Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(mark one)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2010

 

Or

 

o         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 001-34529

 

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-1023344

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

10 Water Street Enfield, Connecticut

 

06082

(Address of principal executive offices)

 

(Zip Code)

 

(860) 749-8371

(Registrant’s telephone number, including area code)

 

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.  YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).  YES o NO 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x.

 

At May 12, 2010, there was 41,349,710 shares of Common Stock, par value $0.01 per share, outstanding

 

 

 



Table of Contents

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STR Holdings, Inc. and Subsidiaries

Quarter Ended March 31, 2010

 

 

PAGE

 

NUMBER

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (unaudited)

2

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (unaudited)

3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)

4

Notes to Condensed Consolidated Financial Statements

5

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3. Quantitative and Qualitative Disclosures About Market Risk

23

Item 4. Controls and Procedures

24

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

24

Item 1A. Risk Factors

24

Item 6. Exhibits

24

SIGNATURE

26

 

1



Table of Contents

 

Part I. Financial Information

 

Item 1. Financial Statements

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

All amounts in thousands except share amounts

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

76,260

 

$

69,149

 

Short-term investments

 

1,002

 

1,001

 

Accounts receivable, trade, less allowances for doubtful accounts of $2,472 and $2,468 in 2010 and 2009, respectively

 

37,582

 

33,744

 

Unbilled receivables

 

4,234

 

2,462

 

Inventories

 

12,828

 

12,267

 

Other current assets

 

6,700

 

6,500

 

Total current assets

 

138,606

 

125,123

 

Property, plant and equipment, net

 

67,736

 

68,895

 

Intangible assets, net

 

213,287

 

216,163

 

Goodwill

 

223,359

 

223,359

 

Deferred financing costs

 

5,465

 

5,797

 

Other noncurrent assets

 

6,482

 

6,523

 

Total assets

 

$

654,935

 

$

645,860

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt

 

$

1,938

 

$

1,981

 

Book overdraft

 

108

 

685

 

Interest rate swap liability

 

2,802

 

4,018

 

Accounts payable

 

13,576

 

10,404

 

Billings in excess of earned revenues

 

4,694

 

4,630

 

Accrued liabilities

 

14,559

 

14,680

 

Income taxes payable

 

3,171

 

3,587

 

Total current liabilities

 

40,848

 

39,985

 

Long-term debt, less current portion

 

238,062

 

238,525

 

Deferred tax liabilities

 

93,023

 

92,962

 

Other long-term liabilities

 

2,340

 

3,118

 

Total liabilities

 

374,273

 

374,590

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 41,349,710 issued and outstanding (Note 5)

 

402

 

402

 

Additional paid-in capital

 

218,278

 

214,954

 

Retained earnings

 

62,965

 

55,205

 

Accumulated other comprehensive (loss) income, net

 

(983

)

709

 

Total stockholders’ equity

 

280,662

 

271,270

 

Total liabilities and stockholders’ equity

 

$

654,935

 

$

645,860

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

All amounts in thousands except shares and per share amounts

 

 

 

Three Months Ended
March 31,

 

 

 

2010

 

2009

 

Net sales—Solar

 

$

54,811

 

$

34,187

 

Net sales—Quality Assurance

 

24,962

 

23,928

 

Total net sales

 

79,773

 

58,115

 

Cost of sales—Solar

 

31,454

 

20,794

 

Cost of sales—Quality Assurance

 

18,228

 

17,199

 

Total cost of sales

 

49,682

 

37,993

 

Gross profit

 

30,091

 

20,122

 

Selling, general and administrative expenses

 

15,969

 

10,888

 

Provision for bad debt expense

 

109

 

400

 

Earnings on equity-method investments

 

(19

)

(36

)

Operating income

 

14,032

 

8,870

 

Interest income

 

28

 

14

 

Interest expense

 

(4,231

)

(4,059

)

Foreign currency transaction losses

 

(43

)

(360

)

Unrealized gain on interest rate swap

 

1,216

 

569

 

Income before income tax expense

 

11,002

 

5,034

 

Income tax expense

 

3,242

 

1,921

 

Net income

 

$

7,760

 

$

3,113

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation loss

 

(1,692

)

(1,047

)

Total comprehensive income

 

$

6,068

 

$

2,066

 

Earnings per share (Note 3):

 

 

 

 

 

Basic

 

$

0.19

 

$

0.09

 

Diluted

 

$

0.19

 

$

0.08

 

Weighted-average shares outstanding (Note 3):

 

 

 

 

 

Basic

 

40,190,769

 

36,434,486

 

Diluted

 

41,698,849

 

37,464,766

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

 

 

 

Three Months Ended
March 31,

 

 

 

2010

 

2009

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

7,760

 

$

3,113

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

2,882

 

2,750

 

Amortization of intangibles

 

2,876

 

2,876

 

Amortization of deferred financing costs

 

332

 

288

 

Stock-based compensation expense

 

3,791

 

404

 

Unrealized gain on interest rate swap

 

(1,216

)

(569

)

Earnings on equity investments

 

(19

)

(36

)

(Gain) loss on disposal of property, plant and equipment

 

(1

)

1

 

Provision for bad debt expense

 

109

 

400

 

Provision for deferred taxes

 

1,047

 

(163

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(4,497

)

6,734

 

Inventories

 

(853

)

1,103

 

Accounts payable

 

3,489

 

(6,409

)

Accrued liabilities

 

180

 

1,691

 

Income taxes payable

 

(323

)

(1,369

)

Other, net

 

(2,315

)

1,308

 

Net cash provided by operating activities

 

13,242

 

12,122

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(3,149

)

(5,773

)

Proceeds from sale of fixed assets

 

12

 

 

Net cash used in investing activities

 

(3,137

)

(5,773

)

FINANCING ACTIVITIES

 

 

 

 

 

Long-term debt repayments

 

(463

)

(463

)

Principal payments on capital lease obligations

 

(43

)

(40

)

Other issuance costs

 

(1,138

)

(250

)

Net cash used in financing activities

 

(1,644

)

(753

)

Effect of exchange rate changes on cash

 

(1,350

)

(504

)

Net increase in cash and cash equivalents

 

7,111

 

5,092

 

Cash and cash equivalents, Beginning of period

 

69,149

 

27,868

 

Cash and cash equivalents, End of period

 

$

76,260

 

$

32,960

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 1—BASIS OF PRESENTATION

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and quarterly reports on the Form 10-Q. Accordingly, they do not include all of the information and the notes required for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009, included in the Company’s Form 10-K filed with the SEC on March 19, 2010. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of only normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results.

 

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.

 

Certain prior period disclosures have been reclassified to conform to the current period’s presentation.

 

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard related to Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on the Company’s condensed consolidated financial statements.

 

In June 2009, the FASB issued a standard related to Amendments to FASB Interpretation No. 46(R). The standard requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on the Company’s condensed consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather than as a combined unit. The amendments will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on the Company’s condensed consolidated financial statements.

 

5



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 3—EARNINGS PER SHARE

 

In connection with the Company’s initial public offering (“IPO”) that occurred in November 2009, existing holders of Class A, B, C, D, E and F units were issued shares of common stock in exchange for their units. Shares of common stock were issued for vested units and restricted common stock for unvested units based upon the equity value of the Company on the IPO date, in accordance with the STR Holdings LLC agreement relating to priority distribution of units for shares.

