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 June 30, 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
(Registrants
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.
x
YES
o
NO
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).
o
YES
o
NO
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).
o
YES
x
NO
At August 10, 2010, there
were 41,351,664 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 Six Months Ended June 30, 2010
1
Table of Contents
Part I.
Financial Information
Item 1.
Financial Statements
STR Holdings, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
All amounts in thousands except share amounts
|
|
June 30,
2010
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
79,534
|
|
$
|
69,149
|
|
Short-term
investments
|
|
1,002
|
|
1,001
|
|
Accounts
receivable, less allowances for doubtful accounts of $1,882 and $2,468,
respectively
|
|
50,453
|
|
33,744
|
|
Unbilled
receivables
|
|
2,172
|
|
2,462
|
|
Inventories
|
|
16,706
|
|
12,267
|
|
Other
current assets
|
|
9,522
|
|
6,500
|
|
Total
current assets
|
|
159,389
|
|
125,123
|
|
Property,
plant and equipment, net
|
|
65,886
|
|
68,895
|
|
Intangible
assets, net
|
|
210,411
|
|
216,163
|
|
Goodwill
|
|
223,359
|
|
223,359
|
|
Deferred
financing costs
|
|
5,134
|
|
5,797
|
|
Other
noncurrent assets
|
|
6,521
|
|
6,523
|
|
Total
assets
|
|
$
|
670,700
|
|
$
|
645,860
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,894
|
|
$
|
1,981
|
|
Book
overdraft
|
|
|
|
685
|
|
Interest
rate swap liability
|
|
1,356
|
|
4,018
|
|
Accounts
payable
|
|
11,846
|
|
10,404
|
|
Billings
in excess of earned revenues
|
|
6,910
|
|
4,630
|
|
Accrued
liabilities
|
|
14,972
|
|
14,680
|
|
Income
taxes payable
|
|
7,885
|
|
3,587
|
|
Total
current liabilities
|
|
44,863
|
|
39,985
|
|
Long-term
debt, less current portion
|
|
237,600
|
|
238,525
|
|
Deferred
tax liabilities
|
|
91,545
|
|
92,962
|
|
Other
long-term liabilities
|
|
2,466
|
|
3,118
|
|
Total
liabilities
|
|
376,474
|
|
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)
|
|
404
|
|
402
|
|
Additional
paid-in capital
|
|
219,659
|
|
214,954
|
|
Retained
earnings
|
|
77,991
|
|
55,205
|
|
Accumulated
other comprehensive (loss) income, net
|
|
(3,828
|
)
|
709
|
|
Total
stockholders equity
|
|
294,226
|
|
271,270
|
|
Total
liabilities and stockholders equity
|
|
$
|
670,700
|
|
$
|
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net salesSolar
|
|
$
|
66,997
|
|
$
|
29,643
|
|
$
|
121,808
|
|
$
|
63,830
|
|
Net salesQuality Assurance
|
|
29,657
|
|
29,920
|
|
54,619
|
|
53,848
|
|
Total net sales
|
|
96,654
|
|
59,563
|
|
176,427
|
|
117,678
|
|
Cost of salesSolar
|
|
38,306
|
|
20,273
|
|
69,760
|
|
41,067
|
|
Cost of salesQuality Assurance
|
|
18,988
|
|
18,905
|
|
37,216
|
|
36,104
|
|
Total cost of sales
|
|
57,294
|
|
39,178
|
|
106,976
|
|
77,171
|
|
Gross profit
|
|
39,360
|
|
20,385
|
|
69,451
|
|
40,507
|
|
Selling, general and administrative expenses
|
|
13,096
|
|
9,533
|
|
29,065
|
|
20,421
|
|
Provision for bad debt expense
|
|
634
|
|
952
|
|
743
|
|
1,352
|
|
Earnings on equity-method investments
|
|
(54
|
)
|
(123
|
)
|
(73
|
)
|
(159
|
)
|
Operating income
|
|
25,684
|
|
10,023
|
|
39,716
|
|
18,893
|
|
Interest income
|
|
36
|
|
56
|
|
64
|
|
70
|
|
Interest expense
|
|
(4,411
|
)
|
(4,209
|
)
|
(8,642
|
)
|
(8,268
|
)
|
Foreign currency transaction gain (loss)
|
|
373
|
|
(83
|
)
|
330
|
|
(443
|
)
|
Unrealized gain on interest rate swap
|
|
1,446
|
|
18
|
|
2,662
|
|
587
|
|
Income before income tax expense
|
|
23,128
|
|
5,805
|
|
34,130
|
|
10,839
|
|
Income tax expense
|
|
8,102
|
|
2,675
|
|
11,344
|
|
4,596
|
|
Net income
|
|
$
|
15,026
|
|
$
|
3,130
|
|
$
|
22,786
|
|
$
|
6,243
|
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain
|
|
(2,845
|
)
|
1,071
|
|
(4,537
|
)
|
24
|
|
Total comprehensive income
|
|
$
|
12,181
|
|
$
|
4,201
|
|
$
|
18,249
|
|
$
|
6,267
|
|
Earnings per share (Note 3):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
$
|
0.09
|
|
$
|
0.57
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.08
|
|
$
|
0.55
|
|
$
|
0.17
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
40,273,457
|
|
36,497,502
|
|
40,218,559
|
|
36,455,434
|
|
Diluted
|
|
42,054,990
|
|
37,120,899
|
|
41,743,168
|
|
37,118,153
|
|
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
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
22,786
|
|
$
|
6,243
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
6,282
|
|
5,760
|
|
Amortization
of intangibles
|
|
5,752
|
|
5,752
|
|
Amortization
of deferred financing costs
|
|
663
|
|
575
|
|
Stock-based
compensation expense
|
|
5,174
|
|
993
|
|
Unrealized
gain on interest rate swap
|
|
(2,662
|
)
|
(587
|
)
|
Earnings
on equity investments
|
|
(73
|
)
|
(159
|
)
|
Loss
on disposal of property, plant and equipment
|
|
10
|
|
10
|
|
Provision
for bad debt expense
|
|
743
|
|
1,352
|
|
Provision
for deferred taxes
|
|
1,027
|
|
(53
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(19,571
|
)
|
8,526
|
|
Inventories
|
|
(5,432
|
)
|
5,648
|
|
Accounts
payable
|
|
2,291
|
|
(7,243
|
)
|
Accrued
liabilities
|
|
3,828
|
|
(2,136
|
)
|
Income
taxes payable
|
|
5,019
|
|
(2,677
|
)
|
Other,
net
|
|
(2,776
|
)
|
(1,098
|
)
|
Net
cash provided by operating activities
|
|
23,061
|
|
20,906
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Capital
expenditures
|
|
(6,590
|
)
|
(10,611
|
)
|
Proceeds
from sale of fixed assets
|
|
12
|
|
|
|
Net
cash used in investing activities
|
|
(6,578
|
)
|
(10,611
|
)
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Long-term
debt repayments
|
|
(925
|
)
|
(925
|
)
|
Principal
payments on capital lease obligations
|
|
(87
|
)
|
(82
|
)
|
Other
issuance costs
|
|
(1,535
|
)
|
(229
|
)
|
Net
cash used in financing activities
|
|
(2,547
|
)
|
(1,236
|
)
|
Effect
of exchange rate changes on cash
|
|
(3,551
|
)
|
538
|
|
Net
increase in cash and cash equivalents
|
|
10,385
|
|
9,597
|
|
Cash
and cash equivalents, Beginning of period
|
|
69,149
|
|
27,868
|
|
Cash
and cash equivalents, End of period
|
|
$
|
79,534
|
|
$
|
37,465
|
|
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
1BASIS 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
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 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 Companys 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
statement of the Companys 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 managements estimates.
