STRI STR Holdings Inc (CE)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

For the Quarterly Period Ended September 30, 2012

Or

For the transition period from               to               

Commission file number 001-34529

(860) 758-7300

 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  x NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  x NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

At November 1, 2012, there were 41,681,238 shares of Common Stock, par value $0.01 per share, outstanding.

Table of Contents

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STR Holdings, Inc. and Subsidiaries

Three and Nine Months Ended September 30, 2012

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See accompanying notes to these condensed consolidated financial statements.

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See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 3—DISCONTINUED OPERATIONS

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

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

In accordance with ASC 250—20—Presentation of Financial Statements—Discontinued Operations and ASC 740—20—Income Taxes—Intraperiod Tax Allocation, the accompanying Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Cash Flows present the results of the QA business as discontinued operations. Prior to the sale, the QA business was a segment of the Company. The Company has no continuing involvement in the operations of the QA business and does not have any direct cash flows from the QA business subsequent to the sale. Accordingly, the Company has presented the QA business as discontinued operations in these condensed consolidated financial statements.

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

In connection with the payoff of all the existing debt, the Company also wrote off $3,586 of the remaining unamortized deferred financing costs associated with the 2007 Credit Agreements.

Out of Period Adjustment

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

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

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

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

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

Since the effect would be anti–dilutive, there were 2,818,979 and 380,432 stock options outstanding that were not included in the computation of diluted weighted–average shares outstanding for the three months ended September 30, 2012 and, 2011, respectively. Since the effect would be anti–dilutive, there were 2,818,979 and 119,516 stock options outstanding that were not

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 4—EARNINGS PER SHARE (Continued)

included in the computation of diluted weighted–average shares outstanding for the nine months ended September 30, 2012 and 2011, respectively.

NOTE 6—LONG — LIVED ASSETS AND GOODWILL

In accordance with ASC 350—Intangibles—Goodwill and Other and ASC 360—Property, Plant and Equipment, the Company assesses the impairment of its long—lived assets including its definite—lived intangible assets, property, plant and equipment and goodwill whenever changes in events or circumstances indicate that the carrying value of such assets may not be recoverable. During each reporting period, the Company assesses if the following factors are present which would cause an impairment review: overall negative solar industry conditions; a significant or prolonged decrease in sales that are generated under its trademarks; loss of a significant customer or a reduction in demand for customers’ products; a significant adverse change in the extent to or manner in which the Company uses its trademarks or proprietary technology; such assets becoming obsolete due to new technology or manufacturing processes entering the markets or an adverse change in legal factors; and the market capitalization of the Company’s common stock. During the first quarter of 2012, the market capitalization of the Company’s common stock declined by approximately 50%. As a result of this decline that did not appear to be temporary, the Company determined that a triggering event occurred requiring it to test its long—assets and its reporting unit for impairment as of March 31, 2012.

At March 31, 2012, the Company valued its reporting unit with the assistance of a valuation specialist and determined that its reporting unit’s net book value exceeded its fair value. The Company then performed step two of the goodwill impairment assessment which involved calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all of its assets and liabilities other than goodwill and comparing the residual amount to the carrying amount of goodwill. The Company determined that the implied fair value of goodwill was lower than its carrying value and recorded a goodwill impairment of $82,524. The Company estimated the fair value of its reporting unit under the income approach using a discounted cash flow method which incorporated the Company’s cash flow projections. The Company also considered its market capitalization, control premiums and other valuation assumptions in reconciling the calculated fair value to the market capitalization at the assessment date. Based on the other-than-temporary decline in the Company’s stock price and its net book value exceeding the market capitalization of its common stock during the first quarter of 2012, the market approach was given a higher weighting in determining fair value. The Company believes the cash flow projections and valuation assumptions used were reasonable and consistent with market participants. Inherent in management’s development of cash flow projections are assumptions and estimates, including those related to future earnings, growth prospects and the weighted—average cost of capital. Many of the factors used in assessing the fair value are outside the control of management, and these assumptions and estimates can change in future periods as a result of both Company—specific factors and overall economic conditions.

Prior to performing its goodwill impairment test, the Company first assessed its long-lived assets for impairment as of March 31, 2012. The Company concluded that no impairment existed as the sum of the undiscounted expected future cash flows exceeded the carrying value of the Company’s asset group which is its reporting unit ($333,375 as of March 31, 2012) by $200,458. The undiscounted cash flows were derived from the same financial forecast utilized in its goodwill impairment analysis.  The key assumptions driving the undiscounted cash flows are the forecasted sales growth rate and EBITDA margin.  For this impairment analysis, the Company used undiscounted cash flows reflecting a sales decline of 23% in 2012 and a sales increase of 20% and 22% in 2013 and 2014, respectively.  Subsequent to 2014, a normalized 3% annual sales growth rate was used for the remaining useful life. The Company estimated its EBITDA margin to range from 12% to 16%. The Company believes its recent net sales decline is temporary compared to the expected useful lives of its long—lived assets and expects volumes to increase in 2013 and

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 6—LONG — LIVED ASSETS AND GOODWILL (Continued)

beyond based upon the factors discussed in the intangible asset section below. The Company believes its long—term EBITDA margin will be sustained due to increased sales volume and continued cost reductions offsetting future price reductions.

The Company performed sensitivity analysis to assess the remaining estimated useful lives of its intangible assets by considering the cash flows used in the step two goodwill fair value assessment and determined that the respective intangible assets’ carrying balances are recoverable based on the projected cash flows for the asset group.  In addition, the Company performed a qualitative assessment as discussed below.

Customer Relationships

Although the Company’s recent sales performance has been negatively impacted by many of its customers losing market share and some declaring bankruptcy, the Company serves many of the largest module manufacturers with whom the Company has rapidly grown with. The remaining estimated useful life of this intangible asset was supported by the Company’s historical customer retention. The Company expects to continue to increase its net sales to many of these customers in conjunction with anticipated long-term growth in the industry due to greater adoption of solar energy. As such, the Company determined that no change in useful life was required.

Proprietary Technology

The Company, as well as its competitors, continues to develop new encapsulant technologies. The Company is in the process of introducing its next generation encapsulant that possesses additional attributes such as high—light transmission and exceptional potential induced degradation (“PID”) resistance. The Company is also in development of a non—EVA encapsulant. However, the Company’s recently developed products and expected innovations leverage its core technology and possess the benefits that the Company’s legacy encapsulants provide, including long—term clarity provided by the Company’s formulations and dimensional stability provided by the Company’s extrusion manufacturing process. Based upon these factors and the Company’s recent successful trade-secret defense litigation as previously disclosed, the Company determined that no change in useful life was required.

Trademarks

The Company’s trademarks are well known in the solar industry due to its reputation for innovation, customer service and having encapsulants perform in the field for over 30 years.  As such, the Company determined that no change in useful life was required.

The Company did not need to test whether its long—lived assets were impaired as of September 30, 2012, as the Company concluded there was no significant triggering event that occurred during the third quarter of 2012 that was not already contemplated in the Company’s March 31, 2012 assessment and given the significant amount by which the undiscounted cash flows exceeded the carrying amounts of the Company’s long—lived assets. Although the Company’s sales volume continued to decline in the third quarter of 2012 and the Company’s estimated full—year 2012 net sales were revised lower, the Company believes that its recent product launches, customer service, quality, geographic footprint and continued focus on innovation will allow the Company to increase its net sales from anticipated 2012 levels as the solar industry continues to grow, driving increased demand for modules and as a result, its encapsulants. However, the solar industry continues to evolve rapidly.  If the Company does not achieve anticipated sales volumes through existing and new products, retain customers, maintain pricing power in the future, or any adverse circumstances occur, certain of the Company’s long—lived assets may be subject to accelerated depreciation/amortization and/or future impairment.

Goodwill was $0 at September 30, 2012 and $82,524 at December 31, 2011. Goodwill is not deductible for tax purposes.

NOTE 7—INCOME TAXES FROM CONTINUING OPERATIONS

The Company’s effective income tax rate from continuing operations for the three months and nine months ended September 30, 2012 was 43.9% and 5.6%, respectively, compared to the U.S. federal statutory tax rate of 35.0%. The Company’s effective tax rate from continuing operations was approximately (37.7)% and 27.0%, respectively, for the three and nine months ended September 30, 2011.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 7—INCOME TAXES FROM CONTINUING OPERATIONS (Continued)

In 2011, the Company generated income in the United States that was taxed at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non—deductible expenses. The 2011 income tax expense was reduced by the Company’s permanently re-invested Malaysia earnings where it benefits from a zero percent tax holiday. In 2012, the Company’s operations are expected to generate a pre-tax loss in the U.S. as the solar industry continues to shift and expand in Asia. As such, the Company expects to receive an income tax benefit that will reduce its expected loss at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non-deductible expenses. In addition, the Company expects to continue to benefit from anticipated earnings in Malaysia that are permanently reinvested at a zero percent tax rate.

The effective tax rate from continuing operations for the nine months ended September 30, 2012 also reflects discrete items recorded in the first quarter relating to the goodwill impairment for which no tax benefit is recorded, settlement of income tax audits resulting in a $1,000 benefit, and a benefit related to a favorable adjustment of $538 made upon filing the Company’s 2011 tax returns.

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

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

On March 7, 2012, the Internal Revenue Service issued Revenue Procedures 2012—9 and 2012—20 (“Revenue Procedures”) that provide a procedure for a taxpayer to follow in order to obtain automatic consent of the Commissioner to change its methods of accounting. This change was made to comply with the tangible property temporary regulations (“Temporary Regulations”) that were issued on December 23, 2011. The Revenue Procedures allow taxpayers to change their method of accounting for tax years beginning on or after January 1, 2012. Taxpayers may not early adopt the provisions in the Temporary Regulations. The Company is assessing the impact, if any, of this procedure.

NOTE 8—COMMITMENTS AND CONTINGENCIES

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

The Company typically does not provide contractual warranties on its products. However, on limited occasions, the Company incurs costs in connection with specific product performance claims. The Company has accrued for specific product performance matters that are probable and estimable based on estimates of ultimate cash expenditures that are expected to be incurred for such items. The following table summarizes the Company’s product performance liability that is recorded in accrued liabilities in the Condensed Consolidated Balance Sheets:

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

During 2010, the Company performed a Phase II environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site was found to contain a presence of volatile organic compounds. The Company has been in contact with the Department of Environmental Protection and has engaged a licensed contractor to remediate this circumstance. Based

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 8—COMMITMENTS AND CONTINGENCIES (Continued)

on ASC 450-Contingencies, the Company has accrued the estimated cost to remediate of $350. During the nine months ended September 30, 2012, the Company utilized $195 of this accrual, leaving a balance of $155 as of September 30, 2012.

Galica/JPS

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

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

Alpha Marathon

On October 7, 2011, the Company filed a Statement of Claim with the Ontario Superior Court of Justice against Alpha Marathon Film Extrusion Technologies Inc. (“Alpha Marathon”), an equipment line manufacturer located in Ontario, Canada, seeking damages resulting from Alpha Marathon’s misappropriation of trade secrets and an injunction barring use of those trade secrets.

On October 17, 2012, Alpha Marathon filed its Statement of Defence denying the Company’s allegations regarding the misappropriation of its trade secrets.  On October 19, 2012, Alpha Marathon filed an Amended Statement of Defence adding that the Company’s trade secrets are in the public domain.  The Company intends to vigorously protect its trade secrets and to continue its claims against Alpha Marathon.

Preferred Stock

The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value. At September 30, 2012, there were no shares issued or outstanding.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 9—STOCKHOLDERS’ EQUITY(Continued)

Common Stock

The Company’s Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At September 30, 2012, there were 41,681,348 shares issued and 41,677,626 shares outstanding of common stock. Each share of common stock is entitled to one vote per share. Included in the 41,677,626 shares outstanding are 41,513,757 shares of common stock and 163,869 shares of unvested restricted common stock.

Treasury Stock

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

NOTE 10—STOCK – BASED COMPENSATION

On November 6, 2009, the Company’s Board of Directors approved the Company’s 2009 Equity Incentive Plan (the “2009 Plan”), which became effective on the same day. A total of 4,750,000 shares of common stock are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, “options,” stock appreciation rights, shares of restricted stock, or “restricted stock,” rights to dividend equivalents and other stock—based awards, collectively, the “awards.” The Board of Directors or the committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by the Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest over a four—year period and expire ten years from date of grant. There were 1,566,312 shares available for grant under the 2009 plan as of September 30, 2012.

The following table summarizes the options activity under the Company’s 2009 Plan for the nine months ended September 30, 2012:

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $3.10 of the Company’s common stock on September 30, 2012.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 10—STOCK — BASED COMPENSATION (Continued)

As of September 30, 2012, there was $1,290 of unrecognized compensation cost related to outstanding employee stock option awards. This amount is expected to be recognized over a weighted—average remaining vesting period of approximately 2 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock—based compensation related to these awards will be different from its expectations.

The following table summarizes the restricted common stock activity of the Company for the nine months ended September 30, 2012:

As of September 30, 2012, there was $940 of unrecognized compensation cost related to employee and director unvested restricted common stock. This amount is expected to be recognized over a weighted—average remaining vesting period of approximately 2 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock—based compensation related to these awards will be different from its expectations.

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

Under the ESPP, eligible employees may use payroll withholdings to purchase shares of the Company’s common stock at a 10% discount. The Company has established four offering periods in which eligible employees may participate. The first offering period commenced in the fourth quarter of 2011. The Company purchases the number of required shares each period based upon the employees’ contribution plus the 10% discount. The number of shares purchased times the 10% discount is recorded by the Company as stock—based compensation. The Company recorded $1 and $4 in stock—based compensation expense relating to the ESPP for the three and nine months ended September 30, 2012, respectively. There were 493,071 shares available for purchase under the ESPP as of September 30, 2012.

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

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

NOTE 11—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION

ASC 280—10—50 Disclosure about Segment of an Enterprise and Related Information, establishes standards for the manner in which companies report information about operating segments, products, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the operating segment within the enterprise for making operating decisions and assessing financial performance. Since the Company has one product line, sells to global customers in one industry, procures raw materials from similar vendors and expects similar long—term economic characteristics, the Company has one reporting segment and the information as to its operation 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 Company’s segment performance. Adjusted EBITDA represents net earnings from continuing operations before interest income and expense, income tax expense, depreciation, amortization of intangible assets, goodwill impairment, stock—based compensation expense, amortization of deferred financing costs and certain non—recurring income and expenses from the results of operations.

The following tables set forth information about the Company’s operations by its reportable segment and by geographic area:

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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