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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 September 30, 2013

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)

(860) 758–7300

 (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 x 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.

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 October 31, 2013, there were 41,894,703 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

Three and Nine Months Ended September 30, 2013

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

All amounts in thousands except share and per share amounts

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

All amounts in thousands except share and per share amounts

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

See accompanying notes to these condensed consolidated financial statements.

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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

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 United 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in STR Holdings, Inc.’s (the “Company”) Form 10–K filed with the SEC on March 15, 2013. 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 Consolidated Balance Sheets 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 periods’ disclosures have been reclassified to conform to the current period’s presentation.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013–11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. With the update, the FASB clarified the presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in a company’s financial statements.  The amended standard will become effective for fiscal years and interim periods beginning after December 15, 2013. The amendments are applied prospectively to all unrecognized tax benefits that exist at the effective date of the standard and retrospective application is permitted. The Company has early adopted this standard and it did not have a material impact on the Company’s condensed consolidated financial statements as the Company had previously separately disclosed its tax benefits and liabilities for financial reporting purposes.

NOTE 3—DISCONTINUED OPERATIONS

On August 16, 2011, the Company entered into an equity purchase agreement to sell its Quality Assurance (“QA”) business to Underwriters Laboratories (“UL”) for $275,000 plus assumed cash. The QA business provided consumer product testing, inspection, auditing and consulting services that enabled retailers and manufacturers to determine whether products and facilities met applicable safety, regulatory, quality, performance, social and ethical standards. In addition, the Company and UL entered into a transition services agreement, pursuant to which the Company agreed to provide certain services to UL following the closing of the sale, including accounting, tax, legal, payroll and employee benefit services. UL agreed to provide certain information technology services to the Company pursuant to such agreement. On September 1, 2011, the Company completed the sale of the QA business for total net cash proceeds of $283,376, which included $8,376 of estimated cash assumed in certain QA locations. On September 1, 2011, pursuant to the terms and conditions of the equity purchase agreement, as amended, the Company transferred the applicable assets, liabilities, subsidiaries and employees of the QA business to Nutmeg Holdings, LLC (“Nutmeg”) and STR International, LLC (“International,” and together with Nutmeg and their respective subsidiaries, the “Nutmeg Companies”), and immediately thereafter sold its equity interest in each of the Nutmeg Companies to designated affiliates of UL. The Company decided to sell the QA business in order to focus exclusively on the solar encapsulant opportunity and to seek further product offerings related to the solar industry, as well as other growth markets related to the Company’s polymer manufacturing capabilities, and to retire its long–term debt.

In the fourth quarter of 2011, the Company received $2,727 in additional cash proceeds from UL related to the finalization of the excess cash and working capital adjustments in accordance with the purchase agreement.

In accordance with ASC 250–20–Presentation of Financial Statements–Discontinued Operations and ASC 740–20–Income Taxes–Intraperiod Tax Allocation, the accompanying Condensed Consolidated Statements of Comprehensive Loss and Condensed

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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—DISCONTINUED OPERATIONS (Continued)

Consolidated Cash Flows present the results of the QA business as discontinued operations. Prior to the sale, the QA business was a segment of the Company. The Company has no continuing involvement in the operations of the QA business and does not have any direct cash flows from the QA business subsequent to the sale. Accordingly, the Company has presented the QA business as discontinued operations in these condensed consolidated financial statements.

As anticipated and in conjunction with the closing of the sale of the QA business, the Company became non–compliant with certain debt covenants that required the repayment of all debt outstanding at that time. Therefore and in order to sell assets of the QA business free and clear of all liens under the 2007 Credit Agreements, on September 1, 2011, the Company terminated the 2007 Credit Agreements and used approximately $237,732 from the proceeds of the sale to repay all amounts due to Credit Suisse AG, as administrative agent and collateral agent. In connection with the payoff of all the existing debt, the Company also wrote off $3,586 of the remaining unamortized deferred financing costs associated with the 2007 Credit Agreements.

Out of Period Adjustment

During the third quarter of 2012, the taxable gain associated with the sale of the Company’s QA business was finalized in conjunction with filing the Company’s 2011 income tax returns. As part of this process, the Company identified and recorded an income tax benefit to discontinued operations of $4,246. The Company determined that $1,629 of this benefit was an error that should have been recorded in 2011.