Certain prior period
disclosures have been reclassified to conform to the current periods presentation.
NOTE
2RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2009, the Financial Accounting Standards Board (FASB) issued a standard
which has been codified under Accounting Standards Codification (ASC) 860-10 Transfers and Servicing. The standard
requires that a transferor recognize and initially measure at fair value all
assets obtained (including a transferors 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 Companys 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 enterprises 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 Companys 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
Companys 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
3EARNINGS PER SHARE
In
connection with the Companys 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 Companys three and six month periods ended June 30,
2009. The number of common shares reflected in the calculation is the total
number of shares (vested and unvested) issued to the Companys 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Basic and diluted net income per share
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,026
|
|
$
|
3,130
|
|
$
|
22,786
|
|
$
|
6,243
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares outstanding
|
|
40,273,457
|
|
36,497,502
|
|
40,218,559
|
|
36,455,434
|
|
Add:
dilutive effect of stock options
|
|
998,946
|
|
|
|
745,163
|
|
|
|
Add:
dilutive effect of restricted common shares
|
|
782,587
|
|
623,397
|
|
779,446
|
|
662,719
|
|
Diluted
weighted-average common shares outstanding
|
|
42,054,990
|
|
37,120,899
|
|
41,743,168
|
|
37,118,153
|
|
Basic
earnings per share
|
|
$
|
0.37
|
|
$
|
0.09
|
|
$
|
0.57
|
|
$
|
0.17
|
|
Diluted
earnings per share
|
|
$
|
0.36
|
|
$
|
0.08
|
|
$
|
0.55
|
|
$
|
0.17
|
|
193,236
stock options issued in 2009 and 2010 were not included in the computation of
diluted weighted-average shares outstanding because the effect would be
anti-dilutive.
NOTE
4INVENTORIES
Inventories consist of the
following:
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Finished
goods
|
|
$
|
4,625
|
|
$
|
2,547
|
|
Raw
materials
|
|
12,081
|
|
9,720
|
|
|
|
$
|
16,706
|
|
$
|
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
5STOCKHOLDERS EQUITY
Changes
in stockholders equity for the six months ended June 30, 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
|
|
241,948
|
|
2
|
|
5,172
|
|
|
|
|
|
5,174
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
22,786
|
|
22,786
|
|
Offering
costs from IPO
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
(467
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
|
(4,537
|
)
|
|
|
(4,537
|
)
|
Balance
at June 30, 2010
|
|
40,408,345
|
|
$
|
404
|
|
$
|
219,659
|
|
$
|
(3,828
|
)
|
$
|
77,991
|
|
$
|
294,226
|
|
Preferred Stock
The
Companys Board of Directors has authorized 20,000,000 shares of preferred
stock, $0.01 par value. At June 30, 2010, there were no shares issued or
outstanding.
Common Stock
The
Companys Board of Directors has authorized 200,000,000 shares of common stock,
$0.01 par value. At June 30, 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 40,408,345 shares of common
stock and 941,365 shares of restricted unvested common stock.
NOTE
6STOCK-BASED COMPENSATION
On
November 6, 2009, the Companys Board of Directors approved the Companys
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 the Company or its affiliates, or a
company acquired by the Company or with which it combines. Options generally
vest monthly over a five-year period and expire ten years from the date of
grant.
During
the second quarter of 2010, the Company issued 185,000 options to purchase
shares of the Companys common stock at exercise prices ranging from $22.60 to
$23.06 to two employees under the 2009 Plan.
On
November 6, 2009, the Company issued 3,495,685 options to purchase shares
of the Companys 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 June 30, 2010. There were 1,029,315 shares available for
grant under the 2009 Plan as of June 30, 2010.
In
connection with the 185,000 options granted during the second quarter of 2010,
there are varying service terms. Following is a summary of the characteristics
of each of these shares:
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
6STOCK-BASED COMPENSATION (Continued)
Shares
|
|
Service/Performance Condition
|
|
60,000
|
|
Vests ratably in 48 equal
monthly installments as of the last day of each month beginning May 31, 2010.
|
|
125,000
|
|
Vests ratably in 48 equal
monthly installments as of the last day of each month beginning June 30,
2010.
|
|
185,000
|
|
|
|
The
fair value of the stock options issued were determined using the Black-Scholes
option pricing model. The Companys 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 Companys 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.
The
following table presents the assumptions used to estimate the fair values of
the stock options granted during the second quarter of 2010:
|
|
Three
Months
Ended
|
|
|
|
June
30, 2010
|
|
Risk-free interest rate
|
|
2.53%
|
|
Expected volatility
|
|
57.5%
|
|
Expected life (in years)
|
|
4.85
to 4.94
|
|
Dividend yield
|
|
|
|
Weighted-average estimated
fair value of options granted during the period
|
|
$11.60
|
|
The
following table summarizes the options activity under the Companys 2009 Plan
for the six months ended June 30, 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
|
|
185,000
|
|
22.91
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Canceled/forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
3,680,685
|
|
$
|
11.26
|
|
9.38
|
|
$
|
4.94
|
|
$
|
27,752
|
|
Vested
and exercisable as of June 30, 2010
|
|
1,980,562
|
|
$
|
10.69
|
|
9.35
|
|
$
|
4.47
|
|
$
|
16,062
|
|
Vested
and exercisable as of June 30, 2010 and expected to vest thereafter
|
|
3,680,685
|
|
$
|
11.26
|
|
9.38
|
|
$
|
4.94
|
|
$
|
27,752
|
|
(1)
The aggregate
intrinsic value is calculated as the difference between the exercise price of
the underlying awards and the closing stock price of $18.80 of the Companys
common stock on June 30, 2010.
As
of June 30, 2010, there was $8.5 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 2.66 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
6STOCK-BASED COMPENSATION (Continued)
The
following table summarizes the restricted shares activity for the six months
ended June 30, 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
|
|
(241,948
|
)
|
|
|
Canceled
|
|
|
|
|
|
Unvested
at June 30, 2010
|
|
941,365
|
|
$
|
10.00
|
|
Expected
to vest after June 30, 2010(1)
|
|
941,365
|
|
$
|
10.00
|
|
(1)
As of
June 30, 2010, there was $5.1 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 2.09 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.
Stock-based
compensation expense was included in the following condensed consolidated
statement of operations and comprehensive income categories:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$
|
1,383
|
|
$
|
589
|
|
$
|
5,174
|
|
$
|
993
|
|
Total
recognized tax benefit
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
NOTE
7INCOME TAXES
The Companys effective
income tax rate for the three and six months ended June 30, 2010 was 35.0% and
33.2%, respectively, compared to the United States federal statutory tax rate
of 35.0%. Included in the Companys effective rate for the six months ended
June 30, 2010 is an $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 1.5% benefit to the
Companys effective tax rate for the six months ended June 30, 2010. The Companys effective tax rate was
approximately 46.1% and 42.4%, respectively, for the three and six months ended
June 30, 2009. The effect on the rate change was primarily the result of
increased uncertain tax positions in foreign jurisdictions recorded in the
second quarter of 2009.