 

The impact of this issuance has been applied on a retrospective basis to determine earnings per share for the Company’s three month period ended March 31, 2009. The number of common shares reflected in the calculation is the total number of shares (vested and unvested) issued to the Company’s unitholders based upon their units held on the IPO date. The vesting provisions of the units have been applied to the total common shares issued to determine basic earnings per share (based upon vested common shares equivalent to vested units) and diluted earnings per share (based upon the treasury stock method for unvested restricted common shares equivalent to unvested units).

 

The calculation of basic and diluted earnings per share for the periods presented is as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2010

 

2009

 

Basic and diluted net earnings per share

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income

 

$

7,760

 

$

3,113

 

Denominator:

 

 

 

 

 

Weighted-average shares outstanding

 

40,190,769

 

36,434,486

 

Add: dilutive effect of stock options

 

705,084

 

 

Add: dilutive effect of restricted common stock units

 

802,996

 

1,030,280

 

Weighted-average shares outstanding with dilution

 

41,698,849

 

37,464,766

 

Basic earnings per share

 

$

0.19

 

$

0.09

 

Diluted earnings per share

 

$

0.19

 

$

0.08

 

 

2,790,601 stock options issued in November 2009 were not included in the computation of diluted weighted-average shares outstanding because the effect would be anti-dilutive.

 

NOTE 4—INVENTORIES

 

        Inventories consist of the following:

 

 

 

March 31,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Finished goods

 

$

 4,043

 

$

 2,547

 

Raw materials

 

8,785

 

9,720

 

 

 

$

 12,828

 

$

 12,267

 

 

6



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 5—STOCKHOLDERS’ EQUITY

 

Changes in stockholders’ equity for the three months ended March 31, 2010 are as follows:

 

 

 

Common Stock

 

Additional
Paid-In

 

Accumulated
Other
Comprehensive

 

Retained

 

Total
Stockholders’

 

 

 

Issued

 

Amount

 

Capital

 

(Loss) Income

 

Earnings

 

Equity

 

Balance at December 31, 2009

 

40,166,397

 

$

402

 

$

214,954

 

$

709

 

$

55,205

 

$

271,270

 

Stock-based compensation

 

73,116

 

 

3,791

 

 

 

3,791

 

Net income

 

 

 

 

 

7,760

 

7,760

 

Offering costs from IPO

 

 

 

(467

)

 

 

(467

)

Foreign currency translation

 

 

 

 

(1,692

)

 

(1,692

)

Balance at March 31, 2010

 

40,239,513

 

$

402

 

$

218,278

 

$

(983

)

$

62,965

 

$

280,662

 

 

Preferred Stock

 

The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value. At March 31, 2010, there were no shares issued or outstanding.

 

Common Stock

 

The Company’s Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At March 31, 2010, there were 41,349,710 shares of issued and outstanding common stock. Each share of common stock is entitled to one vote per share. Included in the 41,349,710 shares are 40,239,513 shares of common stock and 1,110,197 shares of restricted unvested common stock.

 

NOTE 6—STOCK-BASED COMPENSATION

 

On November 6, 2009, the Company’s Board of Directors approved the Company’s 2009 Equity Incentive Plan (the “2009 Plan”) which became effective on the same day. A total of 4,750,000 shares of common stock, subject to increase on an annual basis, are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, “options,” stock appreciation rights, shares of restricted stock, or “restricted stock,” rights to dividend equivalents and other stock-based awards, collectively, the “awards.” The Board of Directors or the committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by us or our affiliates, or a company acquired by us or with which we combine. Options generally vest monthly over a five-year period and expire ten years from the date of grant.

 

On November 6, 2009, the Company issued 3,495,685 options to purchase shares of the Company’s common stock at exercise prices ranging from $10.00 to $21.50 to certain employees and directors under the 2009 Plan. There were also 40,000 restricted shares issued on the same date to certain directors that are included in the unvested restricted shares at March 31, 2010. There were 1,214,315 shares available for grant under the 2009 Plan as of March 31, 2010.

 

7



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 6—STOCK-BASED COMPENSATION (Continued)

 

The following table summarizes the options activity under the Company’s 2009 Plan for the three months ended March 31, 2010:

 

 

 

Options Outstanding

 

 

 

Number
of
Shares

 

Weighted-
Average
Exercise
Price

 

Weighted -
Average
Remaining
Contractual
Term
(in years)

 

Weighted
Average
Grant-Date
Fair Value

 

Aggregate
Intrinsic
Value(1)

 

Balance at December 31, 2009

 

3,495,685

 

$

10.65

 

 

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Canceled/forfeited

 

 

 

 

 

 

 

 

 

Balance at March 31, 2010

 

3,495,685

 

$

10.65

 

9.58

 

$

4.59

 

$

44,928

 

Vested and exercisable as of March 31, 2010

 

1,779,432

 

$

10.67

 

9.58

 

$

4.44

 

$

22,832

 

Vested and exercisable as of March 31, 2010 and expected to vest thereafter

 

3,495,685

 

$

10.65

 

9.58

 

$

4.59

 

$

44,928

 

 


(1)         The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $23.50 of the Company’s common stock on March 31, 2010.

 

As of March 31, 2010, there was $7.2 million of unrecognized compensation cost related to outstanding employee and director stock option awards. This amount is expected to be recognized over a weighted-average remaining vesting period of 2.93 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

 

The following table summarizes the restricted shares activity under the Company’s 2009 Plan for the three months ended March 31, 2010:

 

 

 

Unvested
Restricted Shares

 

 

 

Number of
Shares

 

Weighted-
Average
Grant-
Date
Fair
Value

 

Unvested at December 31, 2009

 

1,183,313

 

$

10.00

 

Granted

 

 

 

 

Vested

 

(73,116

)

 

 

Canceled

 

 

 

 

Unvested at March 31, 2010

 

1,110,197

 

$

10.00

 

Expected to vest after March 31, 2010(1)

 

1,110,197

 

$

10.00

 

 


(1)                     As of March 31, 2010, there was $5.6 million of unrecognized compensation cost related to employee and director unvested restricted shares. This amount is expected to be recognized over a weighted-average remaining vesting period of 2.23 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

 

8



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 6—STOCK-BASED COMPENSATION (Continued)

 

Stock-based compensation expense was included in the following condensed consolidated statement of operations and comprehensive income categories:

 

 

 

Three Months Ended
March 31,

 

 

 

2010

 

2009

 

Selling, general and administrative expense

 

$

3,791

 

$

404

 

Total recognized tax benefit

 

$

 

$

 

 

NOTE 7—INCOME TAXES

 

The Company’s effective income tax rate was 29.5% compared to the United States federal statutory tax rate of 35%. Included in the Company’s effective rate is a $829 Advanced Energy Project tax credit that the Company received in January 2010 under the American Recovery and Reinvestment Act of 2009. The tax credit was partially offset by its related deferred tax liability, with a net impact of $539 being accounted for as a discrete item during the first quarter of 2010, providing a one-time 4.9% benefit to the Company’s effective tax rate. The Company’s effective tax rate was approximately 38.2% for the three months ended March 31, 2009.

 

NOTE 8—FAIR VALUE MEASUREMENTS AND INTEREST RATE SWAP

 

Fair Value Measurements

 

The following table provides the Company’s financial assets and liabilities reported at fair value and measured on a recurring basis as of March 31, 2010 and December 31, 2009:

 

Description

 

Total

 

Quoted Prices in
Active Market for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Interest rate swap liability at December 31, 2009

 

$

(4,018

)

$

 

$

(4,018

)

$

 

Unrealized gain included in net income

 

1,216

 

 

1,216

 

 

Interest rate swap liability at March 31, 2010

 

$

(2,802

)

$

 

$

(2,802

)

$

 

 

The fair value for the Company’s interest rate swap is determined using observable current market information as of the reporting date.

