |
|
|
(.84 |
) |
|
|
(6.40 |
) |
Year ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
42,944 |
|
|
$ |
52,912 |
|
|
$ |
72,406 |
|
|
$ |
86,154 |
|
|
$ |
254,416 |
|
Operating (Loss) |
|
|
(8,278 |
) |
|
|
(32,202 |
) |
|
|
(377,113 |
) |
|
|
(17,508 |
) |
|
|
(435,101 |
) |
Net (Loss) Attributable to ECD Stockholders(1) |
|
|
(11,973 |
) |
|
|
(39,212 |
) |
|
|
(385,076 |
) |
|
|
(20,801 |
) |
|
|
(457,062 |
) |
(Loss) Per Share, Attributable to ECD Stockholders(1) |
|
|
(0.28 |
) |
|
|
(0.93 |
) |
|
|
(9.10 |
) |
|
|
(0.49 |
) |
|
|
(10.75 |
) |
Diluted (Loss) Per Share, Attributable to ECD
Stockholders(1) |
|
|
(0.28 |
) |
|
|
(0.93 |
) |
|
|
(9.10 |
) |
|
|
(0.49 |
) |
|
|
(10.75 |
) |
|
|
|
(1) |
|
As adjusted due to the implementation of FASB ASC 470-20 (see Note 1). |
Note 28 Subsequent Events Discontinued Operations
In July 2011, we announced that we are seeking the sale of Ovonic Battery Company, Inc.,
(OBC), which conducts our battery technology licensing and materials manufacturing
activities and comprises substantially all of the business of our Ovonic Materials Division,
in order to focus on our United Solar Ovonic business activities. OBC is a consolidated
subsidiary in which we have a 93.6% equity interest with the balance owned by Honda Motor
Company, Ltd. (3.2%) and Sanoh Industrial Co., Ltd. (3.2%). In fiscal 2012, we will account
for OBC as discontinued operations in our consolidated financial statements.
88
|
|
|
Item 9: |
|
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure |
Not applicable.
Item 9A: Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, the Principal Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures were effective.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934. The Companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of the assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that could have a material
effect on our financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and
internal auditing practices and actions taken to correct deficiencies as identified. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of June 30, 2011. Management based this assessment on criteria for effective internal
control over financial reporting described in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment included
an evaluation of the design of the Companys internal control over financial reporting and testing
of the operational effectiveness of its internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee of the Companys Board of
Directors. Based on this assessment, management determined that, as of June 30, 2011, the Company
maintained effective internal control over financial reporting.
89
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
Grant Thornton LLP, our independent registered public accounting firm, has issued an
attestation report on our internal control over financial reporting, which appears herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Conversion Devices, Inc.
We have audited Energy Conversion Devices, Inc. (a Delaware Corporation) and subsidiaries
internal control over financial reporting as of June 30, 2011, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Report of Management on Internal
Control over Financial Reporting (Managements Report). Our responsibility is to express an opinion
on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
90
In our opinion, Energy Conversion Devices, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2011, based on
criteria established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Energy Conversion Devices, Inc.
and subsidiaries as of June 30, 2011 and 2010 and the related consolidated statements of
operations, stockholders equity and comprehensive income (loss), cash flows and financial
statement schedule for each of the three years in the period ended June 30, 2011, and our report
dated August 25, 2011 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Southfield, Michigan
August 25, 2011
Item 9B: Other Information
Not applicable.
91
PART III
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is omitted from this Report on Form 10-K and is
hereby incorporated by reference from the Registrants definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on November 15, 2011 (the 2011 Proxy Statement) pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be filed not later
than 120 days after the end of the fiscal year covered by this Report.
Item 10: Directors, Executive Officers and Corporate Governance
The information contained in the sections entitled Election of Directors, Executive
Officers of the Company and Section 16(a) Beneficial Ownership Reporting Compliance included in
our 2011 Proxy Statement is incorporated herein by reference.
The information regarding our Audit Committee, including the members of our Audit Committee
and audit committee financial experts, set forth in the section entitled Corporate Governance and
Board Matters contained in our 2011 Proxy Statement is incorporated herein by reference.