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 8FAIR
VALUE MEASUREMENTS AND INTEREST RATE SWAP
Fair Value Measurements
The
following table provides the Companys financial assets and liabilities
reported at fair value and measured on a recurring basis as of June 30,
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
|
|
(2,662
|
)
|
|
|
(2,662
|
)
|
|
|
Interest
rate swap liability at June 30, 2010
|
|
$
|
1,356
|
|
$
|
|
|
$
|
1,356
|
|
$
|
|
|
The
fair value for the Companys 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 815-10Accounting for Derivative Instruments and Hedging
Activities, as amended. As a result, changes in the fair value of the swap are
recorded in the condensed consolidated statement of operations. The fair value
of the swap was a liability of $1,356 and $4,018 at June 30, 2010 and
December 31, 2009, respectively.
NOTE
9COMMITMENTS 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 Companys financial position, results
of operations, or cash flows.
As
previously disclosed, in October 2007, the Company filed a complaint
against James P. Galica (Galica) and JPS Elastomerics Corp. (JPS) in the
Massachusetts Superior Court in Hampshire County (the Court or State Court
Action). The Company alleged that the
defendants misappropriated trade secrets and violated the Massachusetts Unfair
and Deceptive Trade Practices Act as well as breaches of contract, the implied
covenant of good faith and fair dealing, and fiduciary duty against Galica. The
Court determined that JPS and Galica had violated the Massachusetts Unfair and
Deceptive Trade Practices Act, finding that the technology for the Companys
polymeric sheeting product is a trade secret and that JPS and Galica had
misappropriated the Companys trade secrets. The Court awarded the Company
compensatory and punitive damages, attorneys fees and costs and issued a
temporary injunction preventing JPS from manufacturing, marketing or selling products
based in whole or in part on the Companys trade secrets. The Court has
scheduled a hearing for August 23, 2010 to decide the scope and duration
of injunctive relief as well as the amount of attorneys fees and damages to be
paid by JPS to the Company.
Also
as previously disclosed, in October 2009 (shortly before the effective
date of our initial public offering), JPS counsel sent to the Companys
counsel a letter demanding relief under the Massachusetts Unfair and Deceptive
Trade Practices Act, the Sherman Antitrust Act, the Massachusetts Antitrust Act
and the Lanham Act (the October 2009 Letter).
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
9COMMITMENTS AND CONTINGENCIES (Continued)
On
July 7, 2010, JPS filed a complaint against the Companys wholly owned
subsidiary, Specialized Technology Resources, Inc. (STR), in the U.S.
District Court for the District of Massachusetts which complaint includes the
allegations set forth in the October 2009 Letter (the Federal Court
Action). JPS complaint alleges various antitrust and unfair competition
claims and that the State Court Action (described above) was sham litigation
initiated by STR in an attempt to monopolize the domestic and international
market for low-shrink EVA encapsulants. JPS also alleges other schemes to
monopolize and unfair competition in violation of federal and state laws. JPS seeks $60 million in compensatory
damages, treble damages available under certain federal laws, a permanent
injunction against STR for various activities, reimbursement of legal fees for
the State Court Action as well as for this matter, and disgorgement of proceeds
obtained by STR from allegedly anti-competitive and tortuous acts.
Given
that the Company prevailed in the State Court Action, the Company believes the
claims by JPS of sham litigation are meritless.
Further, the Company believes the Federal Court Action is an attempt by
JPS to relitigate claims decided in the State Court Action. Accordingly, in the Companys view, the
Federal Court Action fails to state a valid claim. Therefore, the Company
intends to file a motion to dismiss, and to otherwise defend vigorously the
Federal Court Action. Also, management has determined any such possible
losses to be remote under the definition of ASC 450.
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 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 Companys product performance liability that is
recorded in accrued liabilities in the condensed consolidated balance sheets:
|
|
Six Months Ended
|
|
|
|
June 30,
2010
|
|
June 30,
2009
|
|
Balance
as of beginning of period
|
|
$
|
4,210
|
|
$
|
4,736
|
|
Additions
|
|
350
|
|
622
|
|
Settlements
|
|
(633
|
)
|
(731
|
)
|
Balance
as of end of period
|
|
$
|
3,927
|
|
$
|
4,627
|
|
NOTE
10REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION
ASC
280-10-50Disclosure 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 of
Directors to plan, forecast and review the Companys segment performance.
Adjusted EBITDA represents net income before interest income and expense,
income tax expense, depreciation, amortization of intangible assets,
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 Companys operations by its
two reportable segments and by geographic area:
11
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
10REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)
Operations by Reportable Segment
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
Solar
|
|
$
|
31,207
|
|
$
|
11,621
|
|
$
|
56,098
|
|
$
|
26,759
|
|
Quality
Assurance
|
|
4,539
|
|
7,045
|
|
6,177
|
|
9,871
|
|
Segment Adjusted EBITDA
|
|
$
|
35,746
|
|
$
|
18,666
|
|
$
|
62,275
|
|
$
|
36,630
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted EBITDA to Net Income
|
|
|
|
|
|
|
|
|
|
Segment
Adjusted EBITDA
|
|
$
|
35,746
|
|
$
|
18,666
|
|
$
|
62,275
|
|
$
|
36,630
|
|
Corporate
Adjusted EBITDA
|
|
(1,732
|
)
|
(2,215
|
)
|
(4,550
|
)
|
(5,524
|
)
|
Adjusted
EBITDA
|
|
34,014
|
|
16,451
|
|
57,725
|
|
31,106
|
|
Depreciation
and amortization
|
|
(6,276
|
)
|
(5,886
|
)
|
(12,034
|
)
|
(11,512
|
)
|
Interest
income
|
|
36
|
|
56
|
|
64
|
|
70
|
|
Interest
expense
|
|
(4,411
|
)
|
(4,209
|
)
|
(8,642
|
)
|
(8,268
|
)
|
Income
taxes
|
|
(8,102
|
)
|
(2,675
|
)
|
(11,344
|
)
|
(4,596
|
)
|
Management
advisory fees
|
|
|
|
(150
|
)
|
|
|
(300
|
)
|
Unrealized
gain on interest rate swap
|
|
1,446
|
|
18
|
|
2,662
|
|
587
|
|
Secondary
offering expense
|
|
(341
|
)
|
|
|
(534
|
)
|
|
|
Stock-based
compensation
|
|
(1,383
|
)
|
(589
|
)
|
(5,174
|
)
|
(993
|
)
|
Loss
on disposal of property, plant and equipment
|
|
(11
|
)
|
(9
|
)
|
(10
|
)
|
(10
|
)
|
Earnings
on equity-method investments
|
|
54
|
|
123
|
|
73
|
|
159
|
|
Net Income
|
|
$
|
15,026
|
|
$
|
3,130
|
|
$
|
22,786
|
|
$
|
6,243
|
|
Operations by Geographic Area
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
41,398
|
|
$
|
34,384
|
|
$
|
78,338
|
|
$
|
70,045
|
|
Spain
|
|
31,659
|
|
10,910
|
|
54,815
|
|
22,863
|
|
Malaysia
|
|
9,572
|
|
13
|
|
17,588
|
|
168
|
|
Hong
Kong
|
|
8,356
|
|
8,441
|
|
14,327
|
|
14,673
|
|
Other
|
|
5,669
|
|
5,815
|
|
11,359
|
|
9,929
|
|
Total Net Sales
|
|
$
|
96,654
|
|
$
|
59,563
|
|
$
|
176,427
|
|
$
|
117,678
|
|
12
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
10REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)
Depreciation and Amortization by
Reportable Segment
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
Solar
|
|
$
|
3,734
|
|
$
|
3,349
|
|
$
|
7,046
|
|
$
|
6,607
|
|
Quality
Assurance
|
|
2,326
|
|
2,386
|
|
4,623
|
|
4,551
|
|
Corporate
|
|
216
|
|
151
|
|
365
|
|
354
|
|
Total Depreciation and Amortization
|
|
$
|
6,276
|
|
$
|
5,886
|
|
$
|
12,034
|
|
$
|
11,512
|
|
Capital Expenditures by Reportable
Segment
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
Solar
|
|
$
|
2,695
|
|
$
|
1,237
|
|
$
|
3,855
|
|
$
|
4,345
|
|
Quality
Assurance
|
|
746
|
|
3,599
|
|
2,455
|
|
6,256
|
|
Corporate
|
|
|
|
2
|
|
280
|
|
10
|
|
Total Capital Expenditures
|
|
$
|
3,441
|
|
$
|
4,838
|
|
$
|
6,590
|
|
$
|
10,611
|
|
Total Assets by Reportable Segment
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Assets
|
|
|
|
|
|
Solar
|
|
$
|
417,098
|
|
$
|
416,853
|
|
Quality
Assurance
|
|
237,277
|
|
214,787
|
|
Corporate
|
|
16,325
|
|
14,220
|
|
Total Assets
|
|
$
|
670,700
|
|
$
|
645,860
|
|
Long-Lived Assets by Geographic
Area
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Long-Lived Assets
|
|
|
|
|
|
United
States
|
|
$
|
23,122
|
|
$
|
23,854
|
|
Spain
|
|
16,828
|
|
22,308
|
|
Malaysia
|
|
14,366
|
|
9,576
|
|
China
|
|
6,337
|
|
7,038
|
|
Hong
Kong
|
|
1,838
|
|
2,098
|
|
Other
countries
|
|
3,395
|
|
4,021
|
|
Total Long-Lived Assets
|
|
$
|
65,886
|
|
$
|
68,895
|
|
Foreign
sales are based on the country in which the sales originate. Solar sales to two
of the Companys major customers for the three months ended June 30, 2010
and 2009 were $21,536 and $11,150, respectively. Solar sales to two of the Companys major
customers for the six months ended June 30, 2010 and 2009 were $36,785 and
$19,789, respectively. Accounts receivable from those customers amounted to
$10,430 and $3,179 as of June 30, 2010 and December 31, 2009,
respectively.
13
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
11COST REDUCTION PLAN
During the first half of
2010, the Company recorded $204 of expense in cost of sales for severance
benefits related to the termination of approximately 90 employees in its
Quality Assurance segment. The cost
reduction plan was initiated to reduce the Quality Assurance segments cost
structure as a result of lower than anticipated forecasted revenue for 2010.
Changes in the cost
reduction accrual for the six months ended June 30, 2010 were as follows:
|
|
June 30,
2010
|
|
Balance
at December 31, 2009
|
|
$
|
|
|
Additions
|
|
204
|
|
Settlements
|
|
(177
|
)
|
Balance
at June 30, 2010
|
|
$
|
27
|
|
The remaining cost reduction
accrual will be fully utilized in the third quarter of 2010.
14
Table of
Contents
Item 2.
Managements
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 six months ended June 30, 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. Events associated with our strategic initiatives
during the first six months of 2010 follow:
·
We believe we increased our solar market
share in the Asia Pacific region, including China. Solar net sales into the
Asia Pacific region increased by approximately 108% in the first six months of
2010 compared to the corresponding 2009 period.
·
Through engineering and manufacturing process
improvements, we have increased the capacity of our existing production lines
by approximately 20%. As a result, we estimate our world-wide capacity to
currently be approximately 7.5 GW.
·
We expanded our Malaysia encapsulant facilitys
capacity from 1.0 GW to 2.4 GW and also ordered an additional 1.0 GW of
production capacity that is expected to become operational in the third quarter
of 2011. In addition, we plan 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 approximately 5.0 GW.
·
We entered into an agreement to acquire a
275,000 square foot manufacturing facility in East Windsor, Connecticut. This
facility will provide us needed space for capacity to meet future demand and
enable us to consolidate our Connecticut-based Solar operations. The facility
will also house a 10,000 square foot, state-of-the-art research and development
laboratory. We expect the transition of
manufacturing operations to occur over the next fifteen to eighteen
months. In addition, we have ordered an
additional 1.0 GW of production capacity to be installed in the East Windsor
facility during the third quarter of 2011.
·
We continued our investment in innovation
with the appointment of a Chief Technology Officer who oversees the Solar
segments 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 began commercialization of our
new Generation 3 fast-cure formulation that can double laminator throughput.
We believe this innovative product provides 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. As of June 30, 2010, we have formal contractual
relationships with six of our top ten customers, the most in STR Solars
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 client
service to drive sales growth. During the first half of 2010, the Quality
Assurance
15
Table of Contents
segment established a global
commercial 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.
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 Managements 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. All amounts in the tables are in
thousands unless otherwise noted.
There have been no changes
in such policies during the six months ended June 30, 2010.
RESULTS OF
OPERATIONS
Condensed
Consolidated Results of Operations
Net Sales
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net salesSolar
|
|
$
|
66,997
|
|
69
|
%
|
$
|
29,643
|
|
50
|
%
|
$
|
37,354
|
|
126
|
%
|
$
|
121,808
|
|
69
|
%
|
$
|
63,830
|
|
54
|
%
|
$
|
57,978
|
|
91
|
%
|
Net salesQuality
Assurance
|
|
$
|
29,657
|
|
31
|
%
|
$
|
29,920
|
|
50
|
%
|
$
|
(263
|
)
|
(1
|
)%
|
$
|
54,619
|
|
31
|
%
|
$
|
53,848
|
|
46
|
%
|
$
|
771
|
|
1
|
%
|
Total net sales
|
|
$
|
96,654
|
|
100
|
%
|
$
|
59,563
|
|
100
|
%
|
$
|
37,091
|
|
62
|
%
|
$
|
176,427
|
|
100
|
%
|
$
|
117,678
|
|
100
|
%
|
$
|
58,749
|
|
50
|
%
|
Net
sales increased $37.1 million, or 62%, to $96.7 million for the three
months ended June 30, 2010 from $59.6 million for the corresponding
2009 period, primarily driven by strong sales volume growth achieved in our
Solar segment.
Net
sales increased $58.7 million, or 50%, to $176.4 million for the six
months ended June 30, 2010 from $117.7 million for the corresponding
2009 period, primarily driven by strong sales volume growth achieved in our
Solar segment.
Net SalesSolar
Net
sales in our Solar segment increased $58.0 million, or 91%, to
$121.8 million for the six months ended June 30, 2010 from
$63.8 million for the corresponding 2009 period. Volume increased 132%
mainly due to an industry wide improvement in the solar marketplace that
increased demand for our encapsulants. The solar module supply chain was
negatively impacted in the first six months of 2009 by, among other things, the
Spanish government change in its feed-in tariff policy that occurred in 2008.
This change resulted in reduced end user solar module demand that created
excess module inventory in the supply chain. Additionally, there was a lack of
available financing for solar projects due to global banking conditions. Our
first half 2009 sales were also negatively 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 six months
of 2010, overall solar industry conditions have improved and we believe we have
increased our market share with Asian module manufacturers. Demand in the first
six months of 2010 also benefited from increased orders ahead of changes to
feed-in tariffs in Europe in the second half of 2010. This has led to an
increase in solar module sales and increased demand for our encapsulants.
Average sales prices (ASPs) declined by 18% to contribute to an overall
decrease of 40% to our net sales due to overall solar industry pricing
pressure, customer mix, as well as deliberate price reductions granted upon the
signing of contracts with certain of our largest customers in exchange for
increased volume. The strengthening of the exchange rate of the U.S dollar
versus the Euro negatively impacted our year-to-date 2010 net sales by
approximately 1%.
16
Table of Contents
Net
sales for the three months ended June 30, 2010 increased by
$37.4 million or 126% over the same period in 2009 from net sales of
$29.6 million. The majority of such increase was due to increased volumes
of 183% driven by improved user demand for solar modules partially due to pull-ins
associated with anticipated changes to feed-in tariffs in Europe and strong
market penetration with Asian module manufacturers. ASPs declined by 20% to
contribute to an overall decrease of 50% to our net sales due to the same
reasons discussed above while foreign exchange negatively impacted net sales by
7%.
Net SalesQuality Assurance
Net
sales in our Quality Assurance segment decreased $0.3 million, or 1%, to
$29.7 million for the three months ended June 30, 2010 from $29.9 million
in 2009, as a result of decreased volume in its testing and inspection
businesses mainly due to the reduction in services procured from certain
clients partially offset by new business.
Net
sales in our Quality Assurance segment increased $0.8 million, or 1%, to
$54.6 million for the six months ended June 30, 2010 from
$53.8 million in 2009. The net sales growth was driven by increased
volumes in Asia that more than offset a decline in services procured from us by
certain clients in North America and Europe. The Quality Assurance leadership
team is keenly focused on increasing sales to existing clients as well as
aggressively targeting new business.
Cost of Sales
|
|
Three
Months Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of salesSolar
|
|
$
|
38,306
|
|
57
|
%
|
$
|
20,273
|
|
68
|
%
|
$
|
18,033
|
|
89
|
%
|
$
|
69,760
|
|
57
|
%
|
$
|
41,067
|
|
64
|
%
|
$
|
28,693
|
|
70
|
%
|
Cost of salesQuality
Assurance
|
|
$
|
18,988
|
|
64
|
%
|
$
|
18,905
|
|
63
|
%
|
$
|
83
|
|
|
%
|
$
|
37,216
|
|
68
|
%
|
$
|
36,104
|
|
67
|
%
|
$
|
1,112
|
|
3
|
%
|
Total cost of sales
|
|
$
|
57,294
|
|
59
|
%
|
$
|
39,178
|
|
66
|
%
|
$
|
18,116
|
|
46
|
%
|
$
|
106,976
|
|
61
|
%
|
$
|
77,171
|
|
66
|
%
|
$
|
29,805
|
|
39
|
%
|
Cost
of sales increased $18.1 million, or 46%, to $57.3 million for the
three months ended June 30, 2010 from $39.2 million for the
corresponding 2009 period. For the six months ended June 30, 2010, cost of
sales increased $29.8 million, or 39%, to $107.0 million from
$77.2 million for the corresponding 2009 period. The increase in both
periods was primarily driven by increased raw material and direct labor costs
as a result of the increase in our Solar net sales as discussed above.
Cost of SalesSolar
Cost
of sales in our Solar segment increased $18.0 million, or 89%, to
$38.3 million for the three months ended June 30, 2010 from
$20.3 million in the same period in 2009. The increase in our Solar
segments cost of sales was mainly due to increased variable costs associated
with the increase in sales volume, raw material inflation of $1.4 million and
higher labor and benefits. The increase was offset by a favorable euro foreign
exchange impact as compared to the same period in 2009 and $0.8 million of
reduced inventory write-offs.
Cost
of sales in our Solar segment increased $28.7 million, or 70%, to
$69.8 million for the six months ended June 30, 2010 from
$41.1 million in the same period in 2009. The increase in our Solar
segments cost of sales was mainly due to increased variable costs associated
with the increase in sales volume, raw material inflation of $2.6 million and
higher labor and benefits. The increase was offset by a favorable euro foreign
exchange impact as compared to the same period in 2009 and $0.8 million of
reduced inventory write-offs.
Non-cash intangible asset
amortization expense of $2.1 million and $4.2 million was included in cost of
sales for the three and six month periods in 2010 and 2009, respectively.
17
Table of Contents
Cost of SalesQuality Assurance
Cost
of sales in our Quality Assurance segment of $19.0 million for the three
months ended June 30, 2010 was essentially flat compared to
$18.9 million for the same period in 2009. Cost of sales in our Quality
Assurance segment increased $1.1 million, or 3%, to $37.2 million for
the six months ended June 30, 2010 from $36.1 million for the same
period in 2009. The change in cost of sales for both periods was essentially
consistent with the net sales trend for the same periods.
Non-cash intangible asset
amortization expense of $0.8 million and $1.6 million was included in cost of
sales for the three and six month periods in 2010 and 2009, respectively.
Gross Profit
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Gross profit
|
|
$
|
39,360
|
|
41
|
%
|
$
|
20,385
|
|
34
|
%
|
$
|
18,975
|
|
93
|
%
|
$
|
69,451
|
|
39
|
%
|
$
|
40,507
|
|
34
|
%
|
$
|
28,944
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit increased $19.0 million, or 93%, to $39.4 million for the
three months ended June 30, 2010 from $20.4 million for the same
period in 2009 primarily due to the sales increase in our Solar segment. As a
percentage of net sales, gross profit increased 650 basis points from 34.2% for
the three months ended June 30, 2009 to 40.7% for the same period in 2010.
Gross
profit increased $28.9 million, or 72%, to $69.5 million for the six
months ended June 30, 2010 from $40.5 million for the same period in
2009 primarily due to the sales increase in our Solar segment. As a percentage
of net sales, gross profit increased 500 basis points from 34.4% for the six
months ended June 30, 2009 to 39.4% for the same period in 2010.
Gross
profit increased as a percentage of net sales primarily due to a higher mix of
net sales in our higher margin Solar business, which accounted for 69% and 50%
of our consolidated net sales for the three months ended June 30, 2010 and
2009, respectively, and 69% and 54% of our consolidated net sales for the six months
ended June 30, 2010 and 2009, respectively. Also, we experienced increased
operating leverage of fixed costs associated with our Solar sales volume
increase, reduced inventory write-offs, partially offset by lower pricing and
increased raw material costs in our Solar segment.
Non-cash
intangible asset amortization expense of $2.9 million reduced gross profit
for the three months ended June 30, 2010 and 2009, respectively and $5.8
million for the six months ended June 30, 2010 and 2009, respectively.