 

Interest Rate Swap

 

Effective September 13, 2007, the Company entered into an interest rate swap contract for $200 million notional principal amount of its variable rate debt. The notional principal amount decreased to $130 million on October 1, 2008 and the contract terminates on September 30, 2010. The Company was required under the terms of both its First Lien and Second Lien debt agreements to fix its interest costs on at least 50% of its funded indebtedness for a minimum of three years to economically hedge against the potential rise in interest rates. The interest rate swap was not designated by the Company as a cash flow hedge under ASC 815-10—Accounting for Derivative Instruments and Hedging Activities, as amended. As a result, changes in the fair value of the swap are recorded in the statement of operations. The fair value of the swap was a liability of $2,802 and $4,018 at March 31, 2010 and December 31, 2009, respectively.

 

9



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 9—COMMITMENTS AND CONTINGENCIES

 

The Company is a party to claims and litigation in the normal course of its operations. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company typically does not provide contractual warranties on its products. However, on limited occasions, the Company incurs costs to service its products in connection with specific product performance matters. The Company has accrued for specific product performance matters incurred in 2009 and 2010 that are probable and estimable based on its best estimate of ultimate cash expenditures that it will incur for such items. The following table summarizes the Company’s product performance liability that is recorded in accrued liabilities in the condensed consolidated balance sheets:

 

 

 

March 31,
2010

 

March 31,
2009

 

Balance as of beginning of period

 

$

4,210

 

$

4,736

 

Additions

 

85

 

247

 

Cash settlements

 

(157

)

(685

)

Balance as of end of period

 

$

4,138

 

$

4,298

 

 

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION

 

ASC 280-10-50—Disclosure about Segments of an Enterprise and Related Information, establishes standards for the manner in which companies report information about operating segments, products, services, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the enterprise for making operating decisions and assessing financial performance. Based on the nature of its products and services, the Company has two reporting segments: Solar and Quality Assurance. Information as to each of these operations is set forth below.

 

Adjusted EBITDA is the main metric used by the management team and the Board to plan, forecast and review the Company’s segment performance. Adjusted EBITDA represents net income before interest income and expense, income tax expense, depreciation, amortization, stock-based compensation expense, transaction fees, equity earnings on investments and certain non-recurring income and expenses from the results of operations.

 

The following table sets forth information about the Company’s operations by its two reportable segments and by geographic area:

Operations by Reportable Segment

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Segment Adjusted EBITDA

 

 

 

 

 

Solar

 

$

24,891

 

$

15,138

 

Quality Assurance

 

1,638

 

2,826

 

Segment Adjusted EBITDA

 

$

26,529

 

$

17,964

 

 

10



Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Reconciliation of Adjusted EBITDA to Net Income

 

 

 

 

 

Segment Adjusted EBITDA

 

$

26,529

 

$

17,964

 

Corporate Adjusted EBITDA

 

(2,818

)

(3,309

)

Adjusted EBITDA

 

23,711

 

14,655

 

Depreciation and amortization

 

(5,758

)

(5,626

)

Interest income

 

28

 

14

 

Interest expense

 

(4,231

)

(4,059

)

Income taxes

 

(3,242

)

(1,921

)

Management advisory fees

 

 

(150

)

Unrealized gain on interest rate swap

 

1,216

 

569

 

Secondary offering expense

 

(193

)

 

Stock-based compensation

 

(3,791

)

(404

)

Gain (loss) on disposal of property, plant and equipment

 

1

 

(1

)

Earnings on equity-method investments

 

19

 

36

 

Net Income

 

$

7,760

 

$

3,113

 

 

Operations by Geographic Area

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Net Sales

 

 

 

 

 

United States

 

$

36,940

 

$

35,661

 

Spain

 

23,156

 

11,953

 

Malaysia

 

8,016

 

155

 

Hong Kong

 

5,971

 

6,232

 

Other

 

5,690

 

4,114

 

Total Net Sales

 

$

79,773

 

$

58,115

 

 

Depreciation and Amortization by Reportable Segment

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Depreciation and Amortization

 

 

 

 

 

Solar

 

$

3,312

 

$

3,258

 

Quality Assurance

 

2,297

 

2,165

 

Corporate

 

149

 

203

 

Total Depreciation and Amortization

 

$

5,758

 

$

5,626

 

 

Capital Expenditures by Reportable Segment

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Capital Expenditures

 

 

 

 

 

Solar

 

$

1,160

 

$

3,108

 

Quality Assurance

 

1,709

 

2,657

 

Corporate

 

280

 

8

 

Total Capital Expenditures

 

$

3,149

 

$

5,773

 

 

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Table of Contents

 

STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

All amounts in thousands except share amounts, per share amounts or unless otherwise noted

 

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

 

Total Assets by Reportable Segment

 

 

 

March 31,
2010

 

December 31,
2009

 

Assets

 

 

 

 

 

Solar

 

$

418,564

 

$

416,853

 

Quality Assurance

 

220,968

 

214,787

 

Corporate

 

15,403

 

14,220

 

Total Assets

 

$

654,935

 

$

645,860

 

 

Long-Lived Assets by Geographic Area

 

 

 

March 31,
2010

 

December 31,
2009

 

Long-lived Assets

 

 

 

 

 

United States

 

$

235,865

 

$

240,017

 

Spain

 

19,102

 

22,308

 

Malaysia

 

13,550

 

9,576

 

China

 

6,767

 

7,038

 

Hong Kong

 

1,994

 

2,098

 

Other countries

 

3,745

 

4,021

 

Total Long-Lived Assets

 

$

281,023

 

$

285,058

 

 

Foreign sales are based on the country in which the sales originate. Solar sales to two of the Company’s major customers for the three months ended March 31, 2010 and 2009 were $19,272 and $15,249, respectively. Accounts receivable from those customers amounted to $6,224 and $3,179 as of March 31, 2010 and December 31, 2009, respectively.

 

NOTE 11—SUBSEQUENT EVENT

 

Secondary Public Offering of Common Stock on Behalf of Selling Stockholders

 

On April 15, 2010, the Company filed a final prospectus with the SEC pursuant to Rule 424(b) for a public offering of 8,050,000 shares of common stock (including 1,050,000 shares sold upon the exercise of the underwriters’ over-allotment option) which were sold at a price to the public of $18.75 per share by certain of the Company’s stockholders. The aggregate offering price for all shares sold in the offering by the selling stockholders, was $150,938. The offer and sale of all of the shares in the offering were registered under the Securities Act of 1933 pursuant to a registration statement on Form S-1 (File No. 333-165893), which was declared effective by the SEC on April 15, 2010. The offering commenced as of April 12, 2010 and closed on April 21, 2010. Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co. acted as representatives of the underwriters. The Company did not receive any of the proceeds from the sale of the shares in the offering.

 

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Table of Contents

 

Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

We were founded in 1944 as a plastics research and development company and evolved into two core businesses; Solar encapsulant manufacturing and Quality Assurance services. We launched our Quality Assurance business in 1973, and we commenced sales of our Solar encapsulant products in the late 1970s.

 

We are a leading global provider of encapsulants to the solar module industry. Encapsulants are a critical component used in solar modules. We supply solar module encapsulants to many of the major solar module manufacturers and believe we were the primary supplier of encapsulants to each of our top 10 customers in the first quarter ended March 31, 2010, which we believe is due to our superior product performance and customer service. Our encapsulants are used in both crystalline and thin-film solar modules.