The Company has determined that the error was not quantitatively or qualitatively material to the annual or interim periods in 2011 and the resulting correction was not material to its annual results for the year ended December 31, 2012.

The following tables set forth the operating results of the QA business presented as a discontinued operation for the three and nine months ended September 30, 2013 and 2012, respectively:

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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 4—(LOSS) EARNINGS PER SHARE

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

Due to the loss from continuing operations for the three and nine months ended September 30, 2013, diluted weighted–average common shares outstanding does not include 83 and 153 shares of unvested restricted common stock as these potential awards do not share in any net loss generated by the Company and are anti–dilutive. Due to the loss from continuing operations for the three and nine months ended September 30, 2012, diluted weighted–average common shares outstanding does not include 179 and 151 shares of unvested restricted common stock as these potential awards do not share in any net loss generated by the Company and are anti–dilutive.

Since the effect would be anti–dilutive, there were 83 and 121 shares of common stock issued under the Employee Stock Purchase Plan (“ESPP”) that were not included in the computation of diluted weighted–average shares outstanding for the three and nine months ended September 30, 2013, respectively. Since the effect would be anti–dilutive, there were 179 and 151 shares of common stock issued under the ESPP that were not included in the computation of diluted weighted–average shares outstanding for the three and nine months ended September 30, 2012, respectively.

Since the effect would be anti–dilutive, there were 3,771,305 and 2,818,979 stock options outstanding that were not included in the computation of diluted weighted–average shares outstanding for the three months ended September 30, 2013 and 2012, respectively. Since the effect would be anti–dilutive, there were 3,721,305 and 2,818,979 stock options outstanding that were not included in the computation of diluted weighted–average shares outstanding for the nine months ended September 30, 2013 and 2012, respectively.

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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—INVENTORIES

Inventories consist of the following:

NOTE 6—LONG–LIVED ASSETS AND GOODWILL

Intangible Assets

The Company recorded the estimated fair values of intangible assets acquired in connection with the DLJ Merchant Banking Partners–Americas’ acquisition of the Company on June 15, 2007 (“2007 DLJ Transaction”). The Company recorded an impairment charge of $135,480 as of December 31, 2012. Refer to the impairment testing section below.

Goodwill

Goodwill represented the excess purchase price consideration of the estimated fair value assigned to the individual assets acquired and liabilities assumed in the 2007 DLJ Transaction. During the nine months ended September 30, 2012, the Company recorded an impairment charge of $82,524.  Refer to the impairment testing section below.

Impairment Testing

In accordance with ASC 350–Intangibles–Goodwill and Other and ASC 360–Property, Plant and Equipment, the Company assesses the impairment of its long–lived assets including its property, plant and equipment whenever changes in events or circumstances indicate that the carrying value of such assets may not be recoverable. Prior to 2013, the Company also assessed the impairment of its definite–lived intangible assets and goodwill. As of December 31, 2012, the Company’s goodwill and definite–lived intangible assets were fully impaired. During each reporting period, the Company assessed if the following factors were present which would cause an impairment review: overall negative solar industry conditions; a significant or prolonged decrease in sales that were generated under its trademarks; loss of a significant customer or a reduction in demand for customers’ products; a significant adverse change in the extent to or manner in which the Company used its trademarks or proprietary technology; such assets becoming obsolete due to new technology or manufacturing processes entering the markets or an adverse change in legal factors; and the market capitalization of the Company’s common stock.

During the first quarter of 2012, the market capitalization of the Company’s common stock declined by approximately 50%. As a result of this decline that did not appear to be temporary, the Company determined that a triggering event occurred requiring it to test its long–lived assets and its goodwill for impairment as of March 31, 2012. Prior to performing its goodwill impairment test, the Company first assessed its long–lived assets for impairment as of March 31, 2012. The Company concluded that no impairment existed as the sum of the undiscounted expected future cash flows exceeded the carrying value of the Company’s asset group which is its reporting unit. The key assumptions driving the undiscounted cash flows were the forecasted sales growth rate and EBITDA margin.

