STR Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
All amounts in thousands
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Year Ended
December 31,
2012
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Year Ended
December 31,
2011
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Year Ended
December 31,
2010
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OPERATING ACTIVITIES
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Net (loss) earnings
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$
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(207,347
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)
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$
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(1,304
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)
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$
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49,311
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Net (earnings) loss from discontinued operations
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(4,228
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)
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(38,124
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)
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5,438
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Net (loss) earnings from continuing operations
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(211,575
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)
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(39,428
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)
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54,749
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Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:
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Depreciation
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11,255
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8,193
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6,896
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Goodwill impairment
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82,524
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63,948
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Intangible asset impairment
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135,480
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Asset impairment
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37,431
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1,861
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Amortization of intangibles
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8,432
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8,432
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8,432
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Amortization of deferred financing costs
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235
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966
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1,327
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Write-off of deferred debt costs on early extinguishment of debt
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844
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3,586
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Stock-based compensation expense
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3,494
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4,436
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6,594
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Loss (gain) on disposal of property, plant and equipment
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2
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(35
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)
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11
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Provision for bad debt expense
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486
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379
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111
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Deferred income tax benefit
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(60,194
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)
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(4,701
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)
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(4,838
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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8,747
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13,541
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(9,514
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)
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Income tax receivable
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(6,951
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)
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(2,847
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)
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Inventories
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20,244
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2,709
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(19,437
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)
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Other current assets
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4,103
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4,071
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(4,874
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)
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Accounts payable
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(1,773
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)
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(12,410
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)
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9,426
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Accrued liabilities
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(1,379
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)
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(50
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)
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1,440
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Income taxes payable
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2,715
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(6,235
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)
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5,268
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Other, net
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(238
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)
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402
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(619
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)
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Net cash provided by continuing operations
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33,882
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46,818
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54,972
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Net cash (used in) provided by discontinued operations
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(32
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)
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(109,341
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)
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3,769
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Net cash provided by (used in) operating activities
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33,850
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(62,523
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)
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58,741
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INVESTING ACTIVITIES
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Capital expenditures
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(10,677
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)
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(21,537
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)
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(16,061
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)
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Proceeds from sale of fixed assets
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43
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Net cash used in continuing operations
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(10,677
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)
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(21,494
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)
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(16,061
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)
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Net cash provided by (used in) discontinued operations
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274,354
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(2,990
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)
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Net cash (used in) provided by investing activities
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(10,677
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)
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252,860
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(19,051
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)
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FINANCING ACTIVITIES
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Proceeds from exercise of stock options
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596
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950
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Option exercise recognized tax benefit
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77
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142
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Net settlement of options
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(31
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)
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Purchase of treasury stock
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(57
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)
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Common stock issued under employee stock option plan
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41
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Other issuance costs
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(43
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)
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(1,306
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)
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(1,535
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)
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Net cash provided by (used in) continuing operations
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(2
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)
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(721
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)
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(443
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)
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Net cash used in discontinued operations
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(238,525
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)
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(1,981
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)
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Net cash (used in) provided by financing activities
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(2
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)
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(239,246
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)
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(2,424
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)
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Effect of exchange rate changes on cash
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20
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1,073
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215
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Net increase (decrease) in cash and cash equivalents
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23,191
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(47,836
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)
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37,481
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Cash and cash equivalents, beginning of period
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58,794
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106,630
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69,149
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Cash and cash equivalents, end of period
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81,985
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58,794
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106,630
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Less cash and cash equivalents of discontinued operations, end of period
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8,297
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Cash and cash equivalents from continuing operations, end of period
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$
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81,985
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$
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58,794
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$
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98,333
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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Cash paid during the period for:
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Interest
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$
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6,699
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$
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14,359
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Income taxes
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$
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2,514
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$
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114,482
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$
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20,974
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See accompanying notes to these consolidated financial statements.
83
Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands except share amounts, per share amounts or
unless otherwise noted
NOTE 1BASIS OF PRESENTATION AND NATURE OF OPERATIONS
Basis of Presentation
These consolidated financial statements reflect the financial statements of STR Holdings, Inc. ("Holdings") or (the "Company")
and its subsidiaries on a consolidated basis. The consolidated financial statements for the years ended December 31, 2012, 2011 and 2010, represent the basis of accounting for STR
Holdings, Inc. and its subsidiaries that reflect the June 15, 2007 DLJ Transactions discussed below. Due to the divestiture of the Quality Assurance ("QA") business as discussed below,
the QA business' historical operating results and the interest expense associated with the Company's prior first lien credit agreement and the second lien credit agreement (together, the "2007 Credit
Agreements") are recorded in discontinued operations in the Consolidated Statements of
Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. See Note 3 below.
The
accompanying consolidated financial statements and the related information contained within the notes to the consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for financial information and
annual reports on the Form 10-K.
Certain
prior periods' disclosures have been reclassified to conform to the current period's presentation.
Nature of Operations
The Company was incorporated in 1944 as a plastics and industrial materials research and development company and evolved into two core
businesses: solar encapsulant manufacturing and quality assurance services. The Company currently designs, develops and manufactures encapsulants that protect the embedded semiconductor circuits of
solar panels for sale to solar module manufacturers worldwide.
The
Company launched their former QA business in 1973 and commenced sales of solar encapsulant products in the late 1970s. The Company's strategic divestiture of the QA business is
described below and in Note 3.
On
September 1, 2011, the Company completed the sale of the QA business to Underwriters Laboratories, Inc. ("UL"). This strategic divestiture was executed to
allow the Company 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. The following transactions occurred as a result of the divestiture:
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-
The Company received $275,000, plus assumed cash in proceeds. The sale generated an after-tax gain of approximately
$14,071 that included a tax liability of approximately $105,934. This gain is recorded in discontinued operations in the Consolidated Statements of Comprehensive Income and the proceeds received are
recorded in discontinued operations in the Consolidated Statements of Cash Flows in 2011. In 2012, the Company finalized the taxable gain and recorded an income tax benefit to discontinued operations
of $4,228. See Note 3.
84
Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 1BASIS OF PRESENTATION AND NATURE OF OPERATIONS (Continued)
-
-
In order to sell the assets of QA free and clear of liens provided pursuant to the 2007 Credit Agreements, the Company
terminated the 2007 Credit Agreements by using $237,732 of the sale proceeds to repay all amounts outstanding thereunder on September 1, 2011 to Credit Suisse AG as administrative and
collateral agent. The cash payment was recorded in discontinued operations in 2011 in the Consolidated Statements of Cash Flows. The interest expense associated with the 2007 Credit Agreements was
recorded in discontinued operations in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows in 2011 and 2010.
-
-
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. The write-off was recorded to continuing operations in 2011 in the Consolidated Statements of Comprehensive Income.