 

Our Quality Assurance business is a leader in the consumer products quality assurance market, and we believe our Quality Assurance business represents the only global testing services provider exclusively focused on the consumer products market. Our Quality Assurance business provides inspection, testing, auditing and consulting services that enable retailers and manufacturers to determine whether products and facilities meet applicable safety, regulatory, quality, performance and social standards.

 

STRATEGIC FOCUS

 

Our objective for our Solar business is to enhance our position as a leading global provider of encapsulants to solar module manufacturers. We plan to accomplish this by continuing to invest in product development to enhance our superior product technologies, optimizing our global manufacturing and distribution footprint and increasing our market share in the rapidly growing Asia-Pacific region via our ‘One Plus China’ growth strategy. Our plant in Malaysia represents the first milestone of this strategy. The second milestone will be to establish a production facility in China when we believe the timing is appropriate. Events associated with our strategic initiatives during the first three months of 2010 follow:

 

·                  We increased our solar market share in the Asia Pacific region, including China. Solar net sales into the Asia Pacific region increased by approximately 72% in the first quarter of 2010 compared to the corresponding 2009 period and by approximately 31% over net sales for the fourth quarter of 2009.

 

·                  Our recently-opened Malaysia encapsulant facility continued to ramp and operated successfully with 1.0 GW of capacity that is now producing commercial volumes. We are in the process of expanding the facility’s capacity from 1.0 GW to 2.0 GW by the end of the second quarter of 2010. In addition, we recently announced plans to double the size of the existing production and warehouse space by the end of the first quarter of 2011 to provide for total capacity of up to 4.0 GW.

 

·                  We continued our investment in innovation with the appointment of a Chief Technology Officer who oversees the Solar segment’s research and development and technical service functions with the intent of developing new generation encapsulant technology and creating a pipeline of innovative products.  Also, we continued the pursuit of commercialization of our new thermoplastic encapsulant that is specific to thin-film applications and our new “Generation 3” fast-cure formulation that can double laminator throughput. We believe these innovative products will provide a strong value proposition to our customers by increasing their manufacturing throughput, improving yields and reducing their overall cost of manufacturing.

 

·                  We continued to strengthen our customer relationships and entered into a contract with another of our top ten customers. As of March 31, 2010, we have formal contractual relationships with six of our top ten customers, the most in STR Solar’s history. These contracts provide for better operational and capital efficiency as well as improved manufacturing visibility, allowing us to better serve the needs of our growing customers.

 

Our Quality Assurance business will focus on leveraging our global footprint and cost base, technical and industry knowledge, breadth of service offerings and superior customer service to drive sales growth. During the first quarter of 2010, the Quality Assurance segment established a global leadership team to increase the global alignment of its operating units and expand services with existing clients and aggressively target new clients on a global scale.

 

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Table of Contents

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our condensed consolidated financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, valuation of inventory, long-lived intangible and tangible assets, goodwill, product performance matters, income taxes and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The accounting policies we believe to be most critical to understand our financial results and condition and that require complex and subjective management judgments are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2010.

 

There have been no changes in such policies during the quarter ended March 31, 2010.

 

RESULTS OF OPERATIONS

 

Condensed Consolidated Results of Operations

 

Net Sales

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Net sales—Solar

 

$

54,811

 

69

%

$

34,187

 

59

%

$

20,624

 

60

%

Net sales—Quality Assurance

 

$

24,962

 

31

%

$

23,928

 

41

%

$

1,034

 

4

%

Total net sales

 

$

79,773

 

100

%

$

58,115

 

100

%

$

21,658

 

37

%

 

Net sales increased $21.7 million, or 37%, to $79.8 million for the three months ended March 31, 2010 from $58.1 million for the corresponding 2009 period, primarily driven by strong sales volume growth achieved in our Solar segment.

 

Net Sales—Solar

 

Net sales in our Solar segment increased $20.6 million, or 60%, to $54.8 million for the three months ended March 31, 2010 from $34.2 million for the corresponding 2009 period. Volume increased 87% mainly due to an improved solar industry macro environment that increased demand for our encapsulants. The solar module supply chain was negatively impacted in the first quarter of 2009 by, among other things, the Spanish government policy change in feed-in tariff policy that occurred in 2008 and reduced end user solar module demand that created excess module inventory in the supply chain and a lack of available financing for solar projects due to global banking conditions. Also, our first quarter 2009 sales were disproportionately impacted as many of our European module customers lost market share to fast-emerging, low cost Asian module manufacturers. During the second half of 2009 and through the first quarter of 2010, overall solar industry conditions have improved and we have increased our market share with Asian module manufacturers. Demand in the first quarter of 2010 also benefited from a pull-in of orders ahead of changes to German feed-in tariffs anticipated for the second half of 2010. This has led to an increase in solar module sales and increased demand for our encapsulants. As such, we may see increased Solar sales in the first half of 2010 than in the second half of 2010. Price decreased 30% due to overall solar industry pricing pressure, mix, as well as deliberate price reductions granted upon the signing of contracts with certain customers in exchange for increased volume. The Euro’s strengthening versus the U.S. dollar positively impacted our first quarter 2010 net sales by 3%.

 

First quarter 2010 net sales increased by $4.5 million or 9% on a sequential basis from fourth quarter 2009 net sales of $50.3 million. The majority of such increase was due to increased volumes of 22% driven by improved user demand for solar modules from pull-ins associated with the changes to German feed-in tariffs and strong market penetration with Asian module manufacturers. On a sequential quarter over quarter basis, price/mix decreased 11% due to the same reasons discussed above while foreign exchange negatively impacted net sales by 2%.

 

Net Sales—Quality Assurance

 

Net sales in our Quality Assurance segment increased $1.0 million, or 4%, to $24.9 million for the three months ended March 31,

 

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Table of Contents

 

2010 from $23.9 million in 2009, primarily as a result of increased volume in the United States and Europe. U.S. Quality Assurance sales growth was mainly driven by our social accountability auditing business. While net sales increased compared to the first quarter of 2009, we did experience lower net sales due to the reduction in services procured from us by certain clients. We expect net sales to increase during the remainder of 2010 as the first quarter is historically slowest for this segment due to seasonal factors. In addition, the Quality Assurance leadership team is keenly focused on increasing sales to existing clients as well as aggressively target new business.

 

Cost of Sales

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Cost of sales—Solar

 

$

31,454

 

39

%

$

20,794

 

36

%

$

10,660

 

51

%

Cost of sales—Quality Assurance

 

$

18,228

 

23

%

$

17,199

 

29

%

$

1,029

 

6

%

Total cost of sales

 

$

49,682

 

62

%

$

37,993

 

65

%

$

11,689

 

31

%

 

Cost of sales increased $11.7 million, or 31%, to $49.7 million for the three months ended March 31, 2010 from $38.0 million for the corresponding 2009 period, mainly as a result of the increase in our Solar net sales as noted above and increased raw material and direct labor costs.

 

Cost of Sales—Solar

 

Cost of sales in our Solar segment increased $10.7 million, or 51%, to $31.5 million for the three months ended March 31, 2010 from $20.8 million in the same period in 2009. The increase in our Solar segment’s cost of sales was mainly due to increased variable costs associated with the increase in sales volume, raw material inflation and higher labor and benefits.

 

Non-cash intangible asset amortization expense of $2.1 million was included in cost of sales for each of the three months ended March 31, 2010 and 2009, respectively.