Selling, General and Administrative
Expenses (SG&A)
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Product
Revenue
|
|
Amount
|
|
% of
Product
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Product
Revenue
|
|
Amount
|
|
% of
Product
Revenue
|
|
Amount
|
|
%
|
|
SG&A
|
|
$
|
13,096
|
|
14
|
%
|
$
|
9,533
|
|
16
|
%
|
$
|
3,563
|
|
37
|
%
|
$
|
29,065
|
|
17
|
%
|
$
|
20,421
|
|
17
|
%
|
$
|
8,644
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
increased 37% for the three months ended June 30, 2010 compared to the
corresponding period in the prior year. The increase was driven by $0.8 million
of non-cash stock-based compensation expense, $0.3 million of secondary
offering costs and $2.5 million of higher labor associated cost related to
increased headcount necessary to support our growth and operating as a public
company. As a percentage of net sales, SG&A was 13.5%, an improvement of
245 basis points from the corresponding 2009 period due to increased operating
leverage driven by the growth in net sales.
SG&A
increased 42% for the six months ended June 30, 2010 compared to the
corresponding period in the prior year. Non-cash stock-based compensation
expense increased by approximately $4.2 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 for the remainder of 2010. Salaries
and benefits increased $3.7 million for the six months ended June 30,
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 years
six month period when the projects were in the development phase. Last,
incremental expenses of $0.5 million were incurred in 2010 associated with the
secondary offering by certain selling stockholders.
18
Table of Contents
Interest Expense
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Interest expense
|
|
$
|
4,411
|
|
5
|
%
|
$
|
4,209
|
|
7
|
%
|
$
|
202
|
|
5
|
%
|
$
|
8,642
|
|
5
|
%
|
$
|
8,268
|
|
7
|
%
|
$
|
374
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense increased $0.2 million, or 5%, to $4.4 million for the second
quarter of 2010 from $4.2 million in the corresponding 2009 period. On a
year-to-date basis, interest expense increased $0.4 million, or 5%, to
$8.6 million for the six months ended June 30, 2010 from
$8.3 million in the corresponding 2009 period. The increase in both
periods 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 June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Other income (expense)
|
|
$
|
1,855
|
|
2
|
%
|
$
|
(9
|
)
|
|
%
|
$
|
1,864
|
|
20,711
|
%
|
$
|
3,056
|
|
2
|
%
|
$
|
214
|
|
|
%
|
$
|
2,842
|
|
1,328
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2010, we recognized a $2.7 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
$0.7 million during the six months ended June 30, 2010 to a gain of
approximately $0.3 million from a loss of $0.4 million in the corresponding
2009 period.
Income Taxes
|
|
Three
Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Income taxes
|
|
$
|
8,102
|
|
8
|
%
|
$
|
2,675
|
|
5
|
%
|
$
|
5,427
|
|
203
|
%
|
$
|
11,344
|
|
6
|
%
|
$
|
4,596
|
|
4
|
%
|
$
|
6,748
|
|
147
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense increased
$5.4 million to $8.1 million for the three months ended June 30,
2010 from $2.7 million in the 2009 period and increased $6.7 million
to $11.3 million for the six months ended June 30, 2010 from
$4.6 million in the 2009 period. Our effective income tax rate for the
three and six months ended June 30, 2010 was 35.0% and 33.2%,
respectively, compared to the United States federal statutory tax rate of 35.0%.
Included in our effective rate for the six months ended June 30, 2010 is
an $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 1.5% benefit to our effective tax rate for the six months
ended June 30, 2010. Our effective
tax rate was approximately 46.1% and 42.4%, respectively, for the three and six
months ended June 30, 2009. The effect on the rate change for the second
quarter and year-to-date periods ended June 30, 2009 was primarily the
result of increased uncertain tax positions in foreign jurisdictions recorded
in the second quarter of 2009.
Net Income
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
% of
Total
Revenue
|
|
Amount
|
|
%
|
|
Net income
|
|
$
|
15,026
|
|
16
|
%
|
$
|
3,130
|
|
5
|
%
|
$
|
11,896
|
|
380
|
%
|
$
|
22,786
|
|
13
|
%
|
$
|
6,243
|
|
5
|
%
|
$
|
16,543
|
|
265
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income increased $11.9 million to $15.0 million for the three months ended
June 30, 2010 from net income of $3.1 million in the same period of
2009 and increased $16.5 million to $22.8 million for the six months ended June 30,
2010 from net income of $6.2 million in the same period in 2009. The
increase in both periods is primarily due to the increased Solar Adjusted
EBITDA as
19
Table of Contents
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 common shares outstanding 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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net income
|
|
$
|
15,026
|
|
$
|
3,130
|
|
$
|
22,786
|
|
$
|
6,243
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
2,876
|
|
2,876
|
|
5,752
|
|
5,752
|
|
Amortization of deferred financing costs
|
|
331
|
|
287
|
|
663
|
|
575
|
|
Stock-based compensation expense
|
|
1,383
|
|
589
|
|
5,174
|
|
993
|
|
Secondary offering expense
|
|
341
|
|
|
|
534
|
|
|
|
Tax effect of adjustments
|
|
(1,519
|
)
|
(1,244
|
)
|
(3,743
|
)
|
(2,397
|
)
|
Non-GAAP net income
|
|
$
|
18,438
|
|
$
|
5,638
|
|
$
|
31,166
|
|
$
|
11,166
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding
|
|
42,054,990
|
|
37,120,899
|
|
41,743,168
|
|
37,118,153
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share
|
|
$
|
0.36
|
|
$
|
0.08
|
|
$
|
0.55
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
Diluted non-GAAP net earnings per share
|
|
$
|
0.44
|
|
$
|
0.15
|
|
$
|
0.75
|
|
$
|
0.30
|
|
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 the Company but
are not directly attributable to the 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Net
Sales
|
|
$
|
66,997
|
|
$
|
29,643
|
|
$
|
37,354
|
|
126
|
%
|
$
|
121,808
|
|
$
|
63,830
|
|
$
|
57,978
|
|
91
|
%
|
Adjusted
EBITDA
|
|
$
|
31,207
|
|
$
|
11,621
|
|
$
|
19,586
|
|
169
|
%
|
$
|
56,098
|
|
$
|
26,759
|
|
$
|
29,339
|
|
110
|
%
|
Adjusted
EBITDA as % of Segment Net Sales
|
|
46.6
|
%
|
39.2
|
%
|
|
|
|
|
46.1
|
%
|
41.9
|
%
|
|
|
|
|
20
Table of Contents
Adjusted
EBITDA as percentage of net sales for this business segment increased for both
the three and six months ended June 30, 2010 compared to the same periods
in 2009 due to higher gross margins driven by the increase in net sales and
increased absorption of fixed costs and the avoidance of $0.8 million of
inventory write-offs. SG&A was relatively flat for both the three and six
months ended June 30, 2010 compared to the same periods in 2009, which
generated increased operating leverage in the current periods.