After evaluating its long–lived assets for impairment, the Company proceeded to test its goodwill for impairment. At March 31, 2012, the Company valued its reporting unit with the assistance of a valuation specialist and determined that its reporting unit’s net book value exceeded its fair value. The Company then performed step two of the goodwill impairment assessment which involved calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all of its assets and liabilities other than goodwill and comparing the residual amount to the carrying amount of goodwill. The Company determined that the implied fair value of goodwill was lower than its carrying value and recorded a non–cash goodwill impairment charge of $82,524 during the three months ended March 31, 2012. The Company estimated the fair value of its reporting unit under the income approach using a discounted cash flow method which incorporated the Company’s cash flow projections. Based on the other–than–temporary decline in the Company’s stock price and its net book value exceeding the market capitalization of its common stock during the first quarter of 2012, the market approach was given a higher weighting in determining fair value. The Company believes the cash flow projections and valuation assumptions used were reasonable and consistent with market participants. Many of the factors used in assessing the fair

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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—LONG–LIVED ASSETS AND GOODWILL (Continued)

value are outside the control of management, and these assumptions and estimates can change in future periods as a result of both Company–specific factors, industry conditions and overall economic conditions.

Due to continued pricing pressure, trade complaints escalating in the industry, increased competition from non–EVA encapsulant materials and the Company’s 2013 sales outlook which included the loss of its largest customer, the Company determined that a triggering event occurred to test its long–lived assets for recoverability as of December 31, 2012. In conjunction with a valuation specialist, the Company determined that the sum of the undiscounted expected future cash flows did not exceed the carrying value of the Company’s asset group which is its reporting unit. The key assumptions driving the undiscounted cash flows were the forecasted sales growth rate and EBITDA margin.

Since the asset group’s carrying value was not recoverable, the Company, in conjunction with a valuation specialist, fair valued the asset group incorporating market participant assumptions. The Company estimated the fair value of its asset group under the income approach using a discounted cash flow model which incorporated its cash flow projections. The Company also considered its market capitalization, control premiums and other valuation assumptions in reconciling the calculated fair value to the market capitalization at the assessment date. Based on the assessment, the Company calculated an impairment charge which was allocated to each of the long–lived assets on a pro–rata basis using the relative carrying values of those assets as of December 31, 2012. However, the Company did not reduce the carrying value of such assets below their fair value where such value could be determined without undue cost and effort. Therefore, the Company recorded a non–cash impairment charge of $135,480 to its intangible assets and $37,431 to its property, plant and equipment as of December 31, 2012. The Company re–evaluated the depreciable lives of such long–lived assets and determined a revision to those lives was not warranted.

The Company’s long–lived assets consist solely of property, plant and equipment as of September 30, 2013.  At September 30, 2013, there were no indicators which significantly changed from the December 31, 2012 impairment test and a detailed impairment analysis was not performed.  However, the Company did perform an analysis using appraisals and other data in order to assess the recoverability of its property, plant and equipment as of September 30, 2013.  As a result of this analysis, the Company determined its long–lived assets were recoverable and its depreciable lives were appropriate as of September 30, 2013.  If the Company experiences a significant reduction in future sales volume, further average sale price (“ASP”) reductions, lower profitability or ceases operations at any of its facilities, the Company’s property, plant and equipment may be subject to future impairment or accelerated depreciation.

NOTE 7—ACCRUED LIABILITIES

Accrued liabilities consist of the following:

Refer to Note 8 for additional information regarding the grants.

NOTE 8—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.

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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 8—COMMITMENTS AND CONTINGENCIES (Continued)

The Company typically does not provide contractual warranties on its products. However, on limited occasions, the Company incurs costs in connection with specific product performance claims. The Company has accrued for specific product performance matters that are probable and estimable based on estimates of ultimate cash expenditures that are expected to be incurred 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:

The majority of this accrual relates to a quality claim by one of the Company’s customers in connection with a non–encapsulant product that the Company purchased from a vendor in 2005 and 2006 and resold. The Company stopped selling this product in 2006 and is currently attempting to resolve this matter.