 

Cost of Sales—Quality Assurance

 

Cost of sales in our Quality Assurance segment increased $1.0 million, or 6%, to $18.2 million for the three months ended March 31, 2010 from $17.2 million for the same period in 2009. This increase was the result of increased labor expense, which provided unfavorable cost absorption due to the first quarter being historically the seasonally slowest for Quality Assurance sales generation and lower volume than anticipated from certain clients.

 

Non-cash intangible asset amortization expense of $0.8 million was included in cost of sales for each of the three months ended March 31, 2010 and 2009, respectively.

 

Gross Profit

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Gross profit

 

$

30,091

 

38

%

$

20,122

 

35

%

$

9,969

 

50

%

 

Gross profit increased $10.0 million, or 50%, to $30.1 million for the three months ended March 31, 2010 from $20.1 million for the same period in 2009 primarily due to the sales increase in our Solar segment. As a percentage of sales, gross profit increased 310 basis points from 34.6% for the three months ended March 31, 2009 to 37.7% for the same period in 2010.

 

Gross profit increased as a percentage of sales primarily due to increased operating leverage of fixed costs associated with our Solar sales volume increase, partially offset by lower pricing and increased raw material costs in our Solar segment and higher labor cost incurred by our Quality Assurance segment. Also, we generated a higher mix of net sales in our higher margin Solar business, which accounted for 69% and 59% of our consolidated net sales for the three months ended March 31, 2010 and 2009, respectively.

 

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Table of Contents

 

Non-cash intangible asset amortization expense of $2.9 million reduced gross profit for the three months ended March 31, 2010 and 2009, respectively.

 

Selling, General and Administrative Expenses (“SG&A”)

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

SG&A

 

$

15,969

 

20

%

$

10,888

 

19

%

$

5,081

 

47

%

 

SG&A increased 47% for the three months ended March 31, 2010 compared to the corresponding period in the prior year. Non-cash stock-based compensation expense increased by approximately $3.4 million, mainly due to the issuance of stock options, which have accelerated vesting clauses, in connection with our initial public offering (“IPO”) that occurred in November 2009. At the IPO date, we issued stock options for incentive units that only partially converted or did not convert to common shares. These stock options began vesting on January 31, 2010. We project that, based on current stock options issued and outstanding, our stock-based compensation expense will be approximately $1.4 million per quarter beginning in the second quarter of 2010 for the remainder of 2010. Salaries and benefits increased $1.6 million for the three months ended March 31, 2010 due to increased headcount in our sales, information technology and finance functions necessary to support our anticipated growth and operations as a public company. The increase in information technology costs was partially the result of a portion of such expense being capitalized in the prior year’s quarter when the projects were in the development phase.

 

Interest Expense

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Interest expense

 

$

4,231

 

5

%

$

4,059

 

7

%

$

172

 

4

%

 

Interest expense increased $0.2 million, or 4%, to $4.2 million for the three months ended March 31, 2010 from $4.0 million in the corresponding 2009 period. This increase was primarily the result of higher non-cash amortization expense of deferred financing costs and lower proceeds received on our interest rate swap that more than offset lower interest rates and lower debt levels.

 

Other Income (Expense) Items

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Other income (expense)

 

$

1,201

 

2

%

$

223

 

%

$

978

 

439

%

 

During the three months ended March 31, 2010, we recognized a $1.2 million unrealized gain on our interest rate swap entered into during 2007 as a requirement under our credit facilities compared to a $0.6 million gain in the corresponding 2009 period. Foreign currency transaction losses decreased $0.3 million during the three months ended March 31, 2010 to a loss of approximately $0.1 million from a loss of $0.4 million in the corresponding 2009 period.

 

Income Taxes

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Income taxes

 

$

3,242

 

4

%

$

1,921

 

3

%

$

1,321

 

69

%

 

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Table of Contents

 

Income tax expense increased $1.3 million to $3.2 million for the three months ended March 31, 2010 from $1.9 million in the 2009 period. Our effective tax rate for the three months ended March 31, 2010 was 29.5% compared to the federal statutory rate of 35% and our effective tax rate for the three months ended March 31, 2009 was 38.2%. Included in our first quarter 2010 effective rate is a $829 Advanced Energy Project tax credit that we received in January 2010 under the American Recovery and Reinvestment Act of 2009. The tax credit was partially offset by its related deferred tax liability, with a net impact of $539 being accounted for as a discrete item during the first quarter of 2010, providing a one-time 4.9% benefit to our effective tax rate.

 

Net Income

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

% of
Total
Revenue

 

Amount

 

% of
Total
Revenue

 

Amount

 

%

 

Net income

 

$

7,760

 

10

%

$

3,113

 

5

%

$

4,647

 

149

%

 

Net income increased $4.7 million to $7.8 million for the three months ended March 31, 2010 from net income of $3.1 million in 2009 primarily due to the increased Solar Adjusted EBITDA as discussed below, gain on our interest rate swap and lower effective tax rate that more than offset the Quality Assurance Adjusted EBITDA decline as discussed below.

 

Non-GAAP Earnings Per Share

 

To supplement our condensed consolidated financial statements, we use a non-GAAP financial measure called non-GAAP earnings per share (“EPS”). Non-GAAP EPS is defined for the periods presented in the following table. It should be noted that diluted weighted average shares are determined on a GAAP basis and the resulting share count is used for computing both GAAP and non-GAAP diluted EPS.

 

Management believes that non-GAAP EPS provides meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of the core business operating results and may help in comparing current-period results with those of prior periods as well as with our peers. Non-GAAP EPS is one of the main metrics used by management and our board of directors to plan and measure our operating performance. In addition, non-GAAP EPS is the only metric used for our chief executive officer and chief financial officer, and is also used in conjunction with segment Adjusted EBITDA, to determine annual bonus compensation for our segment presidents under our management incentive plan.

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Net income

 

$

7,760

 

$

3,113

 

Adjustments to net income:

 

 

 

 

 

Amortization of deferred financing costs

 

332

 

288

 

Amortization of intangibles

 

2,876

 

2,876

 

Stock-based compensation expense

 

3,791

 

404

 

Secondary offering expense

 

193

 

 

Tax effect of adjustments

 

(2,224

)

(1,153

)

 

 

 

 

 

 

Non-GAAP net income

 

$

12,728

 

$

5,528

 

 

 

 

 

 

 

Diluted shares outstanding

 

41,698,849

 

37,464,766

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.19

 

$

0.08

 

 

 

 

 

 

 

Diluted non-GAAP net income per share

 

$

0.31

 

$

0.15

 

 

Segment Results of Operations

 

We report our business in two segments: Solar and Quality Assurance. The accounting policies of the segments are the same. We measure segment performance based on total revenues and Adjusted EBITDA. See Note 10-Reportable Segments and Geographical Information located in the Notes to the Condensed Consolidated Financial Statements for a definition of Adjusted EBITDA and further information. Revenues for each of our segments are described in further detail above. Corporate overhead is not allocated to our segments, and therefore not included in the presentation below. It is mainly comprised of expenses associated with corporate headquarters, the executive management team and certain centralized functions that benefit us but are not directly attributable to the

 

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segments such as finance and certain legal costs. The discussion that follows is a summary analysis of total revenues and the primary changes in Adjusted EBITDA by segment.