Quality Assurance
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Net
Sales
|
|
$
|
29,657
|
|
$
|
29,920
|
|
$
|
(263
|
)
|
(1
|
)%
|
$
|
54,619
|
|
$
|
53,848
|
|
$
|
771
|
|
1
|
%
|
Adjusted
EBITDA
|
|
$
|
4,539
|
|
$
|
7,045
|
|
$
|
(2,506
|
)
|
(36
|
)%
|
$
|
6,177
|
|
$
|
9,871
|
|
$
|
(3,694
|
)
|
(37
|
)%
|
Adjusted
EBITDA as % of Segment Net Sales
|
|
15.3
|
%
|
23.5
|
%
|
|
|
|
|
11.3
|
%
|
18.3
|
%
|
|
|
|
|
Adjusted
EBITDA as a percentage of net sales for this business segment decreased for
both the three and six months ended June 30, 2010 compared to the same
periods in 2009. SG&A expenses increased by $5.5 million due to
increased labor and benefits expense for the six months ended June 30,
2010. 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 in relation to 2010 net sales and the
labor associated with information technology systems. These costs for the recently
implemented systems were capitalized in the prior years corresponding periods
as the projects were in the development phase.
On
a sequential quarter basis, Adjusted EBITDA as a percentage of net sales
increased approximately 870 basis points. The increase is driven by the 19%
increase in sales volume and improved fixed cost absorption in the second
quarter of 2010 as the first quarter of the year is the seasonal slowest. Also,
benefits from cost reduction measures implemented during 2010 began to be
realized in the second quarter.
During the first half of 2010,
we recorded $0.2 million of expense in cost of sales for severance benefits
related to the termination of approximately 90 employees in our Quality
Assurance segment. The cost reduction
plan was initiated to reduce the Quality Assurance segments cost structure as
a result of lower than anticipated forecasted revenue for 2010.
We expect future pre-tax
savings associated with the employee terminations to approximate $1.1 million
in 2010 and overall savings to amount to $2.5 million, including planned reductions
in professional fees, travel and other costs.
Changes in the cost
reduction accrual for the six months ended June 30, 2010 were as follows:
|
|
June 30,
2010
|
|
Balance
at December 31, 2009
|
|
$
|
|
|
Additions
|
|
204
|
|
Settlements
|
|
(177
|
)
|
Balance
at June 30, 2010
|
|
$
|
27
|
|
The remaining cost reduction
accrual will be fully utilized in the third quarter of 2010.
Financial
Condition, Liquidity and Capital Resources
We
have financed our operations primarily through cash provided by operations.
From 2003 through the first six months of 2010, net cash provided by operating
activities has been sufficient to fund our working capital needs, debt service
and capital expenditures. As of June 30, 2010, our principal sources of
liquidity consisted of $80.5 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 $239.5 million as
of June 30, 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 and the need to fund higher accounts receivable and
21
Table of Contents
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 $23.1 million for the six months
ended June 30, 2010 compared to $20.9 million for the six months
ended June 30, 2009. Due to the strength of our Solar segment, cash
earnings increased by approximately $19.8 million for the six months ended June 30,
2010 compared to the same period in 2009. This was mostly offset by increased
working capital, primarily relating to increases in accounts receivable and
inventory. The increase in working capital reflects the investment required to
support our planned growth, timing related to strong net sales growth in 2010
and increased payment terms customary in certain foreign locations.
Cash Flow from Investing Activities
Net
cash used for investing activities of $6.6 million and $10.6 million for
the six months ended June 30, 2010 and 2009, respectively was related to
capital expenditures.
For
our Solar segment, we had capital expenditures of $3.9 million and $4.3
million for the six months ended June 30, 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 $2.5 million
and $6.3 million for the six months ended June 30, 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 expansion in China as well as associated
capitalized labor related to the enhancement of our information systems.
We
expect remaining 2010 consolidated capital expenditures to be approximately
$34.0 million, of which Solar capital expenditures represent approximately
$25.0 million, Quality Assurance capital expenditures represent approximately
$8.0 million and corporate capital expenditures represent approximately $1.0
million.
Free
cash flow, as defined in the following table, was $6.4 million in the
three months ended June 30, 2010 compared to $3.9 million in the
corresponding 2009 period. Free cash flow, was $16.5 million in the six
months ended June 30, 2010 compared to $10.3 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Cash
provided by operating activities
|
|
$
|
9,819
|
|
$
|
8,784
|
|
$
|
23,061
|
|
$
|
20,906
|
|
Less:
capital expenditures
|
|
(3,441
|
)
|
(4,838
|
)
|
(6,590
|
)
|
(10,611
|
)
|
Free
cash flow
|
|
$
|
6,378
|
|
$
|
3,946
|
|
$
|
16,471
|
|
$
|
10,295
|
|
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 $2.5 million for the six months
ended June 30, 2010 primarily for payment of IPO issuance costs of
$1.5 million and $1.0 million for debt repayments.
22
Table of Contents
Net
cash used in financing activities was $1.2 million for the six months
ended June 30, 2009 primarily for payment of IPO issuance costs of
$0.2 million and $1.0 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 June 30, 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.
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 June 30, 2010 and December 31, 2009, the weighted average interest
rate under our credit facilities was 4.26% and 4.14%, respectively, before the
effect of our interest rate swap. At the rate in effect on June 30, 2010
and assuming an outstanding balance of $239.5 million as of June 30,
2010, our annual debt service obligations would be $12.1 million,
consisting of $10.2 million of interest and $1.9 million of scheduled
principal payments. No mandatory principal payment is required until
June 30, 2011 due to the $15.0 million payment made in conjunction
with the Companys 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
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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 June 30, 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 June 30, 2010, we were required to maintain a maximum total leverage
ratio of 6.25 to 1.00. As of June 30, 2010, our first lien debt ratio was
0.76 to 1.00, our total leverage ratio was 1.42 to 1.00 and our interest
coverage ratio was 5.59 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, 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 June 30, 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 June 30, 2010 and
December 31, 2009. The purpose of the credit facility
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is to provide funding for
the subsidiarys working capital as deemed necessary during the normal course
of business. The facility was not utilized as of June 30, 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 six months of 2010, we believe that raw material inflation
negatively impacted our Solar segments cost of sales by approximately $2.6
million.
Recently Issued Accounting Standards
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard which has been codified under Accounting Standards Codification (ASC)
860-10 Transfers and Servicing.
The standard requires that a transferor recognize and initially measure at fair
value all assets obtained (including a transferors 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 enterprises 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 Europe; (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) pricing pressures and other competitive factors;
(x) the impact of the current negative credit markets may have on us or
our customers or suppliers; (xi) loss of professional accreditations and
memberships; (xii) the extent to which we may be required to write-off
accounts receivable or inventory; (xiii) our reliance on vendors and
potential supply chain disruptions, including those resulting from bankruptcy
filings by customers or vendors; (xiv) 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
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costs; (xv) potential
product performance matters, product liability or professional liability claims
and our ability to manage them; (xvi) the impact of changes in foreign
currency exchange rates on financial results, and the geographic distribution
of revenues and income; (xvii) the impact of changes in interest rates in
relation to our variable rate debt; (xviii) 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;
(xix) 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; (xx) outcomes of litigation and regulatory actions;
(xxi) our ability to protect our intellectual property; and
(xxii) the other risks and uncertainties described under Managements
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 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 June 30, 2010 and 2009,
approximately $45.7 million, or 47% and $25.2 million, or 42%,
respectively, of our net sales were denominated in foreign currencies. For the
six months ended June 30, 2010 and 2009, approximately $80.5 million,
or 46% and $47.5 million, or 40%, 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 June 30,
2010 would cause a change in consolidated net assets of approximately
$8.5 million and a change in net sales of approximately $8.1 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 LIBO 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 LIBO
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 June 30, 2010 and December 31, 2009,
our interest rate swap
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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 $1.4 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 June 30, 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 $2.6 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 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, as
amended (Exchange Act) reports is recorded, processed, summarized and
reported within the time periods specified in the SECs 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 June 30, 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
We
implemented a new accounting information system at certain of our Solar
facilities
effective
May 1, 2010.