During 2010, the Company performed a Phase II environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site was found to contain a presence of volatile organic compounds. The Company has been in contact with the Connecticut Department of Energy and Environmental Protection and has engaged a licensed contractor to remediate this site for commercial and industrial use of the property. Based on ASC 450–Contingencies, the Company accrued the estimated cost to remediate. The following table summarizes the Company’s environmental liability that is recorded in accrued liabilities in the Condensed Consolidated Balance Sheets:

Galica/JPS

As previously disclosed, the Company entered into a Global Settlement Agreement and Release (the “Settlement Agreement”) with JPS Industries Inc., JPS Elastomerics Corp. and James P. Galica (collectively “JPS”). Pursuant to the Settlement Agreement, the parties agreed to (i) payment by JPS of $7,131 to the Company, (ii) dismissals of pending actions in state and federal courts and all associated appeals and proceedings, (iii) the satisfaction of outstanding judgments in the state court action, (iv) the disbursement to the Company of $70, deposited with and held in escrow by the court, (v) the discharge of attachments of certain assets of JPS, (vi) the modification of the injunction issued in the state court action: (a) reducing the term of a production injunction from five years to four years, (b) permitting JPS to permanently bond encapsulant to fiberglass mesh and laminate non–low shrink encapsulant to paper, (c) the deletion of JPS’s obligations with respect to the review and deletion of certain documents, (vii) the delivery to the Company by JPS of certain components of an equipment line purchased by it, (viii) the deletion by JPS of certain data, (ix) the general release of claims by the parties related to the state and federal court actions, subject to the retention by the Company of certain rights, (x) the covenant by JPS not to sue the Company (and its affiliates) with respect to matters related to the federal court action, (xi) the agreement by JPS and Galica to cooperate with the Company in connection with investigations related to the potential dissemination of the Company’s trade secrets, and (xii) certain other customary terms and conditions.

The Company received the $7,201 payment during the first quarter of 2012, which is recorded in Other Income on its Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2012.

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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 8—COMMITMENTS AND CONTINGENCIES (Continued)

EVASA

In 2010, Specialized Technologies Recourses España S.A. (“STRE”) learned that a competitor, Encapsulantes De Valor Anandida, S.A. (“EVASA”), was making encapsulant products that were substantially similar to STR’s products. Upon investigation it was learned that Juan Diego Lavandera (“Lavandera”), a former employee of STRE, was employed by EVASA.  It is believed that Lavandera, a former Production Supervisor with STRE, breached his contractual duties, by disclosing STR’s trade secrets to EVASA. On December 15, 2011, STRE and STR filed a confidential preliminary injunction petition with the Commercial Court No. 1 in A Coruña, Galicia, Spain (the “Court”) requesting an investigation of EVASA by the Court, including a search of EVASA’s premises.

The investigation was to assess the facts related to the Company’s claims against Lavandera and EVASA for (i) trade secret infringement, (ii) the breach by Lavandera of his contractual obligations to STRE; and (iii) taking unfair advantage of STRE’s “effort”.

On June 27, 2012, an investigation was commenced by a Court appointed expert. On September 14, 2012, the expert issued a report confirming that EVASA was using the Company’s manufacturing process and product formulations. On October 10, 2012, STRE and the Company filed a preliminary injunction petition (the “PI Petition”) requesting interim measures, including prohibiting EVASA from manufacturing and selling encapsulant products using STR’s trade secrets. In connection with the PI Petition, STR and STRE offered to post a bond in the amount of EUR 50 (or such higher amount as the Court deems necessary), such bond to be formalized in the event the Court approves the PI Petition. The bond is to cover potential damages to EVASA if the Company’s claim on the merits is dismissed. On December 21, 2012, the Court held a hearing on the PI Petition and on April 2, 2013 the Court denied the PI Petition. The Company has appealed the Court’s decision and intends to pursue its claim on the merits. In the event that the appeal of the PI Petition is denied, the Company may be responsible for EVASA’s legal fees. However, the payment of such fees is not probable or determinable at this time.

Spanish Grants

The Company’s Spanish subsidiary has received financial grants for certain fixed assets that requires the Company’s Spanish subsidiary to maintain a specific level of employment and to continue to operate certain fixed assets.  In the third quarter of 2013, the Company’s Spanish subsidiary repaid $1,558 of grants that were accrued in 2012 in conjunction with cost-reduction measures that failed to comply with employment level requirements for certain grants. As of September 30, 2013, approximately $1,055 was accrued for potential breach of grant requirements relating to employment level requirements. If our Spanish subsidiary fails to satisfy these or other requirements, such subsidiary will not qualify for future incentives and may be required to refund a portion of previously granted incentives. If the Company’s Spanish subsidiary fails to comply with its obligations under the grants, or the respective government agencies determine that the Company’s Spanish subsidiary has not complied with all of its grants, the Company could be required to make additional potential repayments ranging from zero to $4,000. Any such additional potential repayment would be in excess of what the Company has accrued as of September 30, 2013 and could have a material adverse effect on the Company’s results of operations, prospects, cash flows and financial condition.