 

Solar

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

Amount

 

Amount

 

%

 

Net Sales

 

$

54,811

 

$

34,187

 

$

20,624

 

60

%

Adjusted EBITDA

 

$

24,891

 

$

15,138

 

$

9,753

 

64

%

Adjusted EBITDA as % of Segment Net Sales

 

45.4

%

44.2

%

 

 

 

 

 

Adjusted EBITDA as percentage of net sales for this business segment increased for the three months ended March 31, 2010 compared to the same period in 2009 due to higher gross margins driven by the increase in net sales and increased absorption of fixed costs. SG&A was relatively flat for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.

 

Quality Assurance

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Change

 

 

 

Amount

 

Amount

 

Amount

 

%

 

Net Sales

 

$

24,962

 

$

23,928

 

$

1,034

 

4

%

Adjusted EBITDA

 

$

1,638

 

$

2,826

 

$

(1,188

)

(42

)%

Adjusted EBITDA as % of Segment Net Sales

 

6.6

%

11.8

%

 

 

 

 

 

Adjusted EBITDA as a percentage of net sales for this business segment decreased for the three months ended March 31, 2010 compared to the same period in 2009. SG&A expenses increased by $1.0 million due to increased labor and benefits expense. This increase is primarily related to headcount added in the prior year to support the full year 2009 sales increase of 8.6% compared to 2008 that provided unfavorable cost absorption due to the first quarter being historically slowest for Quality Assurance sales generation due to seasonal factors and the labor associated with information technology systems that are near the implementation stage that were capitalized in the prior year’s quarter as the projects were in the development phase.

 

Financial Condition, Liquidity and Capital Resources

 

We have financed our operations primarily through cash provided by operations. From 2003 through the first quarter of 2010, net cash provided by operating activities has been sufficient to fund our working capital needs, debt service and capital expenditures. As of March 31, 2010, our principal sources of liquidity consisted of $77.3 million of cash and short-term investments and $20.0 million of availability under the $20.0 million revolving portion of our first lien credit facilities. Our total indebtedness was $240.0 million as of March 31, 2010.

 

Our principal needs for liquidity have been, and for the foreseeable future will continue to be, for capital expenditures, debt service and working capital. The main portion of our capital expenditures has been and is expected to continue to be for expansion. Working capital requirements have increased as a result of our overall growth in prior years and the need to fund higher accounts receivable and inventory. We believe that our cash flow from operations, available cash and cash equivalents and available borrowings under the revolving portion of our credit facilities will be sufficient to meet our liquidity needs, including for capital expenditures, through at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through borrowings under our credit facilities, the incurrence of other indebtedness, additional equity issuances or a combination of these potential sources of liquidity.

 

Although we have no plans to do so, if we decide to pursue one or more strategic acquisitions, we may incur additional debt, if permitted under our existing credit facilities, or sell additional equity to raise any needed capital.

 

Cash Flows

 

Cash Flow from Operating Activities

 

Net cash provided by operating activities was $13.2 million for the three months ended March 31, 2010. Cash provided by operating activities was attributable to $7.8 million in net income and non-cash expenses, including $5.8 million of depreciation and

 

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amortization and $3.8 million of non-cash stock-based compensation less $1.2 million unrealized gain on our interest rate swap transaction. Working capital increased $5.5 million.

 

Net cash provided by operating activities was $12.1 million for the three months ended March 31, 2009. Cash provided by operating activities was attributable to $3.1 million in net income and non-cash expenses, including $5.6 million of depreciation and amortization and $0.4 million of non-cash stock-based compensation less $0.6 million unrealized gain on our interest rate swap transaction. Working capital was reduced by $3.4 million.

 

Cash Flow from Investing Activities

 

Net cash used for investing activities of $3.1 million and $5.8 million for the three months ended March 31, 2010 and 2009, respectively was related to capital expenditures.

 

For our Solar segment, we had capital expenditures of $1.1 million and $3.1 million for the three months ended March 31, 2010 and 2009, respectively. Our Solar capital expenditures for these periods consisted primarily of equipment costs associated with the addition of new production lines and construction costs for our recently opened Malaysia facility.

 

For our Quality Assurance segment, we had capital expenditures of $1.7 million and $2.7 million for the three months ended March 31, 2010 and 2009, respectively. Our Quality Assurance capital expenditures for these periods consisted primarily of costs associated with equipment purchases for testing, information systems and our laboratory expansions in China and the Indian sub-continent as well as associated capitalized labor related to the enhancement of our information systems.

 

We expect remaining 2010 consolidated capital expenditures to be approximately $38.0, of which Solar capital expenditures represent approximately $28.0 million and Quality Assurance capital expenditures represent approximately $10.0 million.

 

Free cash flow, as defined in the following table, was $10.1 million in the first quarter of 2010 compared to $6.3 million in the corresponding 2009 period. We believe free cash flow is an important measure of our overall liquidity and our ability to fund future growth and provide a return to stockholders. Free cash flow does not reflect, among other things, mandatory debt service, other borrowing activity, discretionary dividends on our common stock and acquisitions.

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Cash provided by operating activities

 

$

13,242

 

$

12,122

 

Less: capital expenditures

 

(3,149

)

(5,773

)

Free cash flow

 

$

10,093

 

$

6,349

 

 

We use this non-GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons.

 

Cash Flow from Financing Activities

 

Net cash used in financing activities was $1.6 million for the three months ended March 31, 2010 primarily for payment of IPO issuance costs of $1.1 million and $0.5 million for debt repayments.

 

Net cash used in financing activities was $0.8 million for the three months ended March 31, 2009 primarily for payment of IPO issuance costs of $0.3 million and $0.5 million for debt repayments.

 

Credit Facilities

 

On June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds (“DLJMB”), and its co-investors, together with members of our board of directors, our executive officers and other members of management, acquired 100% of the voting equity interests in our wholly-owned subsidiary, Specialized Technology Resources, Inc., for $365.6 million, including transaction costs. In connection with these transactions, we entered into a first lien credit facility and a second lien credit facility on June 15, 2007, which we refer to collectively as our “credit facilities”, in each case with Credit Suisse, as administrative agent and collateral agent. The first lien credit facility consists of a $185.0 million term loan facility, which matures on June 15, 2014, and a $20.0 million revolving credit facility, none of which was outstanding at March 31, 2010, which matures on June 15, 2012. The second lien credit facility consists of a $75.0 million term loan facility, which matures on December 15, 2014. The revolving credit facility includes a sublimit of $15.0 million for letters of credit.

 

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The obligations under each credit facility are unconditional and are guaranteed by us and substantially all of our existing and subsequently acquired or organized domestic subsidiaries. The first lien credit facility and related guarantees are secured on a first-priority basis, and the second lien credit facility and related guarantees are secured on a second-priority basis, in each case, by security interests (subject to liens permitted under the credit agreements governing the credit facilities) in substantially all tangible and intangible assets owned by us, the obligors under the credit facilities, and each of our other domestic subsidiaries, subject to certain exceptions, including limiting pledges of voting stock of foreign subsidiaries to 66% of such voting stock.

 

Borrowings under the first lien credit facility bear interest at a rate equal to (1) in the case of term loans, at our option (i) the greater of (a) the rate of interest per annum determined by Credit Suisse, from time to time, as its prime rate in effect at its principal office in the City of New York, and (b) the federal funds rate plus 0.50% per annum (the “base rate”), and in each case plus 1.50% per annum or (ii) the LIBO plus 2.50% and (2) in the case of the revolving loans, at our option (subject to certain exceptions) (i) the base rate plus 1.50% when our total leverage ratio (as defined in the first lien credit facility) is greater than or equal to 5.25 to 1.00 (“leverage level 1”), the base rate plus 1.25% when our total leverage ratio is greater than or equal to 4.50 to 1.00 but less than 5.25 to 1.00 (“leverage level 2”) and the base rate plus 1.00% when our total leverage ratio is less than 4.50 to 1.00 (“leverage level 3”) or (ii) the LIBO plus 2.50% in the case of leverage level 1, 2.25% in the case of leverage level 2 and 2.00% in the case of leverage level 3. Borrowings under the second lien credit facility bear interest at a rate equal to, at our option (i) the base rate plus 6.00% or (ii) the LIBO plus 7.00%. For the first five years of the second lien credit facility, we have the option to pay interest in cash or in kind, by increasing the outstanding principal amount of the loans by the amount of accrued interest. Interest paid in kind on the second lien credit facility will be at the rate of interest applicable to such loan described above plus an additional 1.50% per annum. If we default on the payment of any principal, interest, or any other amounts due under the credit facilities, we will be obligated to pay default interest. The default interest rate on principal payments will equal the interest rate applicable to such loan plus 2.00% per annum, and the default interest rate on all other payments will equal the interest rate applicable to base rate loans plus 2.00% per annum.

 

As of March 31, 2010 and December 31, 2009, the weighted average interest rate under our credit facilities was 4.14% for both periods before the effect of our interest rate swap. At the rate in effect on March 31, 2010 and assuming an outstanding balance of $239.9 million as of March 31, 2010, our annual debt service obligations would be $11.8 million, consisting of $9.9 million of interest and $1.9 million of scheduled principal payments. No mandatory payment is required until June 30, 2011 due to the $15.0 million payment made in conjunction with our initial public offering in November 2009. However, we plan to continue to make such debt payments based on the original required maturity schedule.

 

In addition to paying interest on outstanding principal under the credit facilities, we are required to pay a commitment fee at a rate equal to 0.50% per annum on the daily unused commitments available to be drawn under the revolving portion of the first lien credit facility. We are also required to pay letter of credit fees, with respect to each letter of credit issued, at a rate per annum equal to the applicable LIBO margin for revolving credit loans on the average daily amount of undrawn letters of credit plus the aggregate amount of all letter of credit disbursements that have not been repaid by us. We are also required to pay fronting fees, with respect to each letter of credit issued, at a rate specified by the issuer of the letters of credit and to pay Credit Suisse certain administrative fees from time to time, in its role as administrative agent. The term loans under the first lien credit facilities amortize in quarterly installments of 0.25% of the principal amount. Under certain circumstances, we may be required to reimburse the lenders under our credit facilities for certain increased fees and expenses caused by a change of law.

 

We are generally required to prepay term loan borrowings under the credit facilities with (1) 100% of the net cash proceeds we receive from non-ordinary course asset sales or as a result of a casualty or condemnation, (2) 100% of the net cash proceeds we receive from the issuance of debt obligations other than debt obligations permitted under the credit agreements, (3) 50% of the net cash proceeds of a public offering of equity and (4) 50% (or, if our leverage ratio is less than 5.25 to 1.00 but greater than or equal to 4.50 to 1.00, 25%) of excess cash flow (as defined in the credit agreements). Under the credit facilities, we are not required to prepay borrowings with excess cash flow if our leverage ratio is less than 4.50 to 1.00. Subject to a limited exception, all mandatory prepayments will first be applied to the first lien credit facility until all first lien obligations are paid in full and then to the second lien facility.

 

The first lien credit facility requires us to maintain certain financial ratios, including a maximum first lien debt ratio (based upon the ratio of indebtedness under the first lien credit facility to consolidated EBITDA, as defined in the first lien credit facility), a maximum total leverage ratio (based upon the ratio of total indebtedness, net of unrestricted cash and cash equivalents, to consolidated EBITDA) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to consolidated interest expense), which are tested quarterly. Based on the formulas set forth in the first lien credit agreement, as of March 31, 2010, we were required to maintain a maximum first lien debt ratio of 4.00 to 1.00, a maximum total leverage ratio of 6.00 to 1.00 and a minimum interest coverage ratio of 1.80 to 1.00. The second lien credit facility requires us to maintain a maximum total leverage ratio tested quarterly. Based on the formulas set forth in the second lien credit agreement, as of March 31, 2010, we were required to maintain a maximum

 

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total leverage ratio of 6.25 to 1.00. As of March 31, 2010, our first lien debt ratio was 0.93 to 1.00, our total leverage ratio was 1.74 to 1.00 and our interest coverage ratio was 5.07 to 1.00.

 

The financial ratios required under the first and second lien facilities become more restrictive over time. Based on the formulas set forth in the first lien credit agreement, as of March 31, 2011 and March 31, 2012, we are required to maintain a maximum first lien debt ratio of 3.00 to 1.00, respectively, a maximum total leverage ratio of 5.00 to 1.00, and a minimum interest coverage ratio of 2.00 to 1.00. Based on the formulas set forth in the second lien credit agreement, as of March 31, 2011 and March 31, 2012, we are required to maintain a maximum total leverage ratio of 5.25 to 1.00.

 

The credit agreements also contain a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions; sales of assets; sale-leaseback transactions; investments and acquisitions; indebtedness; liens; affiliate transactions; the nature of our business; a prohibition on dividends and restrictions on other restricted payments; modifications or prepayments of our second lien credit facility or other material subordinated indebtedness; and issuing redeemable, convertible or exchangeable equity securities. Under the credit agreements, we are permitted maximum annual capital expenditures of $12.0 million in the fiscal year ending December 31, 2007, with such limit increasing by $1.0 to $2.0 million for each fiscal year thereafter. Capital expenditure limits in any fiscal year may be increased by 40.0% of the excess of consolidated EBITDA for such fiscal year over baseline EBITDA for that year, which is defined as $50.0 million for the fiscal year ending December 31, 2009 and increasing by $5.0 million per year thereafter. The capital expenditure limitations are subject to a two-year carry-forward of the unused amount from the previous fiscal year which will be approximately $15 million for the year ending December 31, 2010.

 

The credit agreements contain events of default that are customary for similar facilities and transactions, including a cross-default provision with respect to other material indebtedness (which, with respect to the first lien credit agreement, would include the second lien credit agreement and with respect to the second lien credit agreement, would include the first lien credit agreement) and an event of default that would be triggered by a change of control, as defined in the credit agreements. As of March 31, 2010, we were in compliance with all of our covenants and other obligations under the credit agreements.

 

On October 5, 2009, we entered into an amendment to the first lien credit agreement and an amendment to the second lien credit agreement. The amendments for both credit agreements permitted us to enter into certain corporate reorganization transactions, including replacing STR Holdings LLC with STR Holdings (New) LLC as a guarantor under each credit agreement. STR Holdings, Inc. became a guarantor under each credit agreement as corporate successor to STR Holdings (New) LLC on November 6, 2009.

 

We were required under the terms of both our first lien and second lien credit facilities to fix our interest costs on at least 50% of the principal amount of our funded indebtedness within three months of entering into the credit facility for a minimum of three years. To manage our interest rate exposure and fulfill the requirements under our credit facilities, effective September 13, 2007, we entered into a $200.0 million notional principal amount interest rate swap agreement with Credit Suisse International that effectively converted a portion of our debt under our credit facilities from a floating interest rate to a fixed interest rate. The notional principal amount decreased to $130.0 million on October 1, 2008 and will remain at that amount until the agreement terminates on September 30, 2010. Under the interest rate swap agreement, we pay interest at 4.622% and receive the floating three-month LIBOR rate from Credit Suisse International on the notional principal amount.

 

In addition, one of our foreign subsidiaries maintains a line of credit facility in the amount of $0.5 million (0.5 million Swiss francs) bearing an interest rate of approximately 4.25% as of March 31, 2010 and December 31, 2009. The purpose of the credit facility is to provide funding for the subsidiary’s working capital as deemed necessary during the normal course of business. The facility was not utilized as of March 31, 2010 and December 31, 2009.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing arrangements.

 

Effects of Inflation

 

Inflation generally affects us by increasing costs of raw materials, labor and equipment. In the first quarter of 2010, we believe that raw material inflation negatively impacted our Solar segment’s cost of sales by approximately $1.2 million.

 

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Recently Issued Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard related to Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on our condensed consolidated financial statements.

 

In June 2009, the FASB issued a standard Amendments to FASB Interpretation No. 46(R). The standard requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on our condensed consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather than as a combined unit. The amendment will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendment in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on our condensed consolidated financial statements.

 

Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to inherent risks and uncertainties. These forward-looking statements present our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future performance or financial or operating results. In addition to the risks and uncertainties discussed in this Quarterly Report, we face risks and uncertainties that include, but are not limited to, the following: (i) demand for solar energy in general and solar modules in particular; (ii) the timing and effects of the implementation of recently announced government incentives and policies for renewable energy, primarily in China and the United States; (iii) the effects of the recently announced cut to solar incentives in Germany; (iv) customer concentration in our Solar business and our relationships with key customers; (v) the continual operation of our Malaysian plant and the planned expansion of our Malaysian plant; (vi) demand for our Quality Assurance services; (vii) the need to utilize our existing $20 million revolving credit facility, and the ability to further access the credit markets on acceptable terms; (viii) maintaining sufficient liquidity in order to fund future profitable growth and long term vitality; (ix) the continuing effects of the ongoing recession on sales; (x) pricing pressures and other competitive factors; (xi) the impact of the current negative credit markets may have on us or our customers or suppliers; (xii) loss of professional accreditations and memberships; (xiii) the extent to which we may be required to write-off accounts receivable or inventory; (xiv) our reliance on vendors and potential supply chain disruptions, including those resulting from bankruptcy filings by customers or vendors; (xv) any potential inflation of commodity costs, including paper and resin used in our encapsulants, and our ability to successfully manage any increases in these commodity costs; (xvi) potential product performance matters, product liability or professional liability claims and our ability to manage them; (xvii) the impact of changes in foreign currency exchange rates on financial results, and the geographic distribution of revenues and income; (xviii) the impact of changes in interest rates in relation to our variable rate debt; (xix) the impact of events that cause or may cause disruption in our inspection, testing, manufacturing, distribution and sales networks such as war, terrorist activities, and political unrest; (xx) the extent and duration of the current downturn in the global economy, including the timing of expected economic recovery in the United States and abroad; (xxi) outcomes of litigation and regulatory actions; (xxii) our ability to protect our intellectual property and (xxiii) the other risks and uncertainties described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in subsequent periodic reports on Forms 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings which are available on http://www.sec.gov or http://www.strholdings.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement

 

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contained in this Quarterly Report, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Item 3.            Quantitative and Qualitative Disclosure About Market Risk

 

Foreign Exchange Risk Management

 

We have foreign currency exposure related to our operations outside of the United States. This foreign currency exposure arises primarily from the translation or re-measurement of our foreign subsidiaries’ financial statements into U.S. dollars. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our condensed consolidated results of operations. For the three months ended March 31, 2010 and 2009, approximately $34.8 million, or 44% and $22.3 million, or 38%, respectively, of our net sales were denominated in foreign currencies. We expect that the percentage of our net sales denominated in foreign currencies will increase in the foreseeable future as we expand our international operations. Selling, marketing and general costs related to these foreign currency net sales are largely denominated in the same respective currency, thereby partially offsetting our foreign exchange risk exposure. However, for net sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products or services in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency.

 

In addition, our assets and liabilities of foreign operations are recorded in foreign currencies and translated into U.S. dollars. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency.

 

We do not engage in any hedging activities related to this exchange rate risk. As such, a 10% change in the U.S. dollar exchange rates in effect as of March 31, 2010 would cause a change in consolidated net assets of approximately $7.4 million and a change in net sales of approximately $3.5 million.

 

Interest Rate Risk

 

We are exposed to interest rate risk in connection with our first lien term loan facility, our second lien term loan facility and any borrowings under our revolving credit facility. Our first lien and second lien facilities bear interest at floating rates based on the LIBOR or the greater of the prime rate or the federal funds rate plus an applicable borrowing margin. Borrowings under our revolving credit facility bear interest at floating rates based on the LIBOR or a base rate plus an applicable borrowing margin. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant.

 

To manage our interest rate exposure and fulfill requirements under our credit facilities, effective September 13, 2007, we entered into an interest rate swap agreement with Credit Suisse International that effectively converted a portion of our debt under our credit facilities from a floating interest rate to a fixed interest rate. As of March 31, 2010 and December 31, 2009, our interest rate swap agreement was for a $130.0 million notional principal amount that expires on September 30, 2010 under our credit facilities and had a fair value of a liability of $2.8 million and $4.0 million, respectively. Such amount was reduced from the December 31, 2007 notional amount of $200.0 million on October 1, 2008. Based on the amount outstanding under our first lien and second lien facilities at March 31, 2010, a change of one percentage point in the applicable interest rate, before the effect of our interest rate swap, would cause an increase or decrease in interest expense of approximately $2.4 million on an annual basis. For further information on the interest rate swap agreement, see Note 8 to our Condensed Consolidated Financial Statements included in Item 1 in this Quarterly Report.

 

Commodity Price Risk

 

The major raw material that we purchase for production of our encapsulants for our Solar segment is resin, and paper liner is the second largest raw material cost. The price and availability of these materials are subject to market conditions affecting supply and demand. In particular, the price of many of our raw materials can be impacted by fluctuations in petrochemical and pulp prices. In 2010, the price of resin has increased and negatively impacted our cost of sales by approximately $1.2 million. Additionally, our distribution costs can be impacted by fluctuations in diesel prices. We currently do not have a hedging program in place to manage

 

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fluctuations in commodity prices. In addition, increases in commodity prices could have a material adverse effect on our gross margins and results of operations, particularly in circumstances where we have entered into fixed price contracts with our Solar customers.

 

Item 4.            Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (“Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of March 31, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Controls Over Financial Reporting

 

There have not been any changes in our internal controls over financial reporting during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

There have been no material developments in the quarter in the legal proceeding indentified in Part I, Item 3 of the Company’s annual report on Form 10-K for the year ended December 31, 2009, except as noted below. In addition, there were no new material legal proceedings during the quarter.

 

Galica/JPS

 

On March 25, 2010, the Massachusetts Appeal Court scheduled a hearing on permanent injunctive relief, attorney’s fees and damages to be held on August 23, 2010.

 

Item 1A.         Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial position and results of operations. There have been no material changes to the risk factors as disclosed in Part I, “Item 1A., Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

 

Item 6.            Exhibits

 

10.1

Employment Agreement, dated as of April 12, 2010, between Specialized Technology Resources, Inc. and Alan N. Forman.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

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32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURE

 

Pursuant to the requirements 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.

 

 

STR HOLDINGS, INC.

 

(Registrant)

 

By: /s/ Barry A. Morris

Date: May 12, 2010

Barry A. Morris, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

 

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