The implementation of the new accounting information
system
required
us to modify and add certain internal controls and processes and procedures.
Otherwise, no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
occurred during the six months ended June 30, 2010 that has materially
affected, or is 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 Companys annual report on Form 10-K for the year ended
December 31, 2009, except as noted below.
Galica/JPS
As
previously disclosed, in October 2007, we filed a complaint against James
P. Galica (Galica) and JPS Elastomerics Corp. (JPS) in the Massachusetts
Superior Court in Hampshire County (the Court or State Court Action). We alleged that the defendants
misappropriated trade secrets and violated the Massachusetts Unfair and
Deceptive Trade Practices Act as well as breaches
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of
contract, the implied covenant of good faith and fair dealing, and fiduciary
duty against Galica. The Court determined that JPS and Galica had violated the
Massachusetts Unfair and Deceptive Trade Practices Act, finding that the
technology for our polymeric sheeting product is a trade secret and that JPS
and Galica had misappropriated our trade secrets. The Court awarded us
compensatory and punitive damages, attorneys fees and costs and issued a
temporary injunction preventing JPS from manufacturing, marketing or selling
products based in whole or in part on our trade secrets. The Court has
scheduled a hearing for August 23, 2010 to decide the scope and duration
of injunctive relief as well as the amount of attorneys fees and damages to be
paid by JPS to us.
Also
as previously disclosed, in October 2009 (shortly before the effective
date of our initial public offering), JPS counsel sent to our counsel a letter
demanding relief under the Massachusetts Unfair and Deceptive Trade Practices
Act, the Sherman Antitrust Act, the Massachusetts Antitrust Act and the Lanham
Act (the October 2009 Letter).
On
July 7, 2010, JPS filed a complaint against our wholly owned subsidiary,
Specialized Technology Resources, Inc. (STR), in the U.S. District Court
for the District of Massachusetts which complaint includes the allegations set
forth in the October 2009 Letter (the Federal Court Action). JPS
complaint alleges various antitrust and unfair competition claims and that the
State Court Action (described above) was sham litigation initiated by STR in an
attempt to monopolize the domestic and international market for low-shrink EVA
encapsulants. JPS also alleges other schemes to monopolize and unfair
competition in violation of federal and state laws. JPS seeks $60 million in compensatory
damages, treble damages available under certain federal laws, a permanent
injunction against STR for various activities, reimbursement of legal fees for
the State Court Action as well as for this matter, and disgorgement of proceeds
obtained by STR from allegedly anti-competitive and tortuous acts.
Given
that we prevailed in the State Court Action, we believe the claims by JPS of
sham litigation are meritless. Further,
we believe the Federal Court Action is an attempt by JPS to relitigate claims
decided in the State Court Action.
Accordingly, in our view, the Federal Court Action fails to state a
valid claim. Therefore, we intend to file a motion to dismiss, and to otherwise
defend vigorously the Federal Court Action.
Also, management has determined any such possible losses to be remote
under the definition of ASC 450.
In addition to the other
information set forth in this report, you should carefully consider the factors
discussed in Part I,
Item 1A. Risk
Factor
s in the Companys 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 Companys
Annual Report on Form 10-K for the year ended December 31, 2009
, except as noted below.
We typically rely upon trade secrets and contractual restrictions, and
not patents, to protect our proprietary rights. Failure to protect our
intellectual property rights may undermine our competitive position and
protecting our rights or defending against third-party allegations of
infringement may be costly.
Protection
of proprietary processes, methods, documentation and other technology is
critical to our business. Failure to protect, monitor and control the use of
our existing intellectual property rights could cause us to lose our
competitive advantage and incur significant expenses. We typically rely on
trade secrets, trademarks, copyrights and contractual restrictions to protect
our intellectual property rights and currently do not hold any patents related
to our Solar business. However, the measures we take to protect our trade
secrets and other intellectual property rights may be insufficient. While we
enter into confidentiality agreements with our Solar employees and third
parties to protect our intellectual property rights, such confidentiality
provisions related to our trade secrets could be breached and may not provide
meaningful protection for our trade secrets. Also, others may independently
develop technologies or products that are similar or identical to ours. In such
case, our trade secrets would not prevent third parties from competing with us.
Third
parties or employees may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could harm our
business and operating results. Policing unauthorized use of intellectual
property rights can be difficult and expensive, and adequate remedies may not
be available.
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As
previously disclosed, in October 2007, we filed a complaint against James
P. Galica (Galica) and JPS Elastomerics Corp. (JPS) in the Massachusetts
Superior Court in Hampshire County (the Court or State Court Action). We alleged that the defendants
misappropriated trade secrets and violated the Massachusetts Unfair and
Deceptive Trade Practices Act as well as breaches of contract, the implied
covenant of good faith and fair dealing, and fiduciary duty against Galica. The
Court determined that JPS and Galica had violated the Massachusetts Unfair and
Deceptive Trade Practices Act, finding that the technology for our polymeric
sheeting product is a trade secret and that JPS and Galica had misappropriated
our trade secrets. The Court awarded us compensatory and punitive damages,
attorneys fees and costs and issued a temporary injunction preventing JPS from
manufacturing, marketing or selling products based in whole or in part on our
trade secrets. The Court has scheduled a hearing for August 23, 2010 to
decide the scope and duration of injunctive relief as well as the amount of
attorneys fees and damages to be paid by JPS to us.
Also
as previously disclosed, in October 2009 (shortly before the effective
date of our initial public offering), JPS counsel sent to our counsel a letter
demanding relief under the Massachusetts Unfair and Deceptive Trade Practices Act,
the Sherman Antitrust Act, the Massachusetts Antitrust Act and the Lanham Act
(the October 2009 Letter).
On
July 7, 2010, JPS filed a complaint against our wholly owned subsidiary,
Specialized Technology Resources, Inc. (STR), in the U.S. District Court
for the District of Massachusetts which complaint includes the allegations set
forth in the October 2009 Letter (the Federal Court Action). JPS
complaint alleges various antitrust and unfair competition claims and that the
State Court Action (described above) was sham litigation initiated by STR in an
attempt to monopolize the domestic and international market for low-shrink EVA
encapsulants. JPS also alleges other schemes to monopolize and unfair
competition in violation of federal and state laws. JPS seeks $60 million in compensatory
damages, treble damages available under certain federal laws, a permanent
injunction against STR for various activities, reimbursement of legal fees for
the State Court Action as well as for this matter, and disgorgement of proceeds
obtained by STR from allegedly anti-competitive and tortuous acts.
Given
that we prevailed in the State Court Action, we believe the claims by JPS of
sham litigation are meritless. Further,
we believe the Federal Court Action is an attempt by JPS to relitigate claims
decided in the State Court Action.
Accordingly, in our view, the Federal Court Action fails to state a
valid claim. Therefore, we intend to file a motion to dismiss, and to otherwise
defend vigorously the Federal Court Action.
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.
|
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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29
Table of Contents
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.
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STR HOLDINGS, INC.
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(Registrant)
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By: /s/ Barry A. Morris
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Date: August 12, 2010
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Barry A. Morris, Executive
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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30
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