-
-
In conjunction with the sale, the Company entered into an agreement to lease its real property located at 10 Water Street,
Enfield, Connecticut to a subsidiary of UL. Prior to the closing of the sale, the property served as the QA headquarters and a testing facility. Since this property was expected to generate rental
income of $300 per year, the Company evaluated whether the carrying value of the property was recoverable. Based on this evaluation an impairment loss of $1,861 was recognized in continuing operations
in 2011 in the Consolidated Statements of Comprehensive Income.
On
June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds, or ("DLJMB"), and its co-investors, together with members of STR
Holdings, Inc.'s Board of Directors, its executive officers, certain prior investors and other members of management, acquired 100% of the voting equity interests in the Company's wholly-owned
subsidiary, Specialized Technology Resources, Inc. for $365,600, including transaction costs (the "Acquisition"). They acquired Specialized Technology Resources, Inc. for investment purposes.
In
connection with the Acquisition:
-
-
DLJMB and its co-investors contributed $145,700 in cash for approximately 81.6% of the voting equity interests
in STR Holdings LLC;
-
-
Dennis L. Jilot, our Chairman, Robert S. Yorgensen, our President and Chief Executive Officer, and Barry A. Morris, our
Executive Vice President and Chief Operating Officer, exchanged a portion of their existing equity investments in Specialized Technology Resources, Inc., valued at approximately $11,500, for
approximately 6.4% of the voting equity interests in STR Holdings LLC;
-
-
Other stockholders of Specialized Technology Resources, Inc., including some current and former employees and
former directors, exchanged a portion of their existing equity investments in Specialized Technology Resources, Inc., valued at approximately $21,500, for approximately 12.0% of the voting
equity interests in STR Holdings LLC;
-
-
Specialized Technology Resources, Inc., as borrower, and STR Holdings LLC, as a guarantor, entered into a
first lien credit facility providing for a fully drawn $185,000 term loan facility and an undrawn $20,000 revolving credit facility and a second lien credit facility providing for a fully
85
Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 1BASIS OF PRESENTATION AND NATURE OF OPERATIONS (Continued)
drawn
$75,000 term loan facility, in each case, with Credit Suisse, as administrative agent and collateral agent; and
-
-
With the cash contributed from DLJMB and its co-investors and the borrowings under the Company's first lien
and second lien credit facilities, STR Holdings LLC (i) purchased the remaining shares of stock in Specialized Technology Resources, Inc. for $324,700, (ii) repaid $61,700
of debt held by Specialized Technology Resources, Inc., (iii) settled Specialized Technology Resources, Inc. stock options for $1,500, (iv) paid financing costs of $7,900
and transaction costs of $4,400, and (v) retained the remaining $5,500 in proceeds for working capital purposes. The Company refers to the foregoing transactions collectively as the "DLJ
Transactions."
On
November 12, 2009, we closed our IPO of 12,300,000 shares of common stock at an offering price of $10.00 per share, of which 3,300,000 shares were sold by us and 9,000,000
shares were sold by selling stockholders, resulting in net proceeds to us of approximately $25.0 million after deducting underwriting discounts, commissions and other offering costs of
approximately $7.8 million. Effective with the conversion of NewCo into STR Holdings, Inc., our outstanding units were converted into shares of common stock and restricted common stock.
In connection with our IPO, we repaid $15.0 million of borrowings under our first lien credit facility, and also paid $2.6 million to terminate an advisory services and monitoring
agreement we entered into in connection with the DLJ Transactions.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is as follows:
Basis of Accounting.
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United
States of America.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries.
Intercompany transactions and account balances have been eliminated.
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United
States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company's significant
estimates include its revenue recognition, allowance for doubtful accounts receivable, inventory valuation, the recorded amounts and amortization periods of its intangible assets, valuation of
goodwill and long-lived assets, product performance accrual, income taxes payable, deferred income taxes, its assessment of uncertain tax positions and its valuation of stock-based compensation costs.
Actual results could differ materially from these estimates.
Fair Value Estimates.
Accounting Standards Codification ("ASC") 820-10 Fair Value Measurements, defines fair value as the price that
would be received to sell an asset or paid to transfer
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Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a
liability in an orderly transaction between market participants at the measurement date. ASC 820-10 classifies the inputs used to measure fair value into the following hierarchy:
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Level 1:
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Unadjusted quoted prices in active markets for identical assets or liabilities
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Level 2:
|
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Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or liability
|
Level 3:
|
|
Unobservable inputs for the asset or liability
|
The
carrying values for cash, accounts receivable, accounts payable, accrued liabilities and other current assets and liabilities approximate their fair values due to their short
maturities. The carrying value of deferred compensation is based on the Company's common stock price as of December 31, 2012, which is a Level 1 input. See Note 11.
Foreign Currency Translation and Transactions.
The Company's international operations use the local currency as their functional
currency, except for
its Malaysian subsidiary whose functional currency is the U.S. dollar. Assets and liabilities of international operations are translated at period-end rates of exchange; revenues and expenses are
translated at average rates of exchange. The resulting translation gains or losses are reflected in accumulated other comprehensive income. Gains or losses resulting from foreign currency transactions
are included in net earnings.
Cash and Cash Equivalents.
All highly-liquid investments with a maturity of three months or less at the date of purchase are considered
to be cash
equivalents. The Company deposits its cash balances with a limited number of banks. Cash balances in these accounts generally exceed government insured limits.
Recognition of Revenue and Accounts Receivable.
The Company recognizes revenue net of any sales returns and allowances when evidence of
an
arrangement exists, delivery of the product or service has occurred and title and risk of loss have passed to the customer, the sales price is fixed or determinable, and collectability of the
resulting receivable is reasonably assured.
The
Company recognizes revenue from the manufacture and sale of its encapsulants, which is the only contractual deliverable, either at the time of shipping or at the time the product is
received at the customer's port or dock, depending upon terms of the sale. The Company does not offer a general right of return or performance warranty on its products.
Allowance for Doubtful Accounts.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its
customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis and writes-off accounts receivable after reasonable collection efforts have been made
and collection is deemed questionable or uncollectible.
Inventories.
The Company's inventories are stated at the lower of cost or market. The Company's primary raw materials consist of resin,
paper,
packaging material and chemicals/additives. The Company's finished goods inventories are made-to-order and possess a shelf life of six to nine months from the date of manufacture. Cost is determined
on a first-in, first-out basis and includes both the
87
Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
costs
of acquisition and the costs of manufacturing. These costs include direct material, direct labor and fixed and variable indirect manufacturing costs, including depreciation expense and
amortization of intangible assets.
The
Company will write-down inventory to its net realizable value when it is probable that its inventory carrying cost is not fully recoverable through sale or other
disposition. The Company's write-down considers overall market conditions, customer inventory levels, legal or contractual provisions and age of the inventories.