NOTE 9—COST–REDUCTION ACTIONS

On January 22, 2013, the Board of Directors of the Company approved a cost–reduction action to cease manufacturing at the Company’s East Windsor, Connecticut facility after being notified that its largest customer selected an alternative supplier. In addition, the Company executed further headcount reductions during the third quarter of 2013 to better align its cost structure with current sales. In total, the Company executed headcount reductions of approximately 150 employees on a global basis through the third quarter of 2013. See Note 16–Subsequent Events.

In conjunction with these headcount reductions, the Company recognized severance and related benefits of $0 and $1,281 in cost of sales and $223 and $606 in selling, general and administrative expense for the three and nine months ended September 30, 2013, respectively.

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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—COST–REDUCTION ACTIONS (Continued)

A rollforward of the restructuring accrual, which is recorded in accrued liabilities in the Condensed Consolidated Balance Sheets was as follows:

The restructuring accrual as of September 30, 2013 consists of $52 for severance and benefits and $268 of other exit costs.

In addition, on October 15, 2013, the Company decided to eliminate the positions of Chief Operating Officer, Vice President of Human Resources, Chief Technology Officer and Vice President of Finance, effective November 15, 2013. Total severance costs expected to be incurred in the fourth quarter of 2013 is $770.

NOTE 10—FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value on a recurring basis in the financial statements. The hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires financial assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

·                  Level 1 — quoted prices in active markets for identical assets and liabilities;

·                  Level 2 — inputs other than Level 1 quoted prices that are directly or indirectly observable; and

·                  Level 3 — unobservable inputs that are not corroborated by market data.

The following table provides the fair value measurements of applicable financial assets and liabilities as of December 31, 2012:

The following table provides the fair value measurements of applicable financial assets and liabilities as of September 30, 2013:

(1)         Included in cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets. The carrying amount of money market funds is a reasonable estimate of fair value.

(2)         Included in other long–term liabilities on the Company’s Condensed Consolidated Balance Sheets.  Refer to Note 14 for further information.

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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 11—LONG–TERM DEBT

2007 Credit Agreements

In connection with the DLJ transaction, the Company entered into a first lien credit facility and a second lien credit facility on June 15, 2007, which the Company refers to collectively as its “2007 Credit Agreements,” in each case with Credit Suisse, as administrative agent and collateral agent. The first lien credit facility consisted of a $185,000 term loan facility, which was to mature on June 15, 2014, and a $20,000 revolving credit facility, which was to mature on June 15, 2012. The second lien credit facility consisted of a $75,000 term loan facility, which was to mature on December 15, 2014. The revolving credit facility included a sublimit of $15,000 for letters of credit.

As anticipated and in conjunction with the closing of the sale of the QA business, the Company triggered non–compliance with certain debt covenants that required the repayment of all debt outstanding at that time. Therefore, and in order to sell assets of the QA business free and clear of all liens under the 2007 Credit Agreements, on September 1, 2011, the Company terminated the 2007 Credit Agreements and used approximately $237,732 from the proceeds of the sale to repay all amounts due to Credit Suisse AG, as administrative agent and collateral agent.

In connection with the payoff of all the debt, the Company also wrote–off $3,586 of the remaining unamortized deferred financing costs associated with such loan arrangements.

2011 Credit Agreement

On October 7, 2011, the Company entered into a multicurrency credit agreement (the “Credit Agreement”) with certain of our domestic subsidiaries, as guarantors (the “Guarantors”), the lenders from time to time party thereto (“the Lenders”) and Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer (“the Administrative Agent”). The Credit Agreement originally provided for a revolving senior credit facility of up to $150,000 that matures on October 7, 2015. The Credit Agreement originally included a $50,000 sublimit for multicurrency borrowings, a $25,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swing line loans. The Credit Agreement also contained an expansion option permitting the Company to request an increase of the revolving senior credit facility from time to time up to an aggregate additional $50,000 from any of the lenders or other eligible lenders as may be invited to join the Credit Agreement, that elect to make such increase available, upon the satisfaction of certain conditions.