The charters of our Audit Committee, Compensation Committee, Corporate Governance and
Nominating Committee, and Finance Committee are available in the Corporate Information
Corporate Governance section of our website at www.energyconversiondevices.com and are available
to any stockholder upon request to the Corporate Secretary. The information on our website is not
incorporated by reference in this Annual Report on Form 10-K.
We have adopted a Code of Business Conduct that applies to all employees, including our chief
executive officer and chief financial officer, and directors. A copy of the Code of Business
Conduct is available in the Corporate Information Corporate Governance section of our website
at www.energyconversiondevices.com.
Item 11: Executive Compensation
The information required to be furnished pursuant to this Item will be included under
Compensation of Directors, Director Compensation Table, Compensation Discussion and Analysis,
Compensation Committee Interlocks and Insider Participation, and Executive Compensation Tables,
in the 2011 Proxy Statement and is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
The information required by this Item concerning equity compensation plan information will be
included under Equity Compensation Plan Information in the 2011 Proxy Statement and is
incorporated herein by reference.
The information required by this Item regarding security ownership of certain beneficial
owners, directors and executive officers will be included under Security Ownership of Management
and Certain Beneficial Owners in the 2011 Proxy Statement and is incorporated herein by reference.
92
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information concerning certain relationships and related transactions will be included
under Certain Relationship and Related Transactions and Corporate Governance and Board Matters
Determination of Independence of Board Members in the 2011 Proxy Statement and is incorporated
herein by reference.
Item 14: Principal Accounting Fees and Services
The information required by this Item will be included under Independent Registered Public
Accounting Firm Fees in the 2011 Proxy Statement and is incorporated herein by reference.
93
PART IV
Item 15: Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
|
|
|
|
|
Other financial statements and financial statement schedules are omitted (1) because of the absence of
the conditions under which they are required or (2) because the information called for is shown in the
financial statements and notes thereto. |
|
|
|
3. Exhibits
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation filed January 8, 2008 (filed with the Registrants Proxy Statement dated October 29,
2007 and incorporated herein by reference) |
|
|
|
3.2
|
|
Certificate of Amendment to Certificate of Incorporation filed on December 16, 2010, increasing the number of authorized shares from
100,000,000 to 150,000,000 (filed with the Registrants Proxy Statement dated November 1, 2010 and incorporated herein by reference) |
|
|
|
3.3
|
|
Bylaws in effect as of October 11, 2007 (incorporated by reference to exhibit 3.1 to the Registrants Form 8-K dated October 17, 2007) |
|
|
|
4.1
|
|
Form of Indenture between Energy Conversion Devices, Inc. and The Bank of New York Trust Company, N.A. as Trustee (incorporated by
reference to exhibit 4.1 to the Registrants Form 8-K dated June 19, 2008) |
|
|
|
4.2
|
|
Form of First Supplemental Indenture between Energy Conversion Devices, Inc. and The Bank of New York Trust Company, N.A., as Trustee
(incorporated by reference to exhibit 4.2 to the Registrants Form 8-K dated June 19, 2008) |
|
|
|
4.3
|
|
Indenture, dated June 24, 2008, between Energy Conversion Devices, Inc. and The Bank of New York Trust Company, N.A. as Trustee
(incorporated by reference to exhibit 4.3 to the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2008) |
|
|
|
4.4
|
|
First Supplemental Indenture dated June 24, 2008, between Energy Conversion Devices, Inc. and The Bank of New York Trust Company, N.A., as
Trustee (incorporated by reference to exhibit 4.4 to the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2008) |
|
|
|
10.1
|
|
Energy Conversion Devices, Inc. 1995 Non-Qualified Stock Option Plan (incorporated by reference to exhibit 10.77 to the Registrants
Annual Report on Form 10-K for the fiscal year ended June 30, 1995) |
|
|
|
94
|
|
|
10.2
|
|
Energy Conversion Devices, Inc. 2000 Non-Qualified Stock Option Plan (filed as exhibit A to the Registrants Proxy Statement dated January
19, 2001 and incorporated herein by reference) |
|
|
|
10.3
|
|
Energy Conversion Devices, Inc. 2006 Stock Incentive Plan (filed as exhibit A to the Registrants Proxy Statement dated October 12, 2006
and incorporated herein by reference |
|
|
|
10.4
|
|
Energy Conversion Devices, Inc. Executive Severance Plan effective July 24, 2007 (incorporated by reference to exhibit 10.1 to the
Registrants Current Report on Form 8-K dated July 30, 2007) |
|
|
|
10.5
|
|
Form of Severance Plan Participation Agreement (incorporated by reference to exhibit 10.2 to the Registrants Current Report on Form 8-K
dated July 30, 2007) |
|
|
|
10.6
|
|
Form of Stock Option Agreement (incorporated by reference to exhibit 10.4 to the Registrants Current Report on Form 8-K dated July 30,
2007) |
|
|
|
10.7
|
|
Form of Restricted Stock Agreement (incorporated by reference to exhibit 10.5 to the Registrants Current Report on Form 8-K dated July
30, 2007) |
|
|
|
10.8
|
|
Letter Agreement dated August 23, 2007 among Stanford R. Ovshinsky, Energy Conversion Devices, Inc. and Ovonic Battery Company
(incorporated by reference to exhibit 10.1 to the Registrants Current Report on Form 8-K dated August 27, 2007) |
|
|
|
10.9
|
|
Share-lending Agreement dated as of June 18, 2008 among Energy Conversion Devices, Inc. and Credit Suisse International and Credit Suisse
Securities (USA) LLC (incorporated by reference to exhibit 10.1 to the Registrants Form 8-K dated June 19, 2008) |
|
|
|
10.10
|
|
Form of Restricted Stock Unit (incorporated by reference to exhibit 10.19 to the Registrants Annual Report on Form 10-K for the fiscal
year ended June 30, 2008) |
|
|
|
10.11
|
|
Amendment No. 1 to 2006 Stock Incentive Plan (incorporated by reference to exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2008) |
|
|
|
10.12
|
|
Form of Performance Share Award Agreement pursuant to the Energy Conversion Devices, Inc. 2006 Stock Incentive Plan, as amended
(incorporated by reference to exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2008) |
|
|
|
10.13
|
|
Form of Restricted Stock Unit Award Agreement (incorporated by reference to exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2008) |
|
|
|
10.14
|
|
Amended Executive Severance Plan (incorporated by reference to exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008) |
|
|
|
10.15
|
|
Agreement and Plan of Merger entered into by Energy Conversion Devices, Inc. and Solar Integrated Technologies dated July 21, 2009
(incorporated by reference to exhibit 10.25 to the Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 2009) |
|
|
|
10.16
|
|
Energy Conversion Devices, Inc. 2010 Omnibus Incentive Compensation Plan (incorporated by reference to exhibit 10.1 to the Registrants
Current Report on Form 8-K dated January 12, 2011) |
95
|
|
|
10.17
|
|
Form of Performance Unit Award Agreement pursuant to the Energy Conversion Devices, Inc. 2010 Omnibus Incentive Compensation Plan
(incorporated by reference to exhibit 10.2 to the Registrants Current Report on Form 8-K dated January 12, 2011) |
|
|
|
10.18
|
|
Form of Restricted Stock Unit Award Agreement pursuant to the Energy Conversion Devices, Inc. 2010 Omnibus Incentive Compensation Plan
(incorporated by reference to exhibit 10.3 to the Registrants Current Report on Form 8-K dated January 12, 2011) |
|
|
|
10.19
|
|
Form of Director Restricted Stock Unit Award Agreement pursuant to the Energy Conversion Devices, Inc. 2010 Omnibus Incentive Compensation
Plan (incorporated by reference to exhibit 10.4 to the Registrants Current Report on Form 8-K dated January 12, 2011) |
|
|
|
10.20
|
|
Separation Agreement dated as of May 6, 2011 between Energy Conversion Devices, Inc. and Mark D. Morelli (incorporated by reference to
exhibit 10.1 to the Registrants Current Report on Form 8-K dated May 10, 2011) |
|
|
|
10.21
|
|
Senior Management Retention Plan dated May 4, 2011 (incorporated by reference to exhibit 10.2 to the Registrants Current Report on Form
8-K dated May 10, 2011) |
|
|
|
10.22
|
|
Form of Participant Agreement for Senior Management Retention Plan (incorporated by reference to exhibit 10.3 to the Registrants Current
Report on Form 8-K dated May 10, 2011) |
|
|
|
10.23
|
|
Transition Agreement dated as of June 29, 2011 between Energy Conversion Devices, Inc. and Subhendu Guha (incorporated by reference to
exhibit 10.1 to the Registrants Current Report on Form 8-K dated July 6, 2011) |
|
|
|
21.1
|
|
List of all direct and indirect subsidiaries of the Company |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm, Grant Thornton LLP |
|
|
|
31.1
|
|
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certifications of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
96
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
Charged |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning of |
|
|
Costs and |
|
|
to Other |
|
|
|
|
|
|
End of |
|
|
|
Period |
|
|
Expenses |
|
|
Accounts |
|
|
Deductions |
|
|
Period |
|
|
|
(in thousands) |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
1,763 |
|
|
$ |
2,171 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,934 |
|
Reserve for losses on government
contracts |
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
581 |
|
Reserve for inventory obsolescence |
|
|
15,882 |
|
|
|
1,074 |
|
|
|
|
|
|
|
(5,126 |
) |
|
|
11,830 |
|
Reserve for warranty |
|
|
41,335 |
|
|
|
4,322 |
|
|
|
|
|
|
|
(7,677 |
) |
|
|
37,980 |
|
Valuation allowance for deferred taxes |
|
|
296,681 |
|
|
|
106,468 |
|
|
|
|
|
|
|
|
|
|
|
403,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
4,481 |
|
|
$ |
462 |
|
|
$ |
|
|
|
$ |
(3,180 |
) |
|
$ |
1,763 |
|
Reserve for losses on government
contracts |
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
(809 |
) |
|
|
952 |
|
Reserve for inventory obsolescence |
|
|
12,901 |
|
|
|
11,721 |
|
|
|
3,267 |
(a) |
|
|
(12,007 |
) |
|
|
15,882 |
|
Reserve for warranty |
|
|
5,917 |
|
|
|
4,036 |
|
|
|
38,548 |
(a) |
|
|
(7,166 |
) |
|
|
41,335 |
|
Valuation allowance for deferred taxes |
|
|
130,535 |
|
|
|
150,811 |
|
|
|
16,420 |
(a) |
|
|
(1,085 |
) |
|
|
296,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts |
|
$ |
825 |
|
|
$ |
3,692 |
|
|
$ |
|
|
|
$ |
(36 |
) |
|
$ |
4,481 |
|
Reserve for losses on government
contracts |
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
1,761 |
|
Reserve for inventory obsolescence |
|
|
4,790 |
|
|
|
8,111 |
|
|
|
|
|
|
|
|
|
|
|
12,901 |
|
Reserve for warranty |
|
|
1,499 |
|
|
|
5,680 |
|
|
|
|
|
|
|
(1,262 |
) |
|
|
5,917 |
|
Valuation allowance for deferred taxes |
|
|
128,757 |
|
|
|
4,934 |
|
|
|
|
|
|
|
(3,156 |
) |
|
|
130,535 |
|
|
|
|
(a) |
|
Addition related to balances assumed in the SIT acquisition and was charged to goodwill. |
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
ENERGY CONVERSION DEVICES, INC.
|
|
August 25, 2011 |
By: |
/s/ Jay B. Knoll
|
|
|
|
Jay B. Knoll |
|
|
|
Interim President (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Jay B. Knoll
Jay B. Knoll
|
|
Interim President
(Principal Executive
Officer)
|
|
August 25, 2011 |
|
|
|
|
|
/s/ William C. Andrews
William C. Andrews
|
|
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
|
|
August 25, 2011 |
|
|
|
|
|
/s/ Joseph A. Avila
Joseph A. Avila
|
|
Director
|
|
August 25, 2011 |
|
|
|
|
|
/s/ Alan E. Barton
Alan E. Barton
|
|
Director
|
|
August 25, 2011 |
|
|
|
|
|
/s/ Robert I. Frey
Robert I. Frey
|
|
Director
|
|
August 25, 2011 |
|
|
|
|
|
/s/ William J. Ketelhut
William J. Ketelhut
|
|
Director
|
|
August 25, 2011 |
|
|
|
|
|
/s/ Stephen Rabinowitz
Stephen Rabinowitz
|
|
Director
|
|
August 25, 2011 |
|
|
|
|
|
/s/ George A. Schreiber, Jr.
George A. Schreiber, Jr.
|
|
Director
|
|
August 25, 2011 |
98