In
2011, the Company recorded $1,000 of inventory write-downs associated with an agreement for the return of product that it could not resell in conjunction with the settlement of
overdue accounts receivable balances. Since the Company was unable to resell the returned product, the Company reduced the inventory carrying value to zero. The Company also incurred a write-down of
$1,000 associated with finished goods produced under a customer order but later cancelled by the customer prior to shipment.
In
2012, the Company incurred a write-down of approximately $450 associated with excess paper raw material inventory due to changes in customer specifications and the Company
being in the process of removing paper from its manufacturing process.
Long-Lived Assets.
The Company's long-lived assets have consisted of goodwill, other intangible assets and property, plant and
equipment.
Property,
plant and equipment are recorded at cost and include expenditures for items that increase the useful lives of existing equipment. Maintenance and repairs are expensed as
incurred. Property, plant and equipment accounts are relieved at cost, less related accumulated depreciation, when properties are disposed of or otherwise retired. Gains and losses from disposal of
property, plant and equipment are included in net earnings.
Due
to continued and expected low production utilization levels, the Company recorded $2,818 of accelerated depreciation in cost of goods sold associated with shortened useful lives of
certain machinery and equipment in 2012. In 2011, the Company closed its Florida manufacturing facility and recorded $512 of accelerated depreciation associated with shortened useful lives of
machinery and equipment.
In
accordance with ASC 360Property, Plant, and Equipment, the Company reviews the carrying value of its long-lived assets, including property, plant and equipment, for
impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If a long-lived asset is found to be impaired, the amount recognized for impairment
is equal to the difference between the carrying value and the asset's fair value. Fair value is estimated based upon discounted future cash flows or other reasonable estimates of fair market value.
The Company recognized an impairment loss of $37,431 and $1,861 in 2012 and 2011, respectively. See Note 6.
Goodwill
represented the excess of the purchase price consideration over the estimated fair value assigned to the individual assets acquired and liabilities assumed from the Acquisition.
The Company did not amortize goodwill, but instead tested goodwill for impairment in accordance with the two-step method described in ASC 350Intangibles, Goodwill and Other. The Company
performed its annual
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Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
impairment
review of goodwill on October 1
st
and would also perform a review if at any time facts and circumstances warrant.
During
the first quarter of 2012, the Company recorded a non-cash goodwill impairment charge of $82,524. Refer to Note 6. During the fourth quarter of 2011, the Company recorded a
non-cash impairment charge of $63,948. The Company completed its required annual impairment testing in the fourth quarter of 2010, which resulted in no goodwill impairment.
The
Company's intangible assets included its customer relationships, trademarks and proprietary technology and resulted from the Acquisition that occurred in June of 2007. The Company
accounted for the Acquisition using the purchase method of accounting and recorded definite-lived intangible assets separately from goodwill. Intangible assets were recorded at their estimated fair
value at the date of acquisition.
The
Company's customer relationships consisted of the value associated with existing contractual arrangements as well as expected value to be derived from future contract renewals of its
customers. The Company determined their value using the income approach. Their useful life was determined by consideration of a number of factors, including the Company's long standing customer base
and attrition rates.
The
Company's trademarks represented the value of its STR® and Photocap® trademarks. The Company determined their value using the "relief-from-royalty" method.
The useful life of trademarks was determined by consideration of a number of factors, including elapsed time and anticipated future cash flows.
The
Company's proprietary technology represented the value of its manufacturing processes and trade secrets. The Company determined its value using the "relief-from-royalty" method. The
useful life of proprietary technology was determined by consideration of a number of factors, including elapsed time, prior innovations and potential future technological changes.
During
the fourth quarter of 2012, the Company recorded a non-cash impairment charge of $135,480. Refer to Note 6.
Asset Retirement Obligations.
The Company accounts for asset retirement obligations in accordance with ASC 410Asset Retirement
and
Environmental Obligations, which requires a company to recognize a liability for the fair value of obligations to retire tangible long-lived assets when there is a contractual obligation to incur such
costs. The Company has recorded its asset retirement obligations relating to the cost of removing improvements from lease facilities at the end of the lease terms. The Company's conditional asset
retirement obligations are not material.
Deferred Financing Costs.
The Company capitalizes debt issuance costs and amortizes the costs to expense over the term of the related
debt facility.
In conjunction with the sale of the QA business, the Company's 2007 Credit Agreements were paid in full during 2011. As such, the related unamortized deferred financing costs of $3,586 were expensed
immediately during 2011. In connection with entering
into the Credit Agreement in 2011, the Company incurred $1,306 of issuance costs. As disclosed in Note 13, the Company amended its Credit Agreement in 2012 and incurred $43 of additional
issuance costs. In conjunction with entering into the amendment in 2012, the Company wrote-off $844 of the
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
remaining
prior capitalized issuance costs based on the proportion of its new borrowing capacity compared to its prior availability. Amortization of deferred financing costs was $1,079, $4,552 and
$1,327 for the years ended December 31, 2012, 2011 and 2010, respectively.
Leases.
The Company leases certain facilities and equipment used in its operations. The Company accounts for its leases under the
provisions of ASC
840Leases, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. Operating lease expense is recorded on a straight-line
basis over the lease term.
Income Taxes.
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740Income Taxes.
Under
this method, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. The Company estimates its deferred tax assets and liabilities using the enacted tax laws expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled, and will recognize the effect of a change in tax laws on deferred tax assets and
liabilities in the results of its operations during the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets if it determines that it is
more likely than not that some or all of the deferred tax assets will not be realized.
The
Company operates in multiple taxing jurisdictions and is subject to the jurisdiction of a number of U.S. and non-U.S. tax authorities and to tax agreements and treaties among those
authorities. Operations in these jurisdictions are taxed on various bases in accordance with jurisdictional regulations.
Tax
benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax
benefits are recorded when a tax position has been effectively settled, which means that the appropriate taxing authority has completed their examination even though the statute of limitations remains
open or the
statute of limitation expires. Interest and penalties related to uncertain tax positions are recognized as part of the Company's provision for income taxes and are accrued beginning in the period that
such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. See Note 8 below.
Product Performance Accrual.
The Company does not provide contractual performance warranties on its products. However, on limited
occasions, the
Company incurs costs to service its products in connection with specific product performance matters. Anticipated future costs are recorded as part of cost of sales and accrued liabilities for
specific product performance matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. As of December 31, 2012, the Company has
an accrual of $3,959 relating to specific product performance matters, which amount represents management's best estimate of the costs to repair or replace such product. 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.
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cost of Sales.
The Company includes the cost of inventory sold and related costs for the distribution of its product in cost of sales.
These costs
include raw materials and other components, direct labor, product performance matters, manufacturing overhead, salaries, and other personnel-related expenses, write-off of inventory, quality control,
freight, insurance, depreciation and amortization of intangibles. Shipping and handling costs are classified as a component of cost of sales. Customer payments for shipping and handling costs are
recorded as a component of net sales.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist primarily of salaries, travel,
commissions and
other personnel-related expenses for employees engaged in sales, marketing and support of the Company's products and services, trade shows and promotions. General and administrative expenses consist
of expenses for the Company's executive, finance, administrative, information technology, compliance and human resource functions.
Research and Development Expense.
The Company has a long history of innovation dating back to its establishment in 1944 as a plastic
and polymer
research and development firm. As the Company's
operations have expanded from solely providing research and development activities into the manufacturing of solar encapsulants, it has created a separate research and development function for
employees and costs that are fully dedicated to research and development activities. The Company's research and development expense consists primarily of salaries and fringe benefit costs and the cost
of materials and outside services used in our pre-commercialization process and development efforts. The Company records depreciation expense for equipment that is used specifically for research and
development activities.
Stock-Based Compensation.
In accordance with ASC 718-Compensation-Stock Compensation, the Company recognizes the grant date fair
value of stock-based awards as compensation expense over the vesting period of the awards. See Note 11.
Earnings Per Share.
The Company computes net earnings per share in accordance with ASC 260Earnings Per Share. Under the
provisions of ASC 260, basic net earnings per share is computed by dividing the net earnings available to common stockholders by the weighted-average common shares outstanding during the period.
Diluted net earnings per common share adjusts basic net earnings per common share for the effects of stock options and restricted stock awards only in periods in which such effect is dilutive. See
Note 4.
Comprehensive Income (Loss).
Comprehensive income (loss) consists of net earnings and the effects on the consolidated financial
statements of
translating the financial statements of the Company's international subsidiaries. Comprehensive income (loss) is presented in the consolidated statements of comprehensive income (loss). The Company's
accumulated other comprehensive income (loss) is presented as a component of equity in its consolidated balance sheets and consists of the cumulative amount of the Company's foreign currency
translation adjustments, net of tax impact.
Recent Accounting Pronouncements:
In June 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. The FASB Topic ASC 220 established standards for the reporting and presentation of comprehensive income and its components
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in
a full set of general-purpose financial statements. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net earnings and the components of
other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. In both choices, an entity is required to present each
component of net earnings along with total net earnings, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.
The entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net earnings in the
statement(s) where the components of net earnings and the components of other comprehensive income are presented. The amendments should be applied retrospectively. The amendments are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption was permitted. The amendments did not require any transition disclosures. The Company
early adopted this standard effective June 30, 2011, and it did not have a material impact on the Company's consolidated financial statements since the Company previously presented net
earnings, other comprehensive income and its components and total comprehensive income in a continuous statement.
The
FASB has subsequently issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments to the Codification in ASU
No. 2011-12 are effective at the same time as the amendments in ASU No. 2011-05, Comprehensive Income, so that entities will not be required to comply with the
presentation requirements in ASU No. 2011-05 that ASU No. 2011-12 is deferring. Entities should continue to report reclassifications out of accumulated other
comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not
affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive
financial statements. Public entities are required to adopt these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted
this standard effective December 31, 2011, and it did not have a material impact on the Company's consolidated financial statements.
In
February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU
2013-02 supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12 for
all public and private organizations. The amendment requires that an entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line
items in net income if the amount being reclassified is required under U.S. GAAP. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU
2013-02 is effective for fiscal years, and interim periods within those years, beginning on or after December 15,
2012. The Company does not expect the adoption of ASU 2013-02 in the first quarter of 2013 to have an impact on the Company's financial position, results of operations or cash flows.
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 3DISCONTINUED OPERATIONS
On August 16, 2011, the Company entered into an equity purchase agreement to sell its QA business to 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 business 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 for the finalization of the excess cash and working capital
adjustments in accordance with the purchase agreement.
In
accordance with ASC 250-20Presentation of Financial StatementsDiscontinued Operations and ASC 740-20Income
TaxesIntraperiod Tax Allocation, the accompanying Consolidated Statements of Comprehensive Income and 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 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 pay-off 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 during 2011.
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 of 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 $4,228. The Company determined
that $1,629 of this benefit was an error that should have been
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 3DISCONTINUED OPERATIONS (Continued)
recorded
in 2011. The Company has determined that the error was not quantitatively or qualitatively material to the annual or interim periods in 2012 and 2011.
The
following table sets forth the operating results of the QA business as being presented as a discontinued operation for the years ended December 31, 2012, 2011 and 2010,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2012
|
|
Year Ended
December 31,
2011
|
|
Year Ended
December 31,
2010
|
|
Net sales
|
|
$
|
|
|
$
|
76,667
|
|
$
|
112,629
|
|
|
|
|
|
|
|
|
|
Loss from operations before income tax expense
|
|
|
|
|
|
(6,493
|
)
|
|
(7,581
|
)
|
Gain on sale before income tax expense
|
|
|
|
|
|
120,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) before income tax expense
|
|
$
|
|
|
$
|
113,512
|
|
$
|
(7,581
|
)
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(4,228
|
)
|
$
|
75,388
|
|
$
|
(2,143
|
)
|
|
|
|
|
|
|
|
|
The
following table sets forth the gain recorded in connection the sale of the QA business:
|
|
|
|
|
|
|
Year Ended
December 31,
2011
|
|
Proceeds
|
|
$
|
286,103
|
|
Less transaction costs
|
|
|
(2,324
|
)
|
|
|
|
|
Proceeds, net of expenses
|
|
|
283,779
|
|
Book value of assets sold excluding deferred tax liability
|
|
|
(163,774
|
)
|
|
|
|
|
Gain on sale before income tax expense
|
|
|
120,005
|
|
Income tax expense
|
|
|
(105,934
|
)
|
|
|
|
|
Gain on sale
|
|
$
|
14,071
|
|
|
|
|
|
94
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 4EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the periods presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2012
|
|
Year Ended
December 31,
2011
|
|
Year Ended
December 31,
2010
|
|
Basic and diluted net earnings per share
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from continuing operations
|
|
$
|
(211,575
|
)
|
$
|
(39,428
|
)
|
$
|
54,749
|
|
Net earnings (loss) from discontinued operations
|
|
|
4,228
|
|
|
38,124
|
|
|
(5,438
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(207,347
|
)
|
$
|
(1,304
|
)
|
$
|
49,311
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weightedaverage shares outstanding
|
|
|
41,314,608
|
|
|
40,886,022
|
|
|
40,302,509
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
1,069,873
|
|
Dilutive effect of restricted common stock
|
|
|
|
|
|
|
|
|
754,120
|
|
|
|
|
|
|
|
|
|
Weightedaverage shares outstanding with dilution
|
|
|
41,314,608
|
|
|
40,886,022
|
|
|
42,126,502
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(5.02
|
)
|
$
|
(0.03
|
)
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(5.02
|
)
|
$
|
(0.03
|
)
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic from continuing operations
|
|
$
|
(5.12
|
)
|
$
|
(0.96
|
)
|
$
|
1.36
|
|
Basic from discontinued operations
|
|
|
0.10
|
|
|
0.93
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(5.02
|
)
|
$
|
(0.03
|
)
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
Diluted from continuing operations
|
|
$
|
(5.12
|
)
|
$
|
(0.96
|
)
|
$
|
1.30
|
|
Diluted from discontinued operations
|
|
|
0.10
|
|
|
0.93
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(5.02
|
)
|
$
|
(0.03
|
)
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
Due
to the loss from continuing operations during the year ending December 31, 2012 and 2011, the weighted-average common shares outstanding does not include 0 and 543,088 of
stock options and 0 and 397,641 of unvested restricted common stock as these potential awards do not share in any loss generated by the Company and are anti-dilutive.
Because
the effect would be anti-dilutive, there were 161 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 year ending December 31, 2012.
Because
the effect would be anti-dilutive, 2,744,910, 314,236 and 193,236 stock options outstanding were not included in the computation of diluted weighted-average shares outstanding
for the years ended December 31, 2012, 2011 and 2010, respectively.
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Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 5INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Finished goods
|
|
$
|
1,352
|
|
$
|
3,112
|
|
Raw materials
|
|
|
7,233
|
|
|
25,697
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
8,585
|
|
$
|
28,809
|
|
|
|
|
|
|
|
NOTE 6LONG
-
LIVED ASSETS AND GOODWILL
Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful
Lives
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Land
|
|
|
|
|
$
|
5,842
|
|
$
|
5,868
|
|
Buildings and improvements
|
|
|
15 - 40
|
|
|
16,020
|
|
|
16,875
|
|
Machinery and equipment
|
|
|
5 - 8
|
|
|
18,618
|
|
|
43,604
|
|
Furniture, fixtures and computer equipment
|
|
|
3 - 5
|
|
|
3,569
|
|
|
2,636
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(18,291
|
)
|
|
(19,925
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
25,758
|
|
|
49,058
|
|
Construction in progress
|
|
|
|
|
|
1,992
|
|
|
14,416
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
$
|
27,750
|
|
$
|
63,474
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $11,255, $8,193 and $6,896 for the years ended December 31, 2012, 2011 and 2010, respectively.
Due
to continued and expected low production utilization levels, the Company recorded $2,818 of accelerated depreciation associated with shortened useful lives of certain machinery and
equipment during the fourth quarter of 2012. In addition, the Company recorded an impairment charge of $37,431 to its property, plant and equipment as of December 31, 2012. The Company
re-evaluated the depreciable lives of such long-lived assets and determined a revision to those lives was not warranted.
In
connection with the sale of the QA business, the Company leased the real property located at 10 Water Street, Enfield, Connecticut to a subsidiary of UL. Prior to the closing of the
sale, the property served as the QA business headquarters and a testing facility. The original term of the lease was for one year. Since this property was expected to generate rental income of $300
per year, the Company evaluated whether the carrying value of the property was recoverable. Based on this evaluation, an impairment loss of $1,861 was recognized in continuing operations in 2011 in
the Consolidated Statements of Comprehensive Income.
In
2011, the Company closed its Florida manufacturing facility and recorded $512 of accelerated depreciation associated with shortened useful lives of machinery and equipment.
96
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 6LONG
-
LIVED ASSETS AND GOODWILL (Continued)
Intangible Assets
The Company has recorded the estimated fair values of intangible assets acquired in connection with the Acquisition. The amounts
recorded, estimated lives, and amortization methods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Impairment
as of
December 31,
2012
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Useful
Lives
|
Customer relationships
|
|
$
|
71,100
|
|
$
|
19,701
|
|
$
|
51,399
|
|
$
|
|
|
$
|
71,100
|
|
$
|
16,146
|
|
$
|
54,954
|
|
20 years
|
Trademarks
|
|
|
40,800
|
|
|
7,537
|
|
|
33,263
|
|
|
|
|
|
40,800
|
|
|
6,177
|
|
|
34,623
|
|
30 years
|
Proprietary technology
|
|
|
70,300
|
|
|
19,482
|
|
|
50,818
|
|
|
|
|
|
70,300
|
|
|
15,965
|
|
|
54,335
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
182,200
|
|
$
|
46,720
|
|
$
|
135,480
|
|
$
|
|
|
$
|
182,200
|
|
$
|
38,288
|
|
$
|
143,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company amortized its intangible assets utilizing the straight-line method as this method approximated the anticipated economic benefit derived from these assets. Amortization
expense of such assets was $8,432 for each of the years ended December 31, 2012, 2011 and 2010. The Company recorded a non-cash impairment charge of $135,480 as of December 31, 2012.
Goodwill
Goodwill represented the excess purchase price consideration of the estimated fair value assigned to the individual assets acquired and
liabilities assumed in the Acquisition. The Company recorded an impairment of $63,948 and $82,524 during 2011 and 2012, respectively, as further discussed below. Goodwill was $0 at December 31,
2012 and $82,524 at December 31, 2011. Goodwill was not deductible for tax purposes.
Impairment Testing
In accordance with ASC 350IntangiblesGoodwill and Other and ASC 360Property, Plant and
Equipment, the Company assessed the impairment of its long-lived assets including its definite-lived intangible assets, property, plant and equipment and goodwill, at least annually for goodwill, and
whenever changes in events or circumstances indicated that the carrying value of such assets may not be recoverable. During each reporting period, the Company assessed if the following factors were
present which would cause an impairment review: overall negative solar industry conditions; a significant or prolonged decrease in sales that 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.
The
Company completes its annual impairment assessment of goodwill as of October 1
st
of each year. Therefore, as of October 1, 2011, the Company
performed its annual impairment testing based on the information available as of that date. 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
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 6LONG
-
LIVED ASSETS AND GOODWILL (Continued)
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. The methodology used on October 1, 2011 was consistent with that used in the prior year. The Company believes the cash flow projections utilized and/or market multiples and
valuation assumptions were reasonable and consistent with the expectations of market participants. Based on this assessment, the Company passed the first step of the twostep method
described in ASC 350. As such, the Company concluded that goodwill was not impaired as of October 1, 2011.
Due
to the Company's net book value exceeding the market capitalization of its common stock in the fourth quarter of 2011, weakening solar market conditions that were greater than the
Company anticipated and the price reductions granted to customers for anticipated 2012 volume, the Company determined that a trigger event occurred to test its reporting unit for impairment as of
December 31, 2011. As such, the Company valued its reporting unit with the assistance of a valuation specialist and determined that its reporting unit's net book value, including goodwill,
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 its implied fair value of goodwill was lower than its carrying
value and recorded a non-cash goodwill impairment charge of $63,948. 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. 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.
During
the first quarter of 2012, the market capitalization of the Company's common stock declined by approximately 50%. As a result of this decline that did not appear to be temporary,
the Company determined that a triggering event occurred requiring it to test its long-lived assets and its goodwill for impairment as of March 31, 2012. Prior to performing its goodwill
impairment test, the Company first assessed its long-lived assets for impairment as of March 31, 2012. The Company concluded that no impairment existed as the sum of the undiscounted expected
future cash flows exceeded the carrying value of the Company's asset group which is its reporting unit. The key assumptions driving the undiscounted cash flows were the forecasted sales growth rate
and EBITDA margin.
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
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 6LONG
-
LIVED ASSETS AND GOODWILL (Continued)
Company
determined that the implied fair value of goodwill was lower than its carrying value and recorded a non-cash goodwill impairment charge of $82,524. The Company estimated the fair value of its
reporting unit under the income approach using a discounted cash flow method which incorporated the Company's cash flow projections. Based on the other-than-temporary decline in the Company's stock
price and its net book value exceeding the market capitalization of its common stock during the first quarter of 2012, the market approach was giving a higher weighting in determining fair value. The
Company believes the cash flow projections and valuation assumptions used were reasonable and consistent with market participants. Many of the factors used in assessing the fair value are outside the
control of management, and these assumptions and estimates can change in future periods as a result of both Company-specific factors, industry conditions and overall economic conditions.
As
of December 31, 2012, due to continued pricing pressure, trade complaints escalating in the industry, increased competition from non-EVA encapsulant materials and the Company's
initial 2013 sales outlook which includes the loss of the its largest customer, the Company determined that a trigger event occurred to test its long-lived assets for recoverability. In conjunction
with a valuation specialist, the Company determined that the sum of the undiscounted expected future cash flows did not exceed the carrying value of the Company's asset group which is its reporting
unit. The key assumptions driving the undiscounted cash flows were the forecasted sales growth rate and EBITDA margin.
Since
the asset group's carrying value was not recoverable, the Company, in conjunction with a valuation specialist, fair valued the asset group incorporating market participant
assumptions. The Company estimated the fair value of its asset group under the income approach using a discounted cash flow model which incorporated our cash flow projections. The Company also
considered its market capitalization, control premiums and other valuation assumptions in reconciling the calculated fair value to the market capitalization at the assessment date. Based on the
assessment, the Company calculated an impairment charge which was allocated to each of the long-lived-assets on a pro-rata basis using the relative carrying values of those assets as of December 31,
2012. However, the Company did not reduce the carrying value of such assets below their fair value where such value could be determined without undue cost and effort. Therefore, the Company recorded a
non-cash impairment charge of $135,480 to its intangible assets and $37,431 to its property, plant and equipment as of December 31, 2012. The Company re-evaluated the depreciable lives of such
long-lived assets and determined a revision to those lives was not warranted.
NOTE 7LEASES
The Company leases facility space under non-cancelable operating leases. The leases require the Company to pay property taxes, common area maintenance and certain other costs in addition
to base rent. The Company also leases office equipment under operating leases.
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 7LEASES (Continued)
Future minimum payments under all non-cancelable operating leases were as follows as of December 31, 2012:
|
|
|
|
|
2013
|
|
$
|
249
|
|
2014
|
|
|
239
|
|
2015
|
|
|
153
|
|
2016
|
|
|
|
|
2017
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
$
|
641
|
|
|
|
|
|
Rental
expense on facility space and equipment operating leases was $474, $1,673 and $1,281 for the years ended December 31, 2012, December 31, 2011 and December 31,
2010, respectively.
NOTE 8INCOME TAXES
(Loss) earnings from continuing operations before income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
Year Ended
December 31, 2010
|
|
Domestic
|
|
$
|
(262,451
|
)
|
$
|
(49,867
|
)
|
$
|
68,139
|
|
Foreign
|
|
|
(15,388
|
)
|
|
21,112
|
|
|
13,279
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(277,839
|
)
|
$
|
(28,755
|
)
|
$
|
81,418
|
|
|
|
|
|
|
|
|
|
100
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 8INCOME TAXES (Continued)
The
(benefit) provision for income taxes from continuing operations consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
Year Ended
December 31, 2010
|
|
Current income tax (benefit) expense from continuing operations
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(8,825
|
)
|
$
|
3,393
|
|
$
|
20,692
|
|
Foreign
|
|
|
3,405
|
|
|
10,075
|
|
|
966
|
|
State and local
|
|
|
(650
|
)
|
|
1,906
|
|
|
9,849
|
|
|
|
|
|
|
|
|
|
Total current income tax (benefit) expense from continuing operations
|
|
|
(6,070
|
)
|
|
15,374
|
|
|
31,507
|
|
Deferred income tax benefit from continuing operations
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(58,015
|
)
|
|
(3,517
|
)
|
|
(3,139
|
)
|
Foreign
|
|
|
(1,722
|
)
|
|
|
|
|
(882
|
)
|
State and local
|
|
|
(457
|
)
|
|
(1,184
|
)
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit from continuing operations
|
|
|
(60,194
|
)
|
|
(4,701
|
)
|
|
(4,838
|
)
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense from continuing operations
|
|
$
|
(66,264
|
)
|
$
|
10,673
|
|
$
|
26,669
|
|
|
|
|
|
|
|
|
|
Tax
benefits of $0, $4 and $22 for the years ended December 31, 2012, 2011 and 2010, respectively, associated with the exercise of stock options were recorded to additional
paid-in capital. Tax benefits associated with the "Windfall" for stock options exercised are determined on a "with and without" basis.
During
2012, vested non-qualified stock options (NQSO) were cancelled resulting in a reversal of the related deferred tax asset. As a result, the Company's additional
paid-in capital "windfall" account has been reduced to zero and an additional deferred tax expense of $113 is reflected in tax expense.
A
deferred tax expense of $70, a tax benefit of $846 and a tax expense of $1,149 relating to the cumulative translation adjustment of the Company's foreign subsidiaries financial
statements is recorded in other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010, respectively.
During
the years ended December 31, 2012, 2011 and 2010, the Company recorded adjustments to income tax and deferred income taxes related to a change in state taxable income
apportionment percent. Amounts recorded in 2012, 2011 and 2010 were to recognize a state deferred income tax benefit of $331, $1,138 and $691, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 8INCOME TAXES (Continued)
Following
is a reconciliation of the Company's effective income tax rate from continuing operations to the United States federal statutory tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
Year Ended
December 31, 2010
|
|
Expected tax at U.S. statutory income tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state and local income taxes net of federal income tax effect
|
|
|
0.3
|
%
|
|
(0.2
|
)%
|
|
0.1
|
%
|
Foreign rate differential
|
|
|
(1.1
|
)%
|
|
10.7
|
%
|
|
(2.1
|
)%
|
Foreign unremitted earnings
|
|
|
0.4
|
%
|
|
(2.6
|
)%
|
|
1.5
|
%
|
Goodwill impairment
|
|
|
(10.4
|
)%
|
|
(77.8
|
)%
|
|
|
%
|
Other non-deductible fees and expenses
|
|
|
(0.1
|
)%
|
|
(0.3
|
)%
|
|
(0.6
|
)%
|
Unrecognized tax benefits
|
|
|
0.3
|
%
|
|
1.4
|
%
|
|
(0.1
|
)%
|
Other
|
|
|
(0.5
|
)%
|
|
(3.3
|
)%
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
23.9
|
%
|
|
(37.1
|
)%
|
|
32.8
|
%
|
|
|
|
|
|
|
|
|
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STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 8INCOME TAXES (Continued)
The
effect of temporary differences is included in deferred tax accounts as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
Accrued bonuses
|
|
$
|
|
|
$
|
18
|
|
Bad debt reserves
|
|
|
15
|
|
|
23
|
|
Inventories
|
|
|
250
|
|
|
164
|
|
Product performance accrual
|
|
|
1,533
|
|
|
1,728
|
|
Other
|
|
|
25
|
|
|
112
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
1,823
|
|
$
|
2,045
|
|
|
|
|
|
|
|
Long-term deferred tax assets:
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
409
|
|
$
|
706
|
|
Non-qualified stock option compensation
|
|
|
3,888
|
|
|
3,445
|
|
Restricted stock compensation
|
|
|
208
|
|
|
|
|
Operating loss carryforwards
|
|
|
2,214
|
|
|
|
|
Fixed assets
|
|
|
5,798
|
|
|
|
|
Other
|
|
|
210
|
|
|
417
|
|
|
|
|
|
|
|
Total long-term deferred tax assets before valuation allowance
|
|
$
|
12,727
|
|
$
|
4,568
|
|
Valuation allowance
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
Long term-deferred tax assets
|
|
|
12,236
|
|
|
4,568
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
14,059
|
|
$
|
6,613
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
|
|
$
|
1,348
|
|
Intangible assets
|
|
|
|
|
|
50,840
|
|
Foreign unremitted earnings
|
|
|
508
|
|
|
407
|
|
Restricted stock compensation
|
|
|
|
|
|
558
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
508
|
|
$
|
53,153
|
|
|
|
|
|
|
|
Total net deferred tax (assets)/liabilities
|
|
$
|
(13,551
|
)
|
$
|
46,540
|
|
|
|
|
|
|
|
A
valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. We have
recorded a valuation allowance of $491 and $0 for deferred tax assets existing as of December 31, 2012 and December 31, 2011. The valuation allowance is primarily attributable to net
operating loss carryforwards in China and Hong Kong.
The
Company recognizes interest accrued related to its liability for unrecognized tax benefits and penalties in income tax expense. The Company recorded interest and penalties related to
unrecognized tax benefits as a component of income tax expense from continuing operations in the amount of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 8INCOME TAXES (Continued)
approximately
$5, $(914) and $612 for the years ended December 31, 2012, 2011 and 2010, respectively. The Company had approximately $939 and $934 for the payments of interest and
penalties accrued at December 31, 2012 and December 31, 2011, respectively.
A
reconciliation of the beginning and ending amount of the Company's liability for unrecognized tax benefits, excluding interest and penalties, is as follows (includes continuing and
discontinued operations):
|
|
|
|
|
Balance at January 1, 2010
|
|
$
|
3,578
|
|
Additions for tax positions of prior years
|
|
|
201
|
|
Reductions for tax positions of prior years
|
|
|
(84
|
)
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
3,695
|
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
2,527
|
|
Reductions for tax positions of prior years
|
|
|
(1,480
|
)
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
4,742
|
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
375
|
|
Reductions for tax positions of prior years
|
|
|
(1,805
|
)
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
3,312
|
|
|
|
|
|
The
amount of unrecognized tax benefit that would potentially impact the Company's effective tax rate from continuing operations was $3,274, $4,704 and $2,543 (excluding interest and
penalties) as of December 31, 2012, 2011 and 2010, respectively.
The
Company conducts its business globally and as a result, the Company and one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The Company is subject to examination by taxing authorities in each of these jurisdictions.
The
Company has open tax years from 2009-2012 for U.S. federal tax purposes. The Company has open tax years from 2007-2012 with various state tax jurisdictions.
The Company has open tax years from 2002-2012 with various foreign tax jurisdictions. The Company believes that no unrecognized tax benefits are expected to reverse within the next twelve
months.
In
connection with the examination of the Company's tax returns, contingencies can arise that generally result from differing interpretations of applicable tax laws and regulations as
they relate to the amount, timing or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. The Company believes it has sufficient
accruals for its contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns, although actual
results may differ.
As
a result of the DLJ Transaction on June 15, 2007, the Company provided deferred taxes for the presumed repatriation of foreign earnings due to increased cash flow needs in the
United States. No U.S. taxes need to be provided for the undistributed earnings of a foreign subsidiary if the Company can assert that such earnings are planned to be reinvested indefinitely outside
of the United States. The
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Table of Contents
STR Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 8INCOME TAXES (Continued)
Company
periodically assesses its business operations and the cash flow needs of its foreign and domestic subsidiaries to determine if the earnings of any of its foreign subsidiaries will be
indefinitely reinvested outside the United States. The Company continues to provide deferred taxes on all of its undistributed foreign earnings other than its Malaysian earnings.
The
Company determined the undistributed earnings of the Company's Malaysia subsidiary will be indefinitely reinvested outside of the United States. The Company currently provides income
taxes on the earnings of foreign subsidiaries to the extent these earnings are currently taxable or expected to be remitted. As of December 31, 2012, taxes have not been provided on
approximately $1,500 of accumulated foreign unremitted earnings that are expected to remain invested indefinely. It is not practicable to estimate the amount of additional taxes which might be payable
on our undistributed earnings due to a variety of factors, including, extent and nature of repatriations. As such, no U.S. federal and state income taxes have been provided thereon. The Company is
currently pursuing an Asia growth strategy that will include capacity expansion in the region. This strategy has been executed to respond to the shift of solar module manufacturing from the United
States and Europe to China and other Asia Pacific countries Upon distribution of those earnings or repatriation of cash in the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable, if applicable. As of December 31, 2012, the Company has $67,115 of cash available in the U.S. The
Company's subsidiary in Malaysia is operating under a tax holiday arrangement which extends through 2014 with availability for a five-year renewal if certain conditions are satisfied. The
Company expects to qualify for the holiday extension. The impact of tax holidays on its effective rate is a reduction in the rate of 0.9%, (8.1)% and 0.7% percentage points for 2012, 2011 and 2010
respectively.
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 $4,228. Refer to Note 3 Discontinued Operations for further discussion.
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 Company's financial position, results of operations, or cash flows. The Company does not provide contractual performance warranties on its products. However, on limited occasions, the
Company incurs costs to service its products in connection with specific product performance matters. The Company has accrued for specific product performance matters incurred in 2012 and 2011 that
are probable and estimable based on its best estimate of ultimate expenditures that it may incur for such
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 9COMMITMENTS AND CONTINGENCIES (Continued)
items.
The following table summarizes the Company's product performance liability that is recorded in accrued liabilities in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Balance as of beginning of period
|
|
$
|
4,762
|
|
$
|
4,109
|
|
Additions
|
|
|
204
|
|
|
1,783
|
|
Reductions
|
|
|
(1,078
|
)
|
|
(1,007
|
)
|
Foreign exchange impact
|
|
|
71
|
|
|
(123
|
)
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
3,959
|
|
$
|
4,762
|
|
|
|
|
|
|
|
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.
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 on ASC 450Contingencies, the Company has accrued the estimated cost to remediate. The following table summarizes the Company's environmental liability that is recorded in accrued
liabilities in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
|
Balance as of beginning of period
|
|
$
|
350
|
|
$
|
100
|
|
Additions
|
|
|
|
|
|
313
|
|
Reductions
|
|
|
(245
|
)
|
|
(63
|
)
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
105
|
|
$
|
350
|
|
|
|
|
|
|
|
Galica/JPS
In October 2007, the Company's wholly-owned subsidiary, Specialized Technology Resources, Inc. ("STR"), filed a complaint
against James P. Galica ("Galica") and JPS Elastomerics Corp. ("JPS") in the Massachusetts Superior Court in Hampshire County (the "Court"). STR 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 "State Court Action"). The Court determined that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act, finding
that the technology for STR's polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated STR's trade secrets. On January 27, 2011, the Court awarded STR the right
to recover from the defendants (i) actual monetary damages of $1,100, (ii) punitive damages of $2,200, (iii) reasonable attorney's fees of $3,900, (iv) reasonable costs of
$1,100, and (v) 12% interest on each of the monetary
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 9COMMITMENTS AND CONTINGENCIES (Continued)
awards
from the date of the judgment (except for the actual monetary damages which accrued interest from October 2, 2007, the date the complaint was entered). In addition, the Court imposed a
five year production injunction (the "Production Injunction") against producing low shrink EVA encapsulant, and a permanent use injunction against the defendants using STR's trade secrets.
On
September 17, 2010, JPS filed an amended complaint against STR, in the U.S. District Court for the District of Massachusetts (the "Federal Court Action"). The amended complaint
alleged 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 alleged other schemes to monopolize and unfair competition in violation of federal and state laws. JPS sought $60,000 in
compensatory damages, treble damages, 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 tortious acts. On October 13, 2010, STR filed a motion to dismiss the amended complaint, and on January 5, 2011
the Court held a hearing on STR's motion to dismiss. At the hearing, the Court ruled in favor of STR and dismissed the case. On February 10, 2011, JPS filed a notice of appeal with the
Appellate Court. JPS filed its appellate brief on May 2, 2011 and STR filed its appellate brief on June 14, 2011.
On
February 10, 2012, the Company, STR, JPS, JPS Industries, Inc., the parent corporation of JPS, and Galica entered into a Global Settlement Agreement and Release (the
"Settlement Agreement"). Pursuant to the Settlement Agreement, the parties agreed to, (i) payment by JPS of $7,132 to the Company (which was received on February 16, 2012),
(ii) dismissals of the State Court Action, the Federal Court Action, 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 the 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 Court Action and the Federal Court Action, 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 $7,202 payment during the first quarter of 2012, which is recorded in Other Income in its Consolidated Statements of Comprehensive Income for the year ended
December 31, 2012.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 9COMMITMENTS AND CONTINGENCIES (Continued)
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") seeking damages resulting from Alpha Marathon's misappropriation of trade secrets and an injunction barring use of those trade secrets. Alpha
Marathon is an equipment line manufacturer located in Ontario, Canada.
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. On January 15, 2013, the Company and Alpha Marathon entered into a
settlement agreement pursuant to which the parties exchanged full general releases.
EVASA
In 2010, Specialized Technologies Recourses España S.A. ("STRE") learned that a competitor, Encapsulantes De
Valor Anandida, S.A. ("EVASA"), was making encapsulant products that were substantially similar to STR's products. Upon investigation it was learned that Juan Diego Lavandera ("Lavandera"), a
former employee of STRE, was employed by EVASA. It is believed that Lavandera, a former Production Supervisor with STRE, breached his contractual duties, by disclosing STR's trade secrets to EVASA. On
December 15, 2011, STRE and STR filed a confidential preliminary injunction petition with the Commercial Court No. 1 in A Coruña, Galicia, Spain (the "Court") requesting
an investigation of EVASA by the Court, including a search of EVASA's premises.
The investigation was to assess the facts related to the Company's claims against Lavandera and EVASA for (i) trade secret infringement, (ii) the breach by Lavandera of his contractual
obligations to STRE; and (iii) taking unfair advantage of STRE's "effort".
On
June 27, 2012, an investigation was commenced by a Court appointed expert. On September 14, 2012, the expert issued a report confirming that EVASA was using the
Company's manufacturing process and product formulations. On October 10, 2012, STRE and the Company filed a preliminary injunction petition (the "PI Petition") requesting interim measures,
including prohibiting EVASA from manufacturing and selling encapsulant products using STR's trade secrets. In connection with the PI Petition, STR and STRE offered to post a bond in the amount of EUR
50 (or such higher amount as the Court deems necessary), such bond to be formalized in the event the Court approves the PI Petition. The bond is to cover potential damages to EVASA if the Company's
claim on the merits is dismissed. On December 21, 2012, the Court held a hearing on the PI Petition and to date the Court has not ruled on the PI Petition. In the event the PI Petition is
dismissed, the Company may be responsible for EVASA's legal fees (to be determined). The Company filed a claim on the merits with the Court on November 16, 2012 and the defendants filed an
answer denying the allegations.
NOTE 10STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value, issuable in series. At
December 31, 2012 and 2011, there were no shares issued or outstanding.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts in thousands except share amounts, per share amounts or unless otherwise noted
NOTE 10STOCKHOLDERS' EQUITY (Continued)
Common Stock
The Company's Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At December 31, 2012, there
were 41,684,960 shares of issued and 41,681,238 shares of outstanding common stock. Each share of common stock is entitled to one vote per share. Included in the 41,681,238 shares are 41,553,178
common shares and 128,060 restricted unvested common shares.
At
December 31, 2011, there were 41,620,501 shares of issued and 41,616,779 shares of outstanding common stock. Included in the 41,616,779 shares are 41,191,468 common shares and
425,311 restricted unvested common shares.
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 December 31, 2012 and 2011,
there were 3,722 shares held in treasury that were purchased at a cost of $57.