The obligations under the Credit Agreement were unconditional and were guaranteed by substantially all of the Company’s existing and subsequently acquired or organized domestic subsidiaries. The Credit Agreement and related guarantees were secured on a first–priority basis, and by security interests (subject to liens permitted under the Credit Agreement) in substantially all tangible and intangible assets owned by the Company and each of the Company’s domestic subsidiaries, subject to certain exceptions, including limiting pledges to 66% of the voting stock of foreign subsidiaries.

Borrowings under the Credit Agreement may have been used to finance working capital, capital expenditures and other lawful corporate purposes, including the financing of certain permitted acquisitions, payment of dividends and/or stock repurchases, subject to certain restrictions.

Each Eurocurrency rate loan bore interest at the Eurocurrency rate (as defined in the Credit Agreement) plus an applicable rate that ranged from 200 basis points to 250 basis points based on our Consolidated Leverage Ratio (as defined in the Credit Agreement) plus, when funds were lent by certain overseas lending offices, an additional cost.

Base rate loans and swing line loans bore interest at the base rate (as defined below) plus the applicable rate, which ranged from 100 basis points to 150 basis points based on the Company’s Consolidated Leverage Ratio. The base rate was the highest of (i) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 1/2 of 1%, (ii) Bank of America’s “prime rate” as publicly announced from time to time, and (iii) the Eurocurrency rate for Eurocurrency loans of one month plus 1%.

If any amount was not paid when due under the Credit Agreement or an event of default existed, then, at the request of the lenders holding a majority of the unfunded commitments and outstanding loans, obligations under the Credit Agreement would have bore interest at a rate per annum equal to 200 basis points higher than the interest rate otherwise applicable. In addition, the Company was required to pay the Lenders a commitment fee equal to an applicable rate, which ranged from 25 basis points

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 11—LONG–TERM DEBT (Continued)

to 35 basis points based on the Company’s Consolidated Leverage Ratio from time to time, multiplied by the actual daily amount of the Lender’s aggregate unused commitments under the Credit Agreement. The facility fee was payable quarterly in arrears. The Company would also pay a letter of credit fee equal to the applicable rate for Eurocurrency rate loans times the dollar equivalent of the daily amount available to be drawn under such letter of credit.

The Company could have optionally prepaid the loans or irrevocably reduced or terminated the unutilized portion of the commitments under the Credit Agreement, in whole or in part, without premium or penalty (other than if Eurocurrency loans are prepaid prior to the end of the applicable interest period) at any time by the delivery of a notice to that effect as provided under the Credit Agreement.

The Credit Agreement contained customary representations and warranties as well as affirmative and negative covenants. Affirmative covenants included, among others, with respect to the Company and the Company’s subsidiaries delivery of financial statements, compliance certificates and notices, payment of obligations, preservation of existence, maintenance of properties, compliance with material contractual obligations, books and records and insurance and compliance with laws.

The Credit Agreement also contained customary events of default, including, among others, nonpayment of principal, interest or other amounts, failure to perform covenants, inaccuracy of representations or warranties in any material respect, cross–defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA or bankruptcy or insolvency events or the occurrence of a Change in Control (as defined in the Credit Agreement) or a material provision of the Credit Agreement ceases to be in effect. Upon an event of default under the Credit Agreement, the Lenders may have declared the loans and all other obligations under the Credit Agreement immediately due and payable and require the Company to cash collateralize the outstanding letter of credit obligations. A bankruptcy or insolvency event caused such obligations automatically to become immediately due and payable.

2012 Amendment to the Credit Agreement

On September 28, 2012 (the “Effective Date”), the Company, the Guarantors, the Lenders and the Administrative Agent entered into the First Amendment to Credit Agreement and Security Agreement (the “First Amendment”), amending (i) the Credit Agreement and (ii) the Security Agreement and dated as of October 7, 2011, among the Company, the Guarantors and the Administrative Agent.  The Company has no outstanding indebtedness pursuant to the Credit Agreement.

The First Amendment reduced the amount available under the revolving senior credit facility from $150,000 to $25,000. During the Cash Collateral Period (as described below), the Company may have borrowed under the revolving senior credit facility. However, the Company must have maintained cash collateral deposited by the Company and/or the Company’s subsidiaries in an account controlled by the Administrative Agent in an amount equal to any outstanding borrowing under the Credit Agreement, as amended. In addition, the Company was not required to comply with the financial covenants set forth in the Credit Agreement, as amended, during the Cash Collateral Period.

Termination of Credit Agreement

On September 16, 2013, the Company terminated its Credit Agreement. The Company had no outstanding indebtedness pursuant to the amended Credit Agreement. The Company cancelled the Credit Agreement since it was not able to draw on it without posting cash collateral and the Company has liquidity with its existing cash balance to run its operations. As a part of the termination, the Company wrote–off approximately $143 of the remaining unamortized deferred financing costs associated with the Credit Agreement.

NOTE 12—INCOME TAXES FROM CONTINUING OPERATIONS

During the three and nine months ended September 30, 2013, the Company recorded an income tax benefit of $268 and $4,346, respectively, resulting in an effective tax rate of 4.3% and 22.9%, respectively.  The projected annual effective tax rate excluding discrete items primarily related to disallowed foreign losses is a benefit of 26.9% as compared to the U.S. federal statutory rate of 35.0%. The annual effective tax rate is principally driven by the Company’s expected mix of geographic earnings.

During the three and nine months ended September 30, 2012, the Company recorded an income tax benefit of $2,800 and $5,250, respectively resulting in an effective tax rate of 43.9% and 5.6%, respectively.  The effective tax rate from continuing operations for the nine months ended September 30, 2012 also reflects discrete items recorded in the first quarter of 2012 relating to

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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 12—INCOME TAXES FROM CONTINUING OPERATIONS (Continued)

the goodwill impairment for which no tax benefit is recorded, settlement of income tax audits resulting in a $1,000 benefit, and a benefit related to a favorable adjustment of $538 made upon filing the Company’s 2011 tax returns.

The Company records a valuation allowance on deferred tax assets if the Company determines that it is more than likely than not that all or a portion of the assets will not be realized. In accordance with ASC 740–10–30, in assessing the need for a valuation allowance, the Company considers all of the positive and negative evidence including: estimates of taxable income, considering the feasibility of ongoing tax planning strategies, the reliability of loss carryforwards and the future reversal of existing temporary differences. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event the Company determines that it would not be able to realize all or a portion of its tax assets in the future, the unrealizable amount would be charged to earnings in the period in which that determination is made. By contrast, if the Company determines that it would be able to realize deferred tax assets in the future in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment of earnings in the period in which that determination is made.

During the third quarter of 2012, the taxable gain associated with the sale of the Company’s QA business in September 2011 was finalized and the Company recorded an income tax benefit to discontinued operations of $4,246. Refer to Note–3 Discontinued Operations for further explanation.

A shift in the mix of the Company’s expected geographic earnings, primarily in Malaysia, could cause its expected effective tax rate to change significantly.

On September 13, 2013, Treasury and the Internal Revenue Service (“IRS”) issued final and re-proposed tangible personal property regulations effective for tax years beginning on or after January 1, 2014, which taxpayers may apply to earlier tax years.  The Company will assess the impact of the final and re-proposed regulations and whether to adopt early.

In August, the Company received notification that its 2012 and 2011 U.S. federal tax returns have been selected for audit by the IRS. The Company has recorded an income tax receivable as of September 30, 2013 of $5,629 related to its 2012 U.S. federal tax return, $1,101 related to Spain and $2,818 related to its anticipated 2013 U.S. federal tax return on its Condensed Consolidated Balance Sheets.

NOTE 13—STOCKHOLDERS’ EQUITY

Changes in stockholders’ equity for the nine months ended September 30, 2013 are as follows:

Preferred Stock

The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value. At September 30, 2013, 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 September 30, 2013, there were 41,861,635 shares issued and 41,857,913 shares outstanding of common stock. Each share of common stock is

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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 13—STOCKHOLDERS’ EQUITY (Continued)

entitled to one vote per share. Included in the 41,857,913 shares outstanding are 41,715,288 shares of common stock and 142,625 shares of unvested restricted common stock.

Treasury Stock

In connection with the Company’s former debt agreements, the Company was permitted to repurchase shares of its common stock owned by terminated employees in connection with the exercise of stock options or similar equity based incentives in an aggregate amount not to exceed $2,000 in any fiscal year. As of September 30, 2013 and 2012, there were 3,722 shares held in treasury that were purchased at a cost of $57.

NOTE 14—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. Effective May 14, 2013, the 2009 Plan was amended to increase the number of shares subject to the Plan. As a result, a total of 6,200,000 shares of common stock 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 the Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest over a three or four–year period and expire ten years from date of grant. There were 1,894,749 shares available for grant under the 2009 plan as of September 30, 2013.

During the third quarter of 2013, the Company issued 50,000 options to purchase shares of the Company’s common stock at exercise price of $2.27 to one employee under the 2009 Plan. In connection with the grant, 25% of the options vest on each of the first two anniversaries of the date of grant and 50% of the options vest on the third anniversary of the date of grant, subject to acceleration in certain circumstances.

The following table presents the assumptions used to estimate the fair values of the stock options granted during the third quarter of 2013:

The fair value of the stock options issued were determined by the Company using the Black-Scholes option pricing model. The Company’s assumptions about stock-price volatility have been based exclusively on the implied volatilities of other publicly traded options to buy stock with contractual terms closest to the expected life of options granted to the Company’s employees. The expected term represents the estimated time until employee exercise is estimated to occur taking into account vesting schedules and using the Hull-White model. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury 10 year zero-coupon strip yield in effect at the time of grant. The expected dividend yield was based on the assumption that no dividends are expected to be distributed in the near future.

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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 14—STOCK–BASED COMPENSATION (Continued)

The following table summarizes the options activity under the Company’s 2009 Plan for the nine months ended September 30, 2013:

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $2.23 of the Company’s common stock on September 30, 2013.

As of September 30, 2013, there was $1,612 of unrecognized compensation cost related to outstanding employee stock option awards. This amount is expected to be recognized over a weighted–average remaining vesting period of approximately one year. 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 common stock activity of the Company for the nine months ended September 30, 2013:

As of September 30, 2013, there was $612 of unrecognized compensation cost related to employee and director unvested restricted common stock. This amount is expected to be recognized over a weighted–average remaining vesting period of approximately 1.5 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.

On November 9, 2010, the Company’s Board of Directors adopted the STR Holdings, Inc. 2010 Employee Stock Purchase Plan (“ESPP”) and reserved 500,000 shares of the Company’s common stock for issuance thereunder. The ESPP was made effective upon its approval by the votes of the Company’s stockholders on May 24, 2011 during the Company’s annual meeting for the purpose of qualifying such shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended.

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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 14—STOCK–BASED COMPENSATION (Continued)

Under the ESPP, eligible employees may use payroll withholdings to purchase shares of the Company’s common stock at a 10% discount. The Company has established four offering periods during the year in which eligible employees may participate. The Company purchases the number of required shares each period based upon the employees’ contribution plus the 10% discount. The number of shares purchased multiplied by the 10% discount is recorded by the Company as stock–based compensation. The Company recorded $0 and $1 in stock–based compensation expense relating to the ESPP for the three and nine months ended September 30, 2013, respectively. There were 482,021 shares available for purchase under the ESPP as of September 30, 2013.

The Company has a deferred compensation arrangement with certain members of management which states upon the earlier of December 31, 2015, sale of the Company, or termination of employment for any reason, the members are entitled to bonus payments based upon a formula set forth in their respective employment agreements. The payments are tied to distribution amounts they would have received with respect to their former ownership in the predecessor Company if the assets were sold at fair market value compared to the value of the Company’s stock price. The amount of the potential bonus payment to the members in the aggregate is $1,997. In accordance with ASC 718–30, the obligation should be remeasured quarterly at fair value. The Company determined fair value using observable current market information as of the reporting date. The most significant input to determine the fair value was determined to be the Company’s common stock price as of September 30, 2013 which is a Level 1 input. Based upon the difference of the floor in the agreements and the Company’s common stock price at September 30, 2013, $18 of accrued compensation was booked during the three months ended September 30, 2013, resulting in a liability of $1,031, $747 which is reflected in other current liabilities and $284 is reflected in other long–term liabilities.

Stock–based compensation expense was included in the following Condensed Consolidated Statements of Comprehensive Loss categories for continuing operations:

NOTE 15—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION