ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read
together with Item 6
—
Selected Financial Data and our Consolidated Financial Statements and the related Notes included in
Item 8 of this Annual Report on Form 10
-
K. This discussion contains forward
-
looking
statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under
Item 1A
—
Risk Factors in this Annual Report on
Form 10
-
K.
Overview
We were founded in 1944 as a plastic and industrial materials research and development company and evolved into two core businesses:
solar encapsulant manufacturing and quality assurance services. We launched our former Quality Assurance business ("QA") in 1973 and we commenced sales of our solar encapsulant products in the late
1970s.
We
are a provider of encapsulant to the solar module industry. Encapsulant is a critical component used in solar modules. Our PhotoCap® products consist of ethylene-vinyl
acetate, or EVA, which is modified with additives and put through our proprietary manufacturing process to increase product stability and make the encapsulant suitable for use in extreme, long-term
outdoor applications. Our encapsulants can be used in both crystalline silicon and thin-film solar modules.
Prior
to its divestiture in September 2011, QA provided product development, inspection, testing and audit services that enabled retailers and manufacturers to determine whether products
met applicable safety, regulatory, quality, performance and social standards.
Strategic Divestiture of QA
On September 1, 2011, we completed the sale of QA to Underwriters Laboratories, Inc. ("UL"). This
strategic divestiture was executed to allow us 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 our polymer manufacturing capabilities, and to retire our long-term debt. The following transactions occurred as a result of the
divestiture:
-
•
-
We received $275.0 million, plus assumed cash in proceeds. The sale generated an after-tax gain of approximately
$14.0 million that included an initially estimated tax liability of $105.9 million. This gain was recorded in discontinued operations in the Consolidated Statements of Comprehensive
Income and the proceeds received were recorded in discontinued operations in the Consolidated Statements of Cash Flows in 2011. During the third quarter of 2012, the taxable gain associated with the
sale of the QA business was finalized in conjunction with filing our 2011 income tax returns. As part of this process, we recorded an income tax benefit to discontinued operations of
$4.2 million. Refer to Note 3 to the Consolidated Financial Statements located in Item 8—Financial Statements and Supplementary Data of this Annual Report on
Form 10-K.
-
•
-
In order to sell the assets of the QA business free and clear of liens provided pursuant to our first lien credit
agreement and second lien credit agreement (together, the "2007 Credit Agreements"), we terminated the 2007 Credit Agreements on September 1, 2011 by using approximately $237.7 million
of the sale proceeds to repay all amounts outstanding thereunder 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 is recorded in discontinued operations in
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QA's
historical operating results are recorded in discontinued operations in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for all periods
presented.
The
discussion contained herein relates to continuing operations unless otherwise noted.
Current Business Environment, Components of Net Sales and Expenses and Anticipated Trends
Strategic Focus
Our sales and profitability have declined significantly since 2011 driven by a rapid shift of solar module production from the United
States and Europe to Asia, the loss of First Solar, Inc., our largest customer, during the first half of 2013, financial distress of certain of our key customers, intensified competition and
steep price declines resulting from excess capacity throughout the solar manufacturing industry.
During
this period of time, we have been attempting to execute on our core strategy, which consisted of four areas of focus: (i) improve sales volumes from current levels,
(ii) further reduce our cost structure, (iii) innovate new products and (iv) maintain adequate liquidity. We have attempted to improve our financial performance by focusing on
cost-reductions, trying to increase our sales to Chinese module manufacturers and working to reduce the rate of decline of our cash balance. Throughout 2013, we significantly reduced our operating
expenses by closing certain facilities and reducing headcount, including the termination of four members of our senior management team during the fourth quarter of 2013. We also announced that we will
further streamline our operations and improve our cost structure by ceasing manufacturing operations at our Johor, Malaysia facility in 2014.
As
discussed above, during the fourth quarter of 2013, in response to declining sales and profitability and the increase of solar module production in China over the past several years,
we adopted a new operating plan, referred to as "the China Tolling Plan". This new approach contemplates licensing our encapsulant technology to third party encapsulant manufacturers and the purchase
of such licensed products from local Chinese encapsulant manufacturing companies for sale by us to existing and new Chinese customers. Since there is excess encapsulant manufacturing capacity
currently in China, we believe that identifying and securing contract manufacturers on commercially favorable terms is feasible. This new plan would also significantly reduce the capital expenditures
associated with building a new manufacturing facility in China and would enable us to generate cash proceeds from the sale of real property that we own in China and our facility in Malaysia. However,
certain Chinese customers require that we manufacture encapsulants in China, and for these customers we are completing the renovation of a leased manufacturing facility which should be operational
during the second quarter of 2014. In addition, outsourcing of the manufacture of encapsulant products reduces our working capital investment that is otherwise required to manufacture products.
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In furtherance of the China Tolling Plan, on January 13, 2014, our indirect subsidiary, STR Solar (Hong Kong), Limited, entered into a Contract
Manufacturing Agreement (the "Agreement") with ZheJiang FeiYu Photo-Electrical Science & Technology Co., Ltd. ("FeiYu") and Zhejiang Xiesheng Group Co., Ltd., the
parent corporation of FeiYu ("Xiesheng," and together with FeiYu, the "Manufacturer"). Pursuant to the Agreement, we will purchase certain solar encapsulant products manufactured by FeiYu to our
specifications. We will supply the Manufacturer with all of the proprietary information and assistance necessary to manufacture the products. We will also supply the Manufacturer with approximately
$2.5 million of raw materials which will be repaid by the Manufacturer over the term of the Agreement. Subject to certain conditions, we are subject to an annual target purchase amount from the
Manufacturer. If we fail to purchase the annual target amount, either party may terminate the Agreement upon 45 days' notice without the payment of any penalties or premiums. The Agreement will
continue for a period of two years following the end of a four month evaluation period, as described in the Agreement. We may, at our sole discretion, elect to terminate the Agreement by delivering
written notice to Manufacturer at any time prior to 30 days following the end of the evaluation period. We or the Manufacturer may also terminate the Agreement upon the occurrence of certain
specified events. We anticipate that at full capacity the Manufacturer will provide approximately 2.5 GW of manufacturing capacity for us in China.
Net Sales
Our net sales are derived from the sale of encapsulants to solar module manufacturers. Net sales to our customers are typically made
through non-exclusive, short-term purchase order arrangements that specify prices and delivery parameters but do not obligate the customer to purchase any minimum amounts. Our customers are solar
module manufacturers located in North America, Europe and Asia.
We
expect that our results of operations for the foreseeable future will depend primarily on the sale of encapsulants to a relatively small number of customers. We believe the
concentration will increase as we expect a consolidation of module manufacturers driven by overcapacity that currently exists. Our top five customers accounted for approximately 64%, 61% and 53% of
our net sales in 2013, 2012 and 2011, respectively. First Solar accounted for 18%, 41% and 23% of our net sales for the years ended December 31, 2013, 2012 and 2011, respectively. In January
2013, we were informed by our largest customer, First Solar, that it would commence sourcing encapsulant from an alternate supplier in the first quarter of 2013. We recorded approximately
$5.7 million of net sales to First Solar in the first half of 2013. We do not expect to generate net sales to First Solar during 2014. Renesola Deutschland GmbH, Conergy AG and Global
Wedge, Inc. each accounted for at least 10% of our net sales, and in the aggregate accounted for approximately 56% of our net sales for the year ended 2013. Suntech Power
Holdings Co. Ltd. accounted for 10% of our net sales for the year ended December 31, 2011.
Our
net sales are significantly driven by end-user demand for solar modules. As more solar modules are sold, there is greater demand from module manufacturers for encapsulants. The solar
power industry is impacted by a variety of factors, including government subsidies and incentives, availability of financing, worldwide economic conditions, environmental concerns, energy costs, the
availability of polysilicon and other factors. A key demand driver for solar module growth in the future will be the ability of solar module manufacturers and downstream solar system installers to
reduce their cost structure, primarily in the balance of system cost components such as inverters, installation costs, wiring, racking and logistics. During 2011, capacity expansion in the solar
module supply chain increased. Increased competition, particularly from China, and continued vertical integration of many manufacturers in the solar supply chain contributed to the increase in
capacity. These events caused many module manufacturers to significantly reduce the average selling price of their modules as the extra capacity drove a severe inventory build. As a result, many
companies in the solar supply chain lacked profitability. From an industry standpoint, the reduction in module selling prices has improved
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rates
of return on solar investments for the end-user. We believe this is a long-term industry trend will help to bring solar energy costs closer to grid-parity and in turn will increase demand for
solar
encapsulants. In 2012 and 2013, industry consolidation continued and the amount of excess capacity has been reduced, but still exists. In addition, pricing appears to have recently stabilized in many
areas of the solar supply chain.
Demand
for our encapsulants also depends in large part on government incentives aimed to promote greater use of solar energy. The type of government incentives vary from country to
country and can change rapidly. As the solar industry continues to reduce the cost of solar power, we expect the level of government subsidies to continue to decrease. For example, in Germany, which
is a large solar PV end-user market, the government enacted legislation that reduced feed-in tariffs beginning June 30, 2010. In early 2011, the German government enacted further legislation to
accelerate the annual year-end feed-in tariff reduction to July 1, 2011 for roof-top systems and September 1, 2011 for ground-mount projects. Also, many European governments have
recently experienced fiscal issues. As such, a risk exists that some of these governments will have to reduce and/or eliminate current subsidies provided for PV installations in conjunction with
overall tighter fiscal policies.
Even
though we expect reduced solar module demand in the European Union and the continued reduction in government subsidies in the next few years, we anticipate an increase in global
demand for solar energy, particularly in China and the United States. This will be primarily driven by solar energy becoming more cost effective as a result of continued cost-reductions in module
selling prices and balance of system costs and continued emergence of end-user financing. In addition, many foreign governments like India, Taiwan and Japan, as well as certain state regulatory
entities, have enacted renewable portfolio standards that require utilities to increase their production of energy from renewable sources.
Pricing
of our encapsulants is impacted by the competition faced by our customers, and the quality and performance of our encapsulant formulations, including their impact on improving
our customers' manufacturing yields, their historical in field performance, our ability to meet our customers' delivery requirements, overall supply and demand levels in the industry and our customer
service and technical support. Historically, we typically priced our encapsulants at a premium to our competition based on product attributes that among other benefits provide a high value proposition
to our customers in a period of tight capacity. During the past few years, however the excess capacity that existed at most module manufacturers has reduced the value proposition of the throughput and
other production efficiencies that our encapsulants provide and has caused encapsulant cost to become a more important factor in the procurement process for many customers. In addition, low-cost
competition from China and increased entrants in the encapsulant market have intensified competition. Based on these factors, we experienced an average selling price ("ASP") decline during 2013 of
approximately 20% from the prior year.
During
the past few years, our net sales have decreased significantly. In addition to the ASP pressure discussed above, our unit volumes have declined due to lost market share. Our
market share loss was the result of the loss of First Solar as a customer, financial distress of certain of our key customers, many of our customers losing market share to certain Chinese module
manufacturers who are currently not our customers, continuing intensified competition in the encapsulant market, and competitive technologies entering the marketplace, including POE encapsulants.
In
order to increase our market share and sales volume in the future, we must penetrate certain Tier 1 and other key Chinese module manufacturers. We are in the process of
introducing our next-generation encapsulant formulation, which we believe possesses enhanced potential induced degradation ("PID") properties and has been specifically engineered for the manufacturing
processes typically utilized in China. In 2013, we passed many internal customer qualification tests, including the successful completion of damp heat testing with several prospective Chinese
customers. Once internal
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qualification
is obtained with a customer, our encapsulant must also be qualified by a third-party certification body, which typically requires approximately three additional months. The qualification
process must occur with each prospective customer. The internal qualification process and timing are managed and customized by each module manufacturer.
In
the second quarter of 2013, we shipped initial commercial shipments of our next-generation encapsulant product to three new Chinese customers to begin production scale-up but did not
recognize sales based upon title transfer terms. Module manufacturers perform production scale-up testing to ensure new products demonstrate performance in mass production as achieved in product
testing. In August 2013, we were notified by certain of these customers that a small percentage of our product was not performing properly in its manufacturing process. Based upon this feedback, we
worked to improve the manufacturing process window of our formula with the customer's lamination cycle. As a consequence, we were delayed in generating net sales from these customers as previously
anticipated. In the fourth quarter of 2013, certain customers provided positive feedback on the modifications made to our next-generation EVA encapsulants, and we started to receive repeat orders. If
we incur similar delays with other potential customers, our net sales, results of operations and financial position will be negatively affected. In 2013, we recognized approximately
$1.5 million of net sales of our next-generation EVA encapsulant. We expect to increase our sales to these Chinese customers in 2014 and expect to receive orders from other prospective
customers.
The
future growth and success in our business depends on the ability of our customers to grow their businesses and our ability to meet any such growth and to grow by adding new
customers. If our customers do not increase production of solar modules, there will be no corresponding increase in encapsulant orders. It is possible that our customers may reduce their purchases
from us. If our customers do not grow their businesses or they find alternative sources for encapsulants to meet their demands, it could limit our ability to grow our business and increase our net
sales. In addition, we have been actively attempting to sell our encapsulants to certain large Chinese module manufacturers. We generated initial orders from certain of these Chinese module
manufacturers in the second half of 2013. Although we intend to obtain and grow our market share with Chinese module manufacturers, failure to do so could negatively affect our financial condition and
results of operations.
Cost of Sales
Cost of sales consists of our costs associated with raw materials, direct labor, manufacturing overhead, salaries, other
personnel-related expenses, write-offs of excess or obsolete inventory, quality control, freight, insurance, disposition of defective product and depreciation of fixed assets. In 2012 and 2011, our
cost of sales also included amortization of intangibles as a result of DLJ Merchant Banking Partners IV, L.P.'s acquisition of us in 2007 ("DLJ Acquisition"). The intangible assets were fully
impaired as of December 31, 2012. Approximately 78% of our cost of sales is variable in nature; 16% is step-variable and relates to direct labor cost and is fixed in the short-term and the
remaining 6% is fixed. Resin constitutes the majority of our raw materials costs at approximately 45% to 50% of our cost of sales, and paper liner is the second largest cost. We are in the process of
modifying our production equipment to remove paper from our bill of material to reduce costs. The price and availability of resin and paper liner are subject to market conditions affecting supply and
demand, have been volatile and we believe resin cannot be hedged in the commodity markets.
Prior
to 2014, we manufactured all of the products that we sold. In January 2014, our Hong Kong subsidiary entered into the Agreement. Pursuant to the Agreement, we will purchase certain
solar encapsulant products manufactured by FeiYu to our specifications. We will supply the Manufacturer with all of the proprietary information and assistance necessary to manufacture the products.
Overall,
we expect our cost of sales, as a percentage of net sales, to decrease over the long-term. We expect to improve our cost structure to more than offset anticipated further
reductions of average
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selling
price of our encapsulants in response to lower overall module pricing driven by increased competition faced by our customers and ourselves. We believe we can improve our cost structure from
current levels by: (i) decreased raw material costs due to active negotiations with our suppliers, favorable resin market dynamics and the removal of paper liner from our manufacturing process,
(ii) more efficient absorption of fixed costs driven by economies of scale when expected sales growth resumes in 2014, (iii) improved raw material utilization and scrap rates and
(iv) continued other cost-reduction efforts.
Gross Profit
Gross profit is affected by numerous factors, including our average selling prices, fluctuations in foreign exchange rates,
seasonality, our manufacturing costs and the effective utilization of our facilities. Another factor impacting gross profit is the time required for new production facilities and the expansion of
existing facilities to reach full production capacity. In 2012, accelerated depreciation increased by $2.3 million due to the shortened useful lives of certain production equipment based on
expected lower capacity utilization level. We also incurred $1.7 million, $0.9 million, $0.0 million of restructuring charges recorded in cost of sales associated with our recent
cost-reduction efforts in 2013, 2012 and 2011, respectively.
Selling, General and Administrative Expenses ("SG&A")
Our selling expenses consist primarily of salaries, travel and other personnel-related expenses for employees engaged in sales,
marketing and support of our products and services, trade shows and promotions. General and administrative expenses consist mainly of insurance, outside professional fees and expenses for our finance,
administrative, information technology, legal and human resource functions. We incurred $2.6 million, $0.2 million and $0.3 million of restructuring charges in SG&A during 2013,
2012 and 2011, respectively
We
expect our selling, general and administrative expenses to decrease in absolute terms as a result of decreased headcount resulting from recent cost-reduction actions.
Research and Development Expense
We have a long history of innovation dating back to our establishment in 1944 as a plastic and polymer research and development firm.
As our operations have expanded from solely providing research and development services into the manufacturing of solar encapsulants, we created a separate research and development function that
tracks employees and costs that are fully dedicated to research and development activities. Our 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 product development efforts. We also record depreciation expense for equipment that is used specifically for research and
development activities.
We
incurred $2.7 million, $4.4 million and $2.6 million of research and development expense in 2013, 2012 and 2011, respectively. We expect annual research and
development expense to approximate $1.5 million for the near-term based upon cost-reduction measures implemented in 2013.
Provision for Bad Debt Expense
We reserve for estimated losses that may result from the inability of our customers to make required payments. We review the
collectability of our receivables on an ongoing basis and reserve for uncollectible accounts after reasonable collection efforts have been made and collection is deemed doubtful.
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Our
bad debt expense has increased in recent years as a result of many solar module manufacturers declaring bankruptcy due to continued solar industry consolidation. We expect our bad
debt expense to decrease going forward as the solar industry transitions to a sustainable, self-supporting industry. In addition, we have been increasing the use of letters of credit and obtaining
bank guarantees from our customers to mitigate credit risk.
Interest (Expense) Income, Net
Interest (expense) income, net was comprised of interest income earned on our cash and cash equivalents and our annual commitment fee
incurred on our revolving senior credit facility (the "Credit Agreement").
We
expect our interest income to decrease in 2014 due to having lower cash balances primarily resulting from the repurchase of approximately $30.0 million of our shares of common
stock pursuant to the Offer completed in March 2014.
We
expect our interest expense to decrease due to the termination of our Credit Agreement in September 2013.
Amortization of Deferred Financing Costs
We capitalized debt issuance costs and amortized the costs to expense over the term of the related debt facility. In conjunction with
the sale of QA, our 2007 Credit Agreements were paid in full. As such, the related unamortized deferred financing costs of $3.6 million were expensed immediately for the year ended
December 31, 2011. In connection with entering into our new Credit Agreement in 2011, we incurred $1.3 million of issuance costs. We amended our Credit Agreement in 2012 and incurred
less than $0.1 million of issuance costs. In addition, we wrote-off $0.8 million of the remaining prior capitalized issuance costs based on the proportion of our new borrowing capacity
compared to our prior availability. As disclosed in Note 12, we terminated the Credit Agreement in September 2013 and wrote-off $0.1 million of the remaining unamortized deferred
financing costs. Amortization of deferred financing costs was $0.2 million, $1.1 million and $4.6 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
Other Income
Other income consists of the $7.2 million payment received from the settlement of the JPS lawsuit in 2012.
Foreign Currency Transaction Gain/(Loss)
Foreign currency transaction gain/(loss) is primarily the result of changes in the Euro, Hong Kong dollar, Chinese renminbi and
Malaysian ringgit exchange rates. The majority of our foreign exchange exposure is due to a Euro denominated liability in the United States, the settlement of intercompany transactions, U.S. cash
balances held in foreign locations and non-resin costs incurred by our Malaysia subsidiary whose functional currency is the U.S. dollar which is the currency that it uses to invoice customers and
procure resin.
Income Taxes
Income tax (benefit) expense is comprised of federal, state, local and foreign taxes based on income in multiple jurisdictions and
changes in uncertain tax positions. We expect our effective tax rate to trend higher over time as we will no longer benefit from a tax holiday at our Malaysia facility subsequent to its closure in
2014 and lower planned investment in research and development that qualifies for tax deductions in certain jurisdictions.
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Critical Accounting Policies
Our discussion and analysis of our consolidated financial position and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an
ongoing basis, including those related to revenue recognition, accounts receivable, bad debts, valuation of inventory, long-lived intangible and tangible assets, goodwill, product performance matters,
income taxes and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
The
accounting policies we believe to be most critical to understanding our financial results and condition and that require complex and subjective management judgments are discussed
below.
Revenue Recognition and Accounts Receivable
We recognize revenue when evidence of an arrangement exists, delivery of the product 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.
Our
business 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.
We
typically do not offer contractual performance warranties or general rights of return on our product. Our contractual relationships may include these types of terms in the future as
the solar industry continues to evolve. In 2011, we reduced our net sales by approximately $2.0 million for an agreement with a customer for the return of product in conjunction with the
settlement of overdue accounts receivable balances.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. We review the collectability of our receivables on an ongoing basis and write-off accounts receivable after reasonable collection efforts have been made and the debt is deemed uncollectible.
Inventory Valuation
Our primary raw materials consist of resin, paper, packaging material and chemicals/additives.
Our
finished goods inventories are made-to-order and have 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 costs of acquisition and the costs of manufacturing. These costs include direct material, direct labor and fixed and variable indirect manufacturing costs, including depreciation and
intangible asset amortization.
We
write inventory down to net realizable value when it is probable that our inventory carrying cost is not fully recoverable through sale or other disposition. Our write down considers
overall market conditions, customer inventory levels, legal or contractual provisions and age of the finished goods inventories.
In
2013, we reserved $0.5 million of inventory, a majority of which is related to raw material inventory procured and not delivered due to the loss of a customer.
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In
2012, we incurred a write-down of approximately $0.5 million associated with excess paper raw material inventory due to changes in customer specifications and being in the
process of removing paper from our manufacturing process.
In
2011, we had an agreement with a customer for the return of product in conjunction with the settlement of overdue accounts receivable balances. Since we were not able to resell the
returned product, we wrote-off the inventory carrying value of approximately $1.0 million. We also incurred a $1.0 million write-off associated with finished goods that were manufactured
to customer order but later cancelled by the customer prior to shipment.
Long-Lived Assets and Goodwill
Our long-lived assets have consisted of goodwill, other intangible assets and property, plant and equipment.
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.
In
2013, we recorded $0.2 million of impairment to our property, plant and equipment. The impairment was driven by our decision to cease the construction of our China
manufacturing plant and to lease an existing building to conduct our manufacturing operations. As such, we wrote-off costs incurred to date relating to the construction of our own facility. During
2012, due to continued and expected low production utilization levels, we recorded $2.8 million of accelerated depreciation associated with shortened useful lives of certain machinery and
equipment. In addition, we recorded a $37.4 million impairment to our property, plant and equipment. See Impairment Testing below.
In
connection with the sale of the QA business, we 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 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 $0.3 million per
year, we evaluated whether the carrying value of the property was recoverable. Based on this evaluation, an impairment loss of $1.9 million was recognized in continuing operations in 2011 in
the Consolidated Statements of Comprehensive Loss.
In
2011, we closed our Florida manufacturing facility and recorded $0.5 million of accelerated depreciation associated with shortened useful lives of machinery and equipment.
Intangible Assets
We accounted for business acquisitions using the purchase method of accounting and recorded definite-lived intangible assets separately
from goodwill. Intangible assets were recorded at their estimated fair value based at the date of acquisition.
Our
intangible assets were recorded as a result of the DLJ Acquisition and included our customer relationships, trademarks and proprietary technology. Our customer relationships
consisted of the value associated with existing contractual arrangements as well as expected value to be derived from future contract renewals with our customers. We determined their value using the
income approach. Their useful life was determined by consideration of a number of factors, including our previously longstanding customer base and historical attrition rates. Our trademarks
represented the value of our STR® and Photocap® trademarks. We determined their value using the "relief-from-royalty" method.
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The
useful life of trademarks was determined by consideration of a number of factors, including elapsed time and anticipated future cash flows. Our proprietary technology represented the value of our
manufacturing processes. We 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.
Determining
the fair value and useful lives of our intangible assets required management's judgment and involved the use of significant estimates and assumptions, including assumptions
with respect to future cash flows, discount rates, asset lives and market royalty rates, among other items. While we believe our estimates were reasonable, different assumptions regarding items such
as future cash flows and volatility in the markets we serve could have affected our evaluations.
In
accordance with ASC 350-Intangibles—Goodwill and Other, we assessed the impairment of our definite-lived intangible assets whenever changes in events or circumstances
indicated that the carrying value of such assets may not be recoverable. During each reporting period, we assessed if the following factors were present which would cause an impairment review: a
significant or prolonged decrease in sales that were generated under our trademarks; loss of a significant customer or reduction in our customers' demand for our products driven by competition they
encounter; a significant adverse change in the extent to or manner in which we used our trademarks or proprietary technology; and, such assets becoming obsolete due to new technology or manufacturing
processes entering the markets or an adverse change in legal factors.
Due
to continued depressed solar market conditions and in conjunction with our goodwill impairment assessment, we tested our intangible assets for impairment as of December 31,
2011. We concluded that no impairment existed as the sum of the undiscounted expected future cash flows exceeded each of our intangible assets' carrying value as of December 31, 2011. However
due to continued pricing pressure, trade complaints escalating in the industry, increased competition from non-EVA encapsulant materials and our initial 2013 sales outlook which included the loss of
the our largest customer, we tested our long-lived assets again for impairment as of December 31, 2012 which resulted in a non-cash $135.5 million impairment to write-off our intangible
assets. See Impairment Testing below.
Goodwill
Goodwill represented the excess purchase price consideration of the estimated fair value assigned to the individual assets acquired and
liabilities assumed in the DLJ Transaction. Goodwill was $0 at December 31, 2013 and December 31, 2012 and $82.5 million at December 31, 2011. Goodwill was not deductible
for tax purposes.
In
assessing if there was an impairment of goodwill, we first determined the fair value of our one reporting unit. Since the fair value of our reporting unit was less than our carrying
value, we allocated the current fair value of the reporting unit to the assets and liabilities of the reporting unit to estimate the reporting unit's implied goodwill. Since the implied goodwill was
less than the carrying value of such goodwill, we recorded an impairment charge for the amount of such difference. We recorded non-cash goodwill impairment charges of $82.5 million and
$63.9 million in 2012 and 2011, respectively. As of December 31, 2012, our goodwill was fully impaired. See Impairment Testing below.
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Impairment Testing
In accordance with ASC 350—Intangibles—Goodwill and Other and ASC 360—Property, Plant and
Equipment, we assessed the impairment of our long-lived assets including our definite-lived intangible assets, property, plant and equipment and goodwill whenever changes in events or circumstances
indicated that the carrying value of such assets may not be recoverable. During each reporting period, we assessed if the following factors were present which would cause an impairment review: overall
negative solar industry conditions; a significant or prolonged decrease in sales that were generated under our 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 we used our 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 our common stock.
Due
to our net book value exceeding the market capitalization of our common stock in the fourth quarter of 2011, weakening solar market conditions that were greater than we anticipated
and the price reductions granted to customers for anticipated 2012 volume, we determined that a trigger event occurred to test our reporting unit for impairment as of December 31, 2011. As
such, we valued our
reporting unit with the assistance of a valuation specialist and determined that our reporting unit's net book value, including goodwill, exceeded our fair value. We 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 our assets and liabilities other than goodwill
and comparing the residual amount to the carrying amount of goodwill. We determined that our implied fair value of goodwill was lower than our carrying value and recorded a non-cash goodwill
impairment charge of $63.9 million. We estimated the fair value of our reporting unit under the income approach using a discounted cash flow method which incorporated our cash flow projections.
We also considered our market capitalization, control premiums and other valuation assumptions in reconciling the calculated fair value to the market capitalization at the assessment date. We believe
the cash flow projections and valuation assumptions used were reasonable and consistent with market participants. Inherent in management's development of cash flow projections were 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 were outside the control of
management, and these assumptions and estimates could have changed in future periods as a result of both our specific factors and overall economic conditions.
During
the first quarter of 2012, the market capitalization of our common stock declined by approximately 50%. As a result of this decline that did not appear to be temporary, we
determined that a triggering event occurred requiring us to test our long-lived assets and our goodwill for impairment as of March 31, 2012. Prior to performing our goodwill impairment test, we
first assessed our long-lived assets for impairment as of March 31, 2012. We concluded that no impairment existed as the sum of the undiscounted expected future cash flows exceeded the carrying
value of our asset group which is our reporting unit ($333.4 million as of March 31, 2012) by $200.5 million. The undiscounted cash flows were derived from the same financial
forecast utilized in our goodwill impairment analysis. The key assumptions driving the undiscounted cash flows were the forecasted sales growth rate and EBITDA margin. For this impairment analysis, we
used undiscounted cash flows reflecting a sales decline of 23% in 2012 and a sales increase of 20% and 22% in 2013 and 2014, respectively. Subsequent to 2014, a normalized 3% annual sales growth rate
was used for the remaining useful life. We estimated our EBITDA margin to range from 12% to 16%. After evaluating our long-lived assets for impairment, we proceeded to test our goodwill for
impairment. At March 31, 2012, we completed step one of the impairment test by valuing our reporting unit with the assistance of a valuation specialist and determined that our reporting unit's
net book value exceeded our fair value. We then performed step two of the goodwill impairment assessment which involved calculating the implied fair value of goodwill
49
Table of Contents
by
allocating the fair value of the reporting unit to all of our assets and liabilities other than goodwill and comparing the residual amount to the carrying amount of goodwill. We determined that the
implied fair value of goodwill was lower than our carrying value and recorded a non-cash goodwill impairment charge of $82.5 million. We estimated the fair value of our reporting unit under the
income approach using a discounted cash flow method which incorporated our cash flow projections. We also considered our market capitalization, control premiums and other valuation assumptions in
reconciling the calculated fair value to the market capitalization at the assessment date. Based on the other-than-temporary decline in our stock price and our net book value exceeding the market
capitalization of our common stock during the first quarter of 2012, the market approach was given a
higher weighting in determining fair value. We believe 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 were outside the control of management, and these assumptions and estimates could have changed in future periods as a result of both our specific factors, industry conditions
and overall economic conditions.
At
December 31, 2012, due to continued pricing pressure, trade complaints escalating in the industry, increased competition from non-EVA encapsulant materials and our initial 2013
sales outlook which included the loss of our largest customer, we determined that a trigger event occurred to test our long-lived assets for recoverability. In conjunction with a valuation specialist,
we determined that the sum of the undiscounted expected future cash flows did not exceed the carrying value of our asset group which is our 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, we, in conjunction with a valuation specialist, fair valued the asset group incorporating market participant assumptions. We
estimated the fair value of our asset group under the income approach using a discounted cash flow model which incorporated our cash flow projections. In performing the fair value analysis, we used
discounted cash flows reflecting a sales decline of 43% in 2013 and a sales increase of 35% and 30% in 2014 and 2015, respectively. Subsequent to 2015, a normalized 3% annual sales growth rate was
used for the remaining useful life of our existing long-lived assets. We estimated our EBITDA margin to range from (22)% to 10%. We also considered our 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, we 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, we 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, we recorded a non-cash impairment charge of $135.5 million to our intangible assets
and $37.4 million to our property, plant and equipment as of December 31, 2012. We re-evaluated the depreciable lives of such long-lived assets and determined a revision to those lives
was not warranted.
In
the fourth quarter of 2013, we recorded an impairment to our property, plant and equipment of $0.2 million. The impairment was driven by our decision to cease the construction
of our China manufacturing plant and to lease an existing building to conduct our manufacturing operations. As such, we wrote-off costs incurred to date relating to the construction of our own
facility.
At
December 31, 2013, there were no indicators that significantly changed from the December 31, 2012 impairment test and a detailed impairment analysis was not performed.
However, we did perform an analysis using appraisals and other data in order to assess the recoverability of our property, plant and equipment as of December 31, 2013. As a result of this
analysis, we determined our long-lived assets were recoverable and our depreciable lives were appropriate as of December 31, 2013. If we experience a significant reduction in future sales
volume, further ASP reductions, lower profitability or ceases operations at any of its facilities, our property, plant and equipment may be subject to future impairment or accelerated depreciation.
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Table of Contents
Product Performance Accrual
We typically do not provide contractual performance warranties on our products. However, on limited occasions, we incur costs to
service our 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.
Income Taxes
We operate in multiple taxing jurisdictions and are 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, including income before taxes as calculated in accordance with jurisdictional
regulations.
We
account for income taxes using the asset and liability method in accordance with ASC 740-Income Taxes. Under this method, we recognize 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. We estimate our 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 our operations during the period that includes the
enactment date.
In
assessing the need for a valuation allowance, we consider all positive and negative evidence including: estimates of future taxable income, considering the feasibility of ongoing tax
planning strategies, the reliability of tax loss carryforwards and the future reversal of existing temporary differences. Valuation allowances related to deferred tax assets can be impacted by changes
to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our tax assets in the future,
the unrealizable amount would be charged to earnings in the period in which that determination is made. By contrast, if we were to determine that we would be able to realize deferred tax assets in the
future in excess of the net
carrying amounts, we would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period in which that determination is made. As of December 31, 2013, we
have recorded $1.3 million of valuation allowances relating to our China and Hong Kong subsidiaries, which have generated operating losses since their inception. If we are able to generate
future profits at such subsidiaries, we will reverse the valuation allowance. We have recorded a deferred tax asset of $3.0 million for a loss carryforward benefit at our Spain subsidiary. We
have not recorded a valuation allowance for this carryforward as we believe it is more likely than not that the benefit of the loss carryforward will be fully realized due to anticipated profits to be
generated by our Spain subsidiary. In the United States, we have amended our 2011 federal tax return to apply current losses as loss carrybacks. We expect to carryback anticipated losses generated in
the United States in 2014. After 2014, any taxable losses will have to be carryforward and the need for a valuation allowance will need to be assessed.
In
2014, approximately 1.1 million stock options are expected to be canceled. These stock options were granted to employees who were recently terminated at the end of 2013 and
were vested. As such, we recorded stock-option compensation expense and a corresponding deferred tax asset as the options vested. Since it is expected that these options will be canceled in 2014, we
are estimating that it will reduce our deferred tax asset by $1.1 million. Since no tax windfall pool exists in additional paid-in-capital, the reduction in the deferred tax asset will be
recorded to income tax expense as a discrete item when the options are cancelled.
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Table of Contents
ASC
740 also addresses the accounting for uncertainty in income taxes recognized in a company's financial statements and how companies should recognize, measure, present and disclose
uncertain tax positions that have been or are expected to be taken. 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 its
examination whether or not the statute of limitations remains open or has expired. Interest and penalties related to uncertain tax positions are recognized as part of our 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.
We
are subject to the examinations of our income tax returns by various domestic and international taxing authorities. We are currently under audit in the United States for tax years
2012 and 2011 and multiple state tax jurisdictions for various years. In addition we are also under audit in Spain for 2012. The final outcome of any examinations or legal proceedings as well as the
outcome of competent authority proceedings, changes and interpretation in regulatory tax laws, or expiration of statutes of limitation could impact our financial statements. Accordingly, we have
accruals recorded for which it is reasonably possible that the amount of the unrecognized tax benefit could increase or decrease. Based on the uncertainties associated with the status of examinations,
including the protocols of finalizing
audits by the relevant tax authorities which could include formal legal proceedings, changes to our estimates may impact the future results of our operations.
We
currently have a tax holiday in Malaysia through 2014. However, we plan to cease operations at this facility during 2014. Our Malaysia tax holiday reduced our effective tax rate by
4.5%, 0.9% and (8.1%) in 2013, 2012 and 2011, respectively.
Stock-Based Compensation
ASC 718-Compensation-Stock Compensation, addresses accounting for share-based awards, including stock options, with compensation
expense measured using fair value and recorded over the requisite service or performance period of the award.
In
2013, we determined the fair value of the stock options issued using the Black-Scholes option pricing model. Prior to 2013, we used an outside appraisal firm. Our assumptions about
stock-price volatility were based on the historical implied volatilities of our common stock and those of other publicly traded options to buy stock with contractual terms closest to the expected life
of options granted to our employees. The expected term represents the estimated time until employee exercise is estimated to occur taking into account vesting schedules and using the Hull-White model.
The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury 10 year zero-coupon strip yield in effect at the time of grant. The expected
dividend yield was based on the assumption that no dividends are expected to be distributed in the near future.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
Expected volatility
|
|
|
58.9
|
%
|
|
75.30
|
%
|
61.07%
|
|
Risk-free interest rates
|
|
|
2.50
|
%
|
|
0.60
|
%
|
1.20%
|
|
Expected term (in years)
|
|
|
7.4
|
|
|
4.4
|
|
4.6 to 5.0
|
|
Dividend yield
|
|
|
—
|
|
|
—
|
|
—
|
|
Weighted-average estimated fair value of options granted during the period
|
|
$
|
1.40
|
|
$
|
1.79
|
|
$6.10
|
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Table of Contents
Deferred Compensation
We have a deferred compensation arrangement with certain members of management that states upon the earlier of December 31,
2015, our sale of us or termination of employment for any reason, the members are entitled to bonus payments based upon a formula set forth in their respective employment agreements. The payments are
tied to distribution amounts they would have received with respect to their former ownership in our predecessor company if its assets were sold at fair market value compared to the value of our stock
price. The amount of the potential bonus payment was capped at $1.2 million. In accordance with ASC 718-30, the obligation should be remeasured quarterly at fair value. We determined fair value
using observable current market information as of the reporting date. The most significant input to determine fair value was determined to be our common stock price which is a Level 2 input.
Based upon the difference of the floor in the agreements and our common stock price at November 15, 2013 for one terminated employee and December 31, 2013 for an active employee, we
accrued $0.8 million as a liability. In the first quarter of 2014, we paid $0.6 million in deferred compensation to one terminated employee pursuant to this agreement.
Consolidated Results of Operations
The following tables set forth our consolidated results of continuing operations in dollars and as a percentage of net sales, for the
fiscal years ended December 31, 2013, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
|
|
(dollars in thousands)
|
|
|
Statement of Continuing Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
31,860
|
|
$
|
95,345
|
|
$
|
232,431
|
|
|
Cost of sales
|
|
|
34,085
|
|
|
97,193
|
|
|
160,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(2,225
|
)
|
|
(1,848
|
)
|
|
71,985
|
|
|
Selling, general and administrative expenses
|
|
|
18,322
|
|
|
21,345
|
|
|
27,832
|
|
|
Research and development expense
|
|
|
2,670
|
|
|
4,371
|
|
|
2,562
|
|
|
Provision for bad debt expense
|
|
|
1,824
|
|
|
486
|
|
|
379
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
82,524
|
|
|
63,948
|
|
|
Intangible asset impairment
|
|
|
—
|
|
|
135,480
|
|
|
—
|
|
|
Asset impairment
|
|
|
194
|
|
|
37,431
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(25,235
|
)
|
|
(283,485
|
)
|
|
(24,597
|
)
|
|
Interest (expense) income, net
|
|
|
(30
|
)
|
|
(196
|
)
|
|
237
|
|
|
Amortization of deferred financing costs
|
|
|
(189
|
)
|
|
(1,079
|
)
|
|
(4,552
|
)
|
|
Other income
|
|
|
—
|
|
|
7,202
|
|
|
—
|
|
|
Gain on disposal of fixed assets
|
|
|
185
|
|
|
—
|
|
|
—
|
|
|
Foreign currency transaction (loss) gain
|
|
|
(366
|
)
|
|
(281
|
)
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax (benefit) expense
|
|
|
(25,635
|
)
|
|
(277,839
|
)
|
|
(28,755
|
)
|
|
Income tax (benefit) expense from continuing operations
|
|
|
(7,349
|
)
|
|
(66,264
|
)
|
|
10,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(18,286
|
)
|
$
|
(211,575
|
)
|
$
|
(39,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
|
Statement of Continuing Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of sales
|
|
|
107.0
|
%
|
|
101.9
|
%
|
|
69.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(7.0
|
)%
|
|
(1.9
|
)%
|
|
31.0
|
%
|
|
Selling, general and administrative expenses
|
|
|
57.5
|
%
|
|
22.4
|
%
|
|
12.0
|
%
|
|
Research and development expense
|
|
|
8.4
|
%
|
|
4.6
|
%
|
|
1.1
|
%
|
|
Provision for bad debt expense
|
|
|
5.7
|
%
|
|
0.5
|
%
|
|
0.2
|
%
|
|
Goodwill impairment
|
|
|
—
|
%
|
|
86.6
|
%
|
|
27.5
|
%
|
|
Intangible asset impairment
|
|
|
—
|
%
|
|
142.1
|
%
|
|
—
|
%
|
|
Asset impairment
|
|
|
0.6
|
%
|
|
39.3
|
%
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(79.2
|
)%
|
|
(297.3
|
)%
|
|
(10.6
|
)%
|
|
Interest (expense) income, net
|
|
|
(0.1
|
)%
|
|
(0.2
|
)%
|
|
0.1
|
%
|
|
Amortization of deferred financing costs
|
|
|
(0.6
|
)%
|
|
(1.1
|
)%
|
|
(2.0
|
)%
|
|
Other income
|
|
|
—
|
%
|
|
7.6
|
%
|
|
—
|
%
|
|
Gain on disposal of fixed assets
|
|
|
0.6
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Foreign currency transaction (loss) gain
|
|
|
(1.1
|
)%
|
|
(0.3
|
)%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax (benefit) expense
|
|
|
(80.5
|
)%
|
|
(291.4
|
)%
|
|
(12.4
|
)%
|
|
Income tax (benefit) expense from continuing operations
|
|
|
(23.1
|
)%
|
|
(69.5
|
)%
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(57.4
|
)%
|
|
(221.9
|
)%
|
|
(17.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
The following tables set forth our consolidated results of continuing operations in dollars and as a percentage of net sales for the
fiscal years ended December 31, 2013 and 2012.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net sales
|
|
$
|
31,860
|
|
|
100.0
|
%
|
$
|
95,345
|
|
|
100.0
|
%
|
$
|
(63,485
|
)
|
|
(66.6
|
)%
|
The
decrease in net sales for the year ended December 31, 2013 compared to the corresponding period in 2012 was mainly due to a 58% decrease in sales volume and an approximate 20%
decrease in our ASP.
Pricing
of our encapsulants is impacted by the competition faced by our customers, and the quality and performance of our encapsulant formulations, including their impact on improving
our customers' manufacturing yields, their history in the field, our ability to meet our customers' delivery requirements, overall supply and demand levels in the industry and our customer service and
technical support. Historically, we typically priced our encapsulants at a premium to our competition based on product
attributes that among other benefits provide a high value proposition to our customers in a period of tight capacity. During recent years, the excess capacity that existed at most module manufacturers
has reduced the value proposition of the throughput and other production efficiencies that our encapsulants provide and has caused encapsulant cost to become a more important factor in the procurement
process for many customers. In addition, low-cost competition from China and increased entrants in the
54
Table of Contents
encapsulant
market have intensified competition. Based on these factors, we experienced an ASP decline of approximately 20% from the prior year.
During
the past few years, our net sales have decreased significantly. In addition to the ASP pressure discussed above, our unit volumes have declined due to lost market share. Our
market share loss was the result of the loss of First Solar as a customer, financial distress of certain of our key customers, many of our customers losing market share to certain Chinese module
manufacturers who are currently not our customers and continuing intensified competition in the encapsulant market, including pressure on pricing and terms and competitive technologies entering the
marketplace.
In
order to increase our market share and sales volume in the future, we are actively introducing our next-generation encapsulant formulation with a focus on growing our market share
with Chinese module manufacturers. We believe our next-generation encapsulant formulation possesses enhanced PID properties and has been specifically engineered for the manufacturing processes
typically used in China. In 2013, we passed many internal customer qualification tests including the successful completion of damp heat testing with several prospective Chinese customers. Once
internal qualification is obtained with a customer, our encapsulant must also be qualified by a third-party certification body, which typically requires approximately three additional months. The
qualification process must occur with each prospective customer. The internal qualification process and timing are managed and customized by each module manufacturer.
In
the second quarter of 2013, we shipped initial commercial shipments of our next-generation encapsulant product to three new Chinese customers to begin production scale-up but did not
recognize sales based upon title transfer terms. Module manufacturers perform production scale-up testing to ensure new products demonstrate performance in mass production as achieved in product
testing. In August, we were notified by certain of these customers that a small percentage of our product was not performing properly in its manufacturing process. Based upon this feedback, we
actively worked to improve the manufacturing process window of our formula with the customer's lamination cycle. As such, we were delayed in being able to generate net sales from these customers as
previously anticipated. In the fourth quarter of 2013, certain customers provided positive feedback on the modifications made to our next-generation EVA encapsulants and we started to receive repeat
orders. If we incur similar delays with other potential customers, our net sales, results of operations and financial position will be negatively affected. In 2013, we recognized approximately
$1.5 million of
net sales of our next-generation EVA encapsulant. We expect to increase our net sales to these Chinese customers in 2014 and expect to receive orders from other prospective customers.
We
also continue to develop our infrastructure in China with the intent of better penetrating module manufacturers located there. In the last few years, we formed a wholly foreign-owned
enterprise in China, received a business license, purchased land near Shanghai and have expanded our local sales and technical service teams in the Asia-Pacific region. We are also constructing a
technical service laboratory in China to improve our customer service and provide support in launching new products.
In
the second quarter of 2013, we executed an agreement to lease manufacturing space that can accommodate 2.4 GW of production capacity. We are renovating the facility and expect to have
1.2 GW of production equipment operating by the end of the second quarter of 2014.
In
addition, we entered into the Agreement with FeiYu to purchase certain solar encapsulant products manufactured by FeiYu to our specifications. We will supply the Manufacturer with all
of the proprietary information and assistance necessary to manufacture the products.
55
Table of Contents
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Cost of sales
|
|
$
|
34,085
|
|
|
107.0
|
%
|
$
|
97,193
|
|
|
101.9
|
%
|
$
|
(63,108
|
)
|
|
(64.9
|
)%
|
The
decrease in our cost of sales for the year ended December 31, 2013 compared to the corresponding period in 2012 reflects an approximate 58% decrease in sales volume. Raw
material costs decreased by $35.4 million due to lower production volume and utilization of lower priced raw materials. Direct labor costs decreased by $4.4 million due to lower volume
and the positive effect of prior cost-reduction measures, that more than offset $0.8 million of increased severance costs. Overhead costs decreased by $23.4 million mostly due to a
reduction of $8.4 million of non-cash intangible asset amortization and $8.4 million of lower depreciation expense due to the long-lived asset impairment recorded at December 31,
2012. In addition, we benefited from the savings associated with prior cost-reduction actions including the indirect headcount reduction actions made during 2013 and 2012, including ceasing production
at our East Windsor, Connecticut facility.
Gross Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Gross loss
|
|
$
|
(2,225
|
)
|
|
(7.0
|
)%
|
$
|
(1,848
|
)
|
|
(1.9
|
)%
|
$
|
(377
|
)
|
|
(20.4
|
)%
|
Gross
loss as a percentage of net sales increased for year ended December 31, 2013 mainly as a result of lower ASP, $0.8 million of higher restructuring charges and the
negative impact of lower sales volume that reduced capacity utilization and fixed cost absorption. Production decreased by 58% during the year ended December 31, 2013 compared to the
corresponding period 2012 period. These negative impacts more than offset the benefit from previous cost-reduction actions, $8.4 million of lower depreciation expense and $8.4 million of
lower non-cash intangible asset amortization as discussed above.
Selling, General and Administrative Expenses ("SG&A")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
SG&A
|
|
$
|
18,322
|
|
|
57.5
|
%
|
$
|
21,345
|
|
|
22.4
|
%
|
$
|
(3,023
|
)
|
|
(14.2
|
)%
|
SG&A
decreased $3.0 million for the year ended December 31, 2013 compared to the corresponding period in 2012. The decrease was primarily driven by a $2.4 million
decrease in labor and benefits due to headcount reductions taken during 2013 and 2012. Non-cash stock-based compensation decreased $1.6 million due to the vesting of equity awards granted at
the time of our initial public offering. In addition, we had lower depreciation expense of $0.6 million and a $0.9 million decrease due to cost-reductions obtained in travel and other
SG&A items that partially offset $2.4 million of increased restructuring charges. Included in the $18.3 million is $1.4 million of professional fees associated with advisors
engaged to assess strategic alternatives for us.
56
Table of Contents
Research and Development Expense ("R&D")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
R&D
|
|
$
|
2,670
|
|
|
8.4
|
%
|
$
|
4,371
|
|
|
4.6
|
%
|
$
|
(1,701
|
)
|
|
(38.9
|
)%
|
Research
and development expenses decreased $1.7 million compared to the corresponding period in 2012. These decreases were driven by cost-reduction measures and lower development
costs associated with the launch of our next generation encapsulant as it reached the initial commercialization stage in late 2012. During the third quarter of 2013, we significantly reduced our
research and development headcount to scale down general development efforts and focus our efforts to optimize our next-generation EVA encapsulant formulation. In addition, we eliminated the position
of Chief Technology Officer effective November 15, 2013. Our President and Chief Executive Officer is directly overseeing the research and development function.
Provision for Bad Debt Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Bad debt expense
|
|
$
|
1,824
|
|
|
5.7
|
%
|
$
|
486
|
|
|
0.5
|
%
|
$
|
1,338
|
|
|
275.3
|
%
|
Our
provision for bad debt expense recorded for 2013 primarily related to two of our customers declaring bankruptcy. In 2012, the bad debt expense was driven by increased aged receivable
balances, primarily in Asia, and one of our European customers declaring bankruptcy.
Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Goodwill impairment
|
|
$
|
—
|
|
|
—
|
%
|
$
|
82,524
|
|
|
86.6
|
%
|
$
|
(82,524
|
)
|
|
(100
|
)%
|
Goodwill
was fully impaired at the end of the first quarter of 2012 after we determined that our implied fair value of goodwill was lower than its carrying value. The goodwill impairment
resulted from a reduction in sales and a decline in the market capitalization of our common stock.
Intangible Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Intangible asset impairment
|
|
$
|
—
|
|
|
—
|
%
|
$
|
135,480
|
|
|
142.1
|
%
|
$
|
(135,480
|
)
|
|
(100
|
)%
|
Our
intangible assets were fully impaired at the end of the fourth quarter of 2012. The impairment was driven by continued pricing pressure, trade complaints escalating in the industry,
increased competition from non-EVA encapsulant materials and our initial 2013 sales outlook, which included the loss of First Solar as a customer.
57
Table of Contents
Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Asset impairment
|
|
$
|
194
|
|
|
0.6
|
%
|
$
|
37,431
|
|
|
39.3
|
%
|
$
|
(37,237
|
)
|
|
(99.5
|
)%
|
In
2013, we recorded $0.2 million of impairment to our property, plant and equipment. The impairment was driven by our decision to cease the construction of our China
manufacturing plant and to lease an existing building to conduct our manufacturing operations. As such, we wrote-off costs incurred to date relating to the construction of our own facility. In 2012,
we tested our long-lived assets for impairment due to continued pricing pressure, trade complaints escalating in the industry, increased competition from non-EVA encapsulant materials and our initial
2013 sales outlook which included the loss of the First Solar, which resulted in a non-cash asset impairment of $37.4 million to certain fixed assets.
Interest (Expense), Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Interest (expense), income, net
|
|
$
|
(30
|
)
|
|
(0.1
|
)%
|
$
|
(196
|
)
|
|
(0.2
|
)%
|
$
|
(166
|
)
|
|
(84.7
|
)%
|
The
decrease in interest (expense) income, net was primarily the result of the decrease in the commitment fee expense for our prior amended Credit Agreement partially offset by lower
interest income earned on our cash balances. In late 2012, we allocated more of our idle cash balances to regular checking accounts as we received greater benefit from reduced bank fees than interest
being earned.
Amortization of Deferred Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Amortization of deferred financing costs
|
|
$
|
189
|
|
|
0.6
|
%
|
$
|
1,079
|
|
|
1.1
|
%
|
$
|
(890
|
)
|
|
(82.5
|
)%
|
Amortization
of deferred financing costs decreased as a result of lower deferred financing costs associated with our amended Credit Agreement. We entered into the amendment in the third
quarter of 2012 to reduce the amount available from $150.0 million to $25.0 million, avoid a financial covenant breach and reduce our commitment fees. In the third quarter of 2013, we
terminated our Credit Agreement and wrote off the remaining balance of deferred financing costs.
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Other income
|
|
$
|
—
|
|
|
—
|
%
|
$
|
7,202
|
|
|
7.6
|
%
|
$
|
(7,202
|
)
|
|
(100.0
|
)%
|
58
Table of Contents
We
received $7.2 million in connection with the settlement of the trade secret lawsuit during the first quarter of 2012.
Gain on Disposal of Fixed Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Gain on disposal of fixed assets
|
|
$
|
185
|
|
|
0.6
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
185
|
|
|
100.0
|
%
|
In
conjunction with exiting the lease at our former Corporate headquarters located at King Street, Enfield, Connecticut, we received $0.2 million in connection with the sale of
previously written off idle fixed assets.
Foreign Currency Transaction Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Foreign currency transaction loss
|
|
$
|
(366
|
)
|
|
(1.1
|
)%
|
$
|
(281
|
)
|
|
(0.3
|
)%
|
$
|
85
|
|
|
30.2
|
%
|
The
foreign currency transaction loss impact was $0.4 million for the year ended December 31, 2013 compared to a loss of $0.3 million in the corresponding 2012
period. The change was primarily the result of volatility in the Euro exchange rate which increased by 4% for the year ended December 31, 2013 compared to the corresponding 2012 period.
Income Tax Benefit from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Income tax benefit from continuing operations
|
|
$
|
(7,349
|
)
|
|
(23.1
|
)%
|
$
|
(66,264
|
)
|
|
(69.5
|
)%
|
$
|
(58,915
|
)
|
|
(88.9
|
)%
|
Our
effective income tax rate from continuing operations for the year ended December 31, 2013 was 28.7% compared to the U.S. federal statutory tax rate of 35.0%. Our effective tax
rate from continuing operations was 23.9% for the year ended December 31, 2012.
In
2012, our operations generated a pre-tax loss in the United States as the solar industry continued to shift and expand in Asia. As such, we received an income tax benefit that reduced
our expected loss at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non-deductible
expenses. Similar to 2011, our effective tax rate from continuing operations for the year ended December 31, 2012 of 23.9% reflected a reduction in the income tax benefit due to goodwill
impairment charges that were not deductible for U.S. income tax purposes. The December 31, 2012 effective tax rate from continuing operations was further decreased for Malaysia pre-tax losses
for which there is no tax benefit due to the tax holiday as well as other foreign losses for which no tax benefit has been recorded. Settlement of income tax audits resulted in a $0.9 million
benefit and a $0.5 million benefit received upon filing our 2011 tax returns.
In
2013, similar to 2012, our operations generated a pre-tax loss in the United States as the solar industry continues to shift and expand in Asia. As such, we received an income tax
benefit that will
59
Table of Contents
reduce
our expected loss at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non-deductible expenses. The December 31, 2013 effective tax rate from continuing
operations was further decreased for Malaysia pre-tax losses for which there is no tax benefit due to the tax holiday as well as other foreign losses for which no tax benefit has been recorded.
A
shift in the mix of our expected geographic earnings, primarily in Malaysia, could cause our expected effective tax rate to change significantly.
Net Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net loss from continuing operations
|
|
$
|
(18,286
|
)
|
|
(57.4
|
)%
|
$
|
(211,575
|
)
|
|
(221.9
|
)%
|
$
|
(193,289
|
)
|
|
(91.4
|
)%
|
Net
loss from continuing operations for the year ended December 31, 2013 decreased compared to the corresponding 2012 period driven by the 2012 goodwill impairment of
$82.5 million, the intangible asset impairment of $135.5 million and the property, plant and equipment impairment of $37.4 million, all of which did not recur. These decreases
combined with lower SG&A and R&D expenses more than offset lower net sales, lower gross profit and higher bad debt expense for the year ended December 31, 2013 as well as the receipt of
$7.2 million in 2012 for the trade secret settlement that did not recur.
Cost-Reduction Actions
On January 22, 2013, the Board of Directors approved a cost-reduction action to cease manufacturing at our East Windsor,
Connecticut facility after being notified that our largest customer selected an alternative supplier. In addition, we executed further headcount reductions during the third and fourth quarters of 2013
to better align our cost structure with current sales. In addition, on October 15, 2013, we eliminated the positions of Chief Operating Officer, Vice President of Human Resources, Chief
Technology Officer and Vice President of Finance, effective November 15, 2013. In total, we executed headcount reductions of approximately 180 employees on a global basis for the year ended
December 31, 2013.
In
conjunction with these headcount reductions, we recognized severance and related benefits of $1.7 million in cost of sales and $2.6 million in selling, general and
administrative expense. The restructuring accrual as of December 31, 2013 consists of $1.6 million for severance and benefits and $0.3 million of other exit costs for the year
ended December 31, 2013.
A
rollforward of the restructuring accrual activity was as follows:
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Balance at December 31, 2012
|
|
$
|
0.2
|
|
|
Additions
|
|
|
4.3
|
|
|
Cash utilization
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Table of Contents
Net Earnings from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net earnings from discontinued operations
|
|
$
|
—
|
|
|
—
|
%
|
$
|
4,228
|
|
|
4.4
|
%
|
$
|
(4,228
|
)
|
|
(100.0
|
)%
|
Net
earnings from discontinued operations was $4.2 million for the year ended December 31, 2012, which was due to the finalization of the taxable gain associated with the
sale of the QA business resulting in lower than previously estimated income tax expense. Refer to Note—3 Discontinued Operations in the Notes to the Consolidated Financial Statements for
further information.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net loss
|
|
$
|
(18,286
|
)
|
|
(57.4
|
)%
|
$
|
(207,347
|
)
|
|
(217.5
|
)%
|
$
|
(189,061
|
)
|
|
(91.2
|
)%
|
Net
loss from continuing operations for the year ended December 31, 2013 decreased compared to the corresponding 2012 period driven by the 2012 goodwill impairment of
$82.5 million, the intangible asset impairment of $135.5 million and the property, plant and equipment impairment of $37.4 million, all of which did not recur. These decreases
combined with lower SG&A and R&D expenses more than offset lower net sales, lower gross profit and higher bad debt expense for the year ended December 31, 2013 as well as the receipt of
$7.2 million in 2012 for the trade secret settlement that did not recur.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
The following tables set forth our consolidated results of continuing operations in dollars and as a percentage of net sales for the
fiscal years ended December 31, 2012 and 2011.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net sales
|
|
$
|
95,345
|
|
|
100.0
|
%
|
$
|
232,431
|
|
|
100.0
|
%
|
$
|
(137,086
|
)
|
|
(59.0
|
)%
|
The
decrease in net sales for the year ended December 31, 2012 compared to the corresponding period in 2011 was mainly due to a 46% decrease in sales volume and an approximate 24%
decrease in our ASP. Also, a 8% weaker Euro provided a negative impact in the foreign exchange translation of our European net sales.
We
believe the decline in volume for the year ended December 31, 2012 was the result of market share loss due to some of our customers losing market share to certain Chinese
module manufacturers who are currently not our customers and continuing intensified competition in the encapsulant market, including pressure on pricing and terms, and competitive technologies
entering the marketplace.
Recently, competitors have introduced new encapsulant products to the market based upon POE. We believe that one of our former crystalline silicon customers is now using POE encapsulant for its
modules. Although we have been pursuing the development of POE, such products are not yet commercially available and it is uncertain as to when or if we will sell such products. In the event that
61
Table of Contents
solar
module manufacturers switch to POE encapsulant products from EVA encapsulants and we do not offer a competitive POE product, such switch could adversely affect our business, financial condition
and results of operations.
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Cost of sales
|
|
$
|
97,193
|
|
|
101.9
|
%
|
$
|
160,446
|
|
|
69.0
|
%
|
$
|
(63,253
|
)
|
|
(39.4
|
)%
|
The
decrease in our cost of sales for the year ended December 31, 2012 compared to the corresponding period in 2011 reflects an approximate 46% decrease in sales volume. Raw
material costs decreased by $56.9 million due to lower production volume and utilization of lower priced raw materials. Direct labor costs decreased by $3.8 million due to lower volume
and the positive effect of prior cost-reduction measures, that more than offset $1.0 million of increased severance costs. Overhead costs decreased by $2.3 million mostly due to the
savings from the closure of our Florida facility in October 2011 and other cost-reduction actions. These savings were partially offset by the costs associated with the expansion of our Malaysia
facility that was completed in the second half of 2011, costs associated with consolidating our Connecticut operations into our East Windsor facility that was completed in June 2012 and
$2.3 million of increased accelerated depreciation due to the shortened useful lives of certain production
equipment based on expected lower capacity utilization. Also, an 8% weaker Euro decreased the translation impact of our European subsidiary's cost of sales.
Non-cash
intangible asset amortization expense of $8.4 million was included in cost of sales for each of the years ended December 31, 2012 and 2011.
Gross (Loss) Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Gross (loss) profit
|
|
$
|
(1,848
|
)
|
|
(1.9
|
)%
|
$
|
71,985
|
|
|
31.0
|
%
|
$
|
(73,833
|
)
|
|
(102.6
|
)%
|
Gross
(loss) profit as a percentage of net sales declined for year ended December 31, 2012 mainly as a result of decreased net sales due to lower ASP, the negative impact of lower
sales volume that reduced capacity utilization and fixed cost absorption and costs associated with the expansion of our Malaysia facility in the second half of 2011. In addition, accelerated
depreciation increased by $2.3 million due to the shortened useful lives of certain production equipment based on expected lower capacity utilization. Severance costs associated with the recent
cost-reduction efforts increased by $1.0 million in 2012.
Non-cash
intangible asset amortization expense of $8.4 million reduced gross profit for each of the years ended December 31, 2012 and 2011.
62
Table of Contents
SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
SG&A
|
|
$
|
21,345
|
|
|
22.4
|
%
|
$
|
27,832
|
|
|
12.0
|
%
|
$
|
(6,487
|
)
|
|
(23.3
|
)%
|
SG&A
decreased $6.5 million for the year ended December 31, 2012 compared to the corresponding period in the prior year. This decrease was driven by lower professional fees
of $4.8 million primarily relating to reduced legal and accounting costs. Additionally there was a $0.9 million reduction in stock-based compensation relating to a reversal of deferred
compensation. Furthermore, we reduced travel costs by $0.4 million as part of our cost-reduction efforts.
R&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
R&D
|
|
$
|
4,371
|
|
|
4.6
|
%
|
$
|
2,562
|
|
|
1.1
|
%
|
$
|
1,809
|
|
|
70.6
|
%
|
Research
and development expenses increased $1.8 million. The increase was driven by the opening of our 20,000 square foot state-of-the-art laboratory in 2012, the addition of
scientific equipment and scientific and engineering talent and increased product development costs associated with the launch of our next generation encapsulant.
Provision for Bad Debt Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Bad debt expense
|
|
$
|
486
|
|
|
0.5
|
%
|
$
|
379
|
|
|
0.2
|
%
|
$
|
107
|
|
|
28.2
|
%
|
Our
provision for bad debt expense increased due to continued lower profitability throughout the solar supply chain and many industry participants experiencing financial difficulty.
Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Goodwill impairment
|
|
$
|
82,524
|
|
|
86.6
|
%
|
$
|
63,948
|
|
|
27.5
|
%
|
$
|
18,576
|
|
|
29.0
|
%
|
We
valued our reporting unit with the assistance of a valuation specialist and determined that our reporting unit's net book value exceeded its fair value. We 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 our assets and liabilities other than
goodwill and comparing the residual amount to the carrying amount of goodwill. We determined that our implied fair value of goodwill was lower than its carrying value and recorded a non-cash goodwill
impairment charge of $82.5 million and $63.9 million in 2012 and 2011, respectively.
63
Table of Contents
Intangible Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Intangible asset impairment
|
|
$
|
135,480
|
|
|
142.1
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
135,480
|
|
|
100
|
%
|
Our
intangible assets were fully impaired at the end of the fourth quarter of 2012. The impairment was driven by continued pricing pressure, trade complaints escalating in the industry,
increased competition from non-EVA encapsulant materials and our initial 2013 sales outlook, which included the loss of First Solar as a customer.
Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Asset impairment
|
|
$
|
37,431
|
|
|
39.3
|
%
|
$
|
1,861
|
|
|
0.8
|
%
|
$
|
35,570
|
|
|
1,911.3
|
%
|
The
non-cash asset impairment for the year ended December 31, 2011 relates to real property that was previously occupied by our QA business. Since this asset was not included as
part of the sale to UL on September 1, 2011, the real property is a non-operating asset, which was being leased to UL under a one-year agreement with an option to renew. As such, in the third
quarter of 2011, we recorded an impairment charge to write down the carrying value of the real property to its fair value less estimated disposal cost. The lease was terminated on December 31,
2012.
Due
to continued pricing pressure, trade complaints escalating in the industry, increased competition from non-EVA encapsulant materials and our initial 2013 sales outlook which included
the loss of the
our largest customer, we tested our long-lived assets again for impairment as of December 31, 2012 which resulted in a non-cash asset impairment of $37.4 million to certain fixed assets.
Interest (Expense) Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Interest (expense) income, net
|
|
$
|
(196
|
)
|
|
(0.2
|
)%
|
$
|
237
|
|
|
0.1
|
%
|
$
|
(433
|
)
|
|
(182.7
|
)%
|
The
increase in interest (expense) income, net was primarily the result of $0.3 million of commitment fee expense for our amended Credit Agreement that more than offset interest
income of $0.1 million earned on our cash balances. We had lower interest bearing cash balances for the year ended December 31, 2012 compared to the corresponding 2011 period resulting
from the repayment of our 2007 Credit Agreements and an estimated federal tax payment of $90.3 million.
64
Table of Contents
Amortization of Deferred Financing Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Amortization of deferred financing costs
|
|
$
|
1,079
|
|
|
1.1
|
%
|
$
|
4,552
|
|
|
2.0
|
%
|
$
|
(3,473
|
)
|
|
76.3
|
%
|
Amortization
of deferred financing costs decreased as a result of lower deferred financing costs associated with our new amended Credit Agreement compared to the 2007 Credit Agreements.
In the third quarter of 2011, we fully repaid and then terminated our 2007 Credit Agreements in conjunction with our divestiture of the QA business. In connection with the settlement of debt, we
wrote-off $3.6 million of the remaining unamortized deferred financing costs associated with the 2007 Credit Agreements.
In
the third quarter of 2012, we amended our Credit Agreement to reduce the facility from $150.0 million to $25.0 million of availability. As such, we wrote-off
approximately $0.8 million of the
unamortized deferred financing costs associated with the Credit Agreement. The write-off was proportional to the reduction in borrowing availability under the Credit Agreement.
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Other income
|
|
$
|
7,202
|
|
|
7.6
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
7,202
|
|
|
100.0
|
%
|
We
received $7.2 million in connection with the settlement of the trade secret lawsuit during the first quarter of 2012. Refer to Item 3—Legal Proceedings.
Foreign Currency Transaction (Loss) Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Foreign currency transaction (loss) gain
|
|
$
|
(281
|
)
|
|
(0.3
|
)%
|
$
|
157
|
|
|
0.1
|
%
|
$
|
(438
|
)
|
|
(279.0
|
)%
|
The
Foreign currency transaction impact was a $(0.3) million loss for the year ended December 31, 2012 compared to a gain of $0.2 million in the corresponding 2011 period.
The change was primarily the result of volatility in the Euro exchange rate which decreased by 8% for the year ended December 31, 2012 compared to the corresponding 2011 period.
Income Tax (Benefit) Expense from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Income tax (benefit) expense from continuing operations
|
|
$
|
(66,264
|
)
|
|
(69.5
|
)%
|
$
|
10,673
|
|
|
4.6
|
%
|
$
|
(76,937
|
)
|
|
(720.9
|
)%
|
65
Table of Contents
Our
effective income tax rate from continuing operations for the year ended December 31, 2012 was 23.9% compared to the U.S. federal statutory tax rate of 35.0%. Our effective tax
rate from continuing operations was (37.1%) for the year ended December 31, 2011.
In
2011, we generated loss from continuing operations that was taxed at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non-deductible expenses. The
expected 2011 income tax benefit was increased by our permanently re-invested Malaysia earnings where we benefit from a one-hundred percent tax holiday. Our expected 2011 income tax benefit was
decreased by goodwill impairment charges that were not deductible for U.S. income tax purposes. The inability to deduct goodwill impairment charges resulted in tax expense on pre-tax losses from
continuing operations in 2011.
In
2012, our operations generated a pre-tax loss in the U.S. as the solar industry continued to shift and expand in Asia. As such, we received an income tax benefit that will reduce our
expected loss at the U.S. federal statutory rate of 35%, prior to the impact of any deductions or non-deductible expenses. Similar to 2011, our effective tax rate from continuing operations for the
year ended December 31, 2012 of 23.9% reflects a reduction in the income tax benefit due to goodwill impairment charges that were not deductible for U.S. income tax purposes. The
December 31, 2012 effective tax rate from continuing operations was further decreased for Malaysia pre-tax losses for which there is no tax benefit due to the tax Holiday as well as other
foreign losses for which no tax benefit has been recorded. Settlement of income tax audits resulted in a $0.9 million benefit and a $0.5 million benefit received upon filing our 2011 tax
returns.
Net Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net loss from continuing operations
|
|
$
|
(211,575
|
)
|
|
(221.9
|
)%
|
$
|
(39,428
|
)
|
|
(17.0
|
)%
|
$
|
(172,147
|
)
|
|
(436.6
|
)%
|
Net
loss from continuing operations for the year ended December 31, 2012 compared to the corresponding 2011 period included lower net sales and lower gross margin. For the year
ended December 31, 2012, net loss from continuing operations included an $82.5 million goodwill impairment, $2.8 million of accelerated depreciation, $1.1 million of
restructuring, $37.4 million of property, plant and equipment impairment and $135.5 million intangible asset impairment that was partially offset by the $7.2 million settlement of
the trade secret lawsuit, an income tax benefit of $66.3 million and $0.8 million deferred compensation reversal.
Cost-Reduction Actions
During 2012, we entered into a Labor Force Adjustment Plan ("LFAP") with the union and the local government at our Spain facility that
temporarily furloughed approximately 60 employees for the period of February 1, 2012 to July 31, 2012. In July 31, 2012, we entered into an agreement to extend our LFAP at our
Spain facility. Under the new agreement, we were responsible for 10% of the salary of employees who were furloughed during the period from August 1, 2012 through October 31, 2012. On
October 17, 2012, we permanently reduced headcount at this facility by 58 employees to better align our cost structure with current and anticipated sales volumes. We also reduced headcount by
39 employees at our Connecticut facilities in 2012. In conjunction with these headcount reductions and anticipated future actions, we recognized severance of $1.0 million in cost of
sales and $0.4 million in selling, general and administrative expense for the year ended December 31, 2012, respectively. Total expected pre-tax savings associated with the headcount
reductions is $5.9 million.
66
Table of Contents
A
rollforward of accrued severance activity was as follows:
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
Balance at December 31, 2011
|
|
$
|
—
|
|
|
Additions
|
|
|
1.4
|
|
|
Cash utilization
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net earnings from discontinued operations
|
|
$
|
4,228
|
|
|
4.4
|
%
|
$
|
38,124
|
|
|
16.4
|
%
|
$
|
(33,896
|
)
|
|
(88.9
|
)%
|
Net
earnings from discontinued operations decreased mainly due to the absence of the one-time gain on the sale of QA that occurred in 2011. During the third quarter of 2012, the taxable
gain associated with the sale of our QA business was finalized in conjunction with filing our 2011 income tax returns. As part of this process, we identified and recorded an income tax benefit to
discontinued operations of $4.2 million. We determined that $1.6 million of this benefit was an error that should have been recorded in 2011. We determined that the error was not
quantitatively or qualitatively material to the annual or interim periods in 2012 and 2011.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
% of
Net Sales
|
|
|
|
% of
Net Sales
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Net loss
|
|
$
|
(207,347
|
)
|
|
(217.5
|
)%
|
$
|
(1,304
|
)
|
|
0.6
|
%
|
$
|
(206,043
|
)
|
|
(15,800.8
|
)%
|
Net
loss increased mainly due to the recording of the goodwill, intangible asset and property, plant and equipment non-cash impairment charges, lower net sales and the absence of the
one-time gain on the sale of QA that occurred in 2011.
Non-GAAP Earnings Per Share
To supplement our consolidated financial statements, we use a non-GAAP financial measure called non-GAAP EPS from continuing operations
("non-GAAP EPS"). Non-GAAP EPS is defined for the periods presented in the following table. For the periods prior to 2011, the diluted weighted-average common shares outstanding were determined on a
GAAP basis and the resulting share count was used for computing both GAAP and non-GAAP diluted EPS. Since we recorded a loss from continuing operations in 2013 and 2012 on a GAAP basis, the
weighted-average common share count for GAAP reporting does not include the number of potentially dilutive common shares since these potential shares do not share in any loss generated and are
anti-dilutive for determining GAAP EPS. However, we have included these shares in our 2011 non-GAAP EPS calculation as such shares are dilutive. Refer to the weighted-average shares outstanding
reconciliation below. All amounts are stated in thousands except per share amounts and unless otherwise noted.
Management
believes that non-GAAP EPS provides meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of the core
67
Table of Contents
business
operating results and may help in comparing current period results with those of prior periods as well as with our peers. Non-GAAP EPS is one of the main metrics used by management and our
Board of Directors to plan and measure our operating performance. In addition, non-GAAP EPS was the only metric used to determine annual bonus compensation for our President and Chief Executive
Officer, our Vice President and Chief Financial Officer and Chief Accounting Officer and certain other senior executives.
Although
we use non-GAAP EPS as a measure to assess the operating performance of our business, non-GAAP EPS has significant limitations as an analytical tool because it excludes certain
material costs. Because non-GAAP EPS does not account for these expenses, its utility as a measure of our operating performance has material limitations. The omission of the substantial amortization
expense associated with our intangible assets and deferred financing costs, goodwill, intangible and other asset impairments and stock-based compensation expense further limits the usefulness of this
measure. Non-GAAP EPS also adjusts for the related tax effects of the adjustments and the payment of taxes is a necessary element of our operations. Because of these limitations, management does not
view non-GAAP EPS in isolation and uses other measures, such as Adjusted EBITDA, net loss from continuing operations, net sales, gross margin and operating loss, to measure operating performance.
During
2013, we did not include any new items to arrive at non-GAAP EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
Year Ended
December 31, 2012
|
|
Year Ended
December 31, 2011
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
Net loss from continuing operations
|
|
$
|
(18,286
|
)
|
$
|
(211,575
|
)
|
$
|
(39,428
|
)
|
|
Adjustments to net loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
—
|
|
|
8,432
|
|
|
8,432
|
|
|
Amortization of deferred financing costs
|
|
|
189
|
|
|
1,079
|
|
|
4,552
|
|
|
Stock-based compensation expense
|
|
|
1,902
|
|
|
3,494
|
|
|
4,436
|
|
|
Restructuring costs
|
|
|
4,331
|
|
|
1,069
|
|
|
308
|
|
|
Accelerated depreciation
|
|
|
—
|
|
|
2,819
|
|
|
512
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
82,524
|
|
|
63,948
|
|
|
Intangible asset impairment
|
|
|
—
|
|
|
135,480
|
|
|
—
|
|
|
Asset impairment
|
|
|
194
|
|
|
37,431
|
|
|
1,861
|
|
|
Interest expense from 2007 Credit Agreements
|
|
|
—
|
|
|
—
|
|
|
(6,699
|
)
|
|
Tax effect of adjustments
|
|
|
(2,154
|
)
|
|
(62,649
|
)
|
|
(4,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net (loss) earnings from continuing operations
|
|
$
|
(13,824
|
)
|
$
|
(1,896
|
)
|
$
|
33,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding GAAP
|
|
|
41,619,868
|
|
|
41,314,608
|
|
|
40,886,022
|
|
|
Diluted shares outstanding GAAP
|
|
|
41,619,868
|
|
|
41,314,608
|
|
|
40,886,022
|
|
|
Stock options
|
|
|
—
|
|
|
—
|
|
|
543,088
|
|
|
Restricted common stock
|
|
|
—
|
|
|
—
|
|
|
397,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding non-GAAP
|
|
|
41,619,868
|
|
|
41,314,608
|
|
|
41,826,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share from continuing operations
|
|
$
|
(0.44
|
)
|
$
|
(5.12
|
)
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted non-GAAP net (loss) earnings per share from continuing operations
|
|
$
|
(0.33
|
)
|
$
|
(0.05
|
)
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Table of Contents
Adjusted EBITDA
We define Adjusted EBITDA as net loss from continuing operations before interest income and expense, income tax (benefit) expense,
depreciation expense, amortization of deferred financing costs, intangible asset amortization, restructuring, stock-based compensation expense, intangible asset impairment, goodwill impairment, other
asset impairment and certain non-recurring income and expenses from the results of continuing operations.
We
present Adjusted EBITDA because it is one of the main metrics used by our management and our Board of Directors to plan and measure our Segment's operating performance. Our management
believes that Adjusted EBITDA is useful to investors because Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating
performance of companies in industries similar to ours. We also believe Adjusted EBITDA is useful to our management and investors as a measure of comparative operating performance from period to
period. The DLJ Acquisition in 2007 had a significant impact on our capital structure and resulted in accounting charges that make period to period comparisons of our core operations difficult and
resulted in expenses that may not be indicative of our future operating performance. For example, as a result of the DLJ Acquisition, we incurred significant non-cash amortization charges. Adjusted
EBITDA removes the impact of changes to our capital structure and asset base (primarily amortization
expense resulting from the DLJ Acquisition). By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods. In addition, measures
similar to Adjusted EBITDA are one of the metrics utilized to measure performance based bonuses paid to certain of our managers and were used to determine compliance with financial covenants under our
prior Credit Agreement.
Adjusted
EBITDA, however, does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined in accordance with generally
accepted accounting principles, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. Although we use Adjusted EBITDA as a measure to assess
the operating performance of our business, Adjusted EBITDA has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include interest
expense, which was a necessary element of our costs. Because we use capital assets, depreciation expense is a necessary element of our costs and ability to generate net sales. In addition, the
omission of the substantial amortization expense, impairment associated with our goodwill, intangible assets and property, plant and equipment and restructuring charges, further limits the usefulness
of this measure. Adjusted EBITDA also does not include the payment of taxes, which is also a necessary element of our operations. Because Adjusted EBITDA does not account for these expenses, its
utility as a measure of our operating performance has material limitations. Because of these limitations management does not view Adjusted EBITDA in isolation and also uses other measures, such as net
loss, net sales, gross margin and operating loss, to measure operating performance.
We
report our business in one aggregated segment. We measure segment performance based on net sales, Adjusted EBITDA and non-GAAP EPS. See Note 16—Reportable Segment
and Geographical Information located in the Notes to the Consolidated Financial Statements for a definition of Adjusted EBITDA, a reconciliation to net loss from continuing operations and further
information. Net sales for our segment and non-GAAP EPS from continuing operations ("non-GAAP EPS") are described in further detail above. The discussion that follows is a summary
69
Table of Contents
analysis
of the primary changes in Adjusted EBITDA for the year ended December 31, 2013 compared to the year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Adjusted EBITDA
|
|
$
|
(17,150
|
)
|
$
|
3,123
|
|
$
|
(20,273
|
)
|
|
(649.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as % of segment net sales
|
|
|
53.8
|
%
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA as a percentage of net sales decreased for the year ended December 31, 2013 compared to 2012 due to lower ASP, reduced operating leverage associated with the sales
volume decrease, and the receipt of $7.2 million for the trade secret settlement in 2012 that did not recur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
|
Adjusted EBITDA
|
|
$
|
3,123
|
|
$
|
62,703
|
|
$
|
(59,580
|
)
|
|
(95.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA as % of segment net sales
|
|
|
3.3
|
%
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA as a percentage of net sales decreased for the year ended December 31, 2012 compared to 2011 due to lower ASP and reduced operating leverage associated with the
sales volume decrease, partially offset by the receipt of $7.2 million for the trade secret settlement.
70
Table of Contents
Quarterly Consolidated Results of Operations
The following tables set forth our consolidated results of continuing operations, other data and Adjusted EBITDA on a quarterly basis
for the year ended December 31, 2013 and the year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Unaudited)
|
|
|
|
(dollars in thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
11,215
|
|
$
|
7,755
|
|
$
|
6,219
|
|
$
|
6,671
|
|
|
Cost of sales
|
|
|
11,916
|
|
|
7,396
|
|
|
7,040
|
|
|
7,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(701
|
)
|
|
359
|
|
|
(821
|
)
|
|
(1,062
|
)
|
|
Selling, general and administrative expenses
|
|
|
4,137
|
|
|
4,305
|
|
|
4,570
|
|
|
5,310
|
|
|
Research and development
|
|
|
904
|
|
|
709
|
|
|
703
|
|
|
354
|
|
|
Provision for (reversal of) bad debt expense
|
|
|
340
|
|
|
1,898
|
|
|
(138
|
)
|
|
(276
|
)
|
|
Asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,082
|
)
|
|
(6,553
|
)
|
|
(5,956
|
)
|
|
(6,644
|
)
|
|
Interest income (expense) net
|
|
|
1
|
|
|
(7
|
)
|
|
—
|
|
|
(24
|
)
|
|
Amortization of deferred financing costs
|
|
|
(17
|
)
|
|
(17
|
)
|
|
(155
|
)
|
|
—
|
|
|
(Loss) gain on disposal of fixed assets
|
|
|
—
|
|
|
(40
|
)
|
|
140
|
|
|
85
|
|
|
Foreign currency transaction gain (loss)
|
|
|
44
|
|
|
(108
|
)
|
|
(231
|
)
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(6,054
|
)
|
|
(6,725
|
)
|
|
(6,202
|
)
|
|
(6,654
|
)
|
|
Income tax benefit from continuing operations
|
|
|
(1,844
|
)
|
|
(2,234
|
)
|
|
(268
|
)
|
|
(3,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(4,210
|
)
|
$
|
(4,491
|
)
|
$
|
(5,934
|
)
|
$
|
(3,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
492
|
|
$
|
524
|
|
$
|
487
|
|
$
|
521
|
|
|
Stock-based compensation
|
|
$
|
354
|
|
$
|
760
|
|
$
|
563
|
|
$
|
225
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(3,619
|
)
|
$
|
(5,286
|
)
|
$
|
(4,646
|
)
|
$
|
(3,599
|
)
|
|
Depreciation expense
|
|
|
(492
|
)
|
|
(524
|
)
|
|
(487
|
)
|
|
(521
|
)
|
|
Amortization of deferred financing costs
|
|
|
(17
|
)
|
|
(17
|
)
|
|
(155
|
)
|
|
—
|
|
|
Interest income (expense) net
|
|
|
1
|
|
|
(7
|
)
|
|
—
|
|
|
(24
|
)
|
|
Income tax benefit
|
|
|
1,844
|
|
|
2,234
|
|
|
268
|
|
|
3,003
|
|
|
Asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(194
|
)
|
|
Restructuring
|
|
|
(1,573
|
)
|
|
(91
|
)
|
|
(491
|
)
|
|
(2,176
|
)
|
|
Stock-based compensation
|
|
|
(354
|
)
|
|
(760
|
)
|
|
(563
|
)
|
|
(225
|
)
|
|
(Loss) gain on disposal of property, plant and equipment
|
|
|
—
|
|
|
(40
|
)
|
|
140
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(4,210
|
)
|
$
|
(4,491
|
)
|
$
|
(5,934
|
)
|
$
|
(3,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(Unaudited)
|
|
|
|
(dollars in thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
31,083
|
|
$
|
25,119
|
|
$
|
23,092
|
|
$
|
16,051
|
|
|
Cost of sales
|
|
|
29,083
|
|
|
23,534
|
|
|
22,510
|
|
|
22,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
2,000
|
|
|
1,585
|
|
|
582
|
|
|
(6,015
|
)
|
|
Selling, general and administrative expenses
|
|
|
6,668
|
|
|
5,595
|
|
|
4,780
|
|
|
4,302
|
|
|
Research and development
|
|
|
1,078
|
|
|
1,113
|
|
|
1,064
|
|
|
1,116
|
|
|
Provision for (reversal of) bad debt expense
|
|
|
1,606
|
|
|
(1,156
|
)
|
|
47
|
|
|
(11
|
)
|
|
Goodwill impairment
|
|
|
82,524
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intangible asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,480
|
|
|
Asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(89,876
|
)
|
|
(3,967
|
)
|
|
(5,309
|
)
|
|
(184,333
|
)
|
|
Interest (expense) income, net
|
|
|
(61
|
)
|
|
(50
|
)
|
|
(85
|
)
|
|
—
|
|
|
Amortization of deferred financing costs
|
|
|
(82
|
)
|
|
(81
|
)
|
|
(899
|
)
|
|
(17
|
)
|
|
Other income
|
|
|
7,201
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Foreign currency transaction (loss) gain
|
|
|
(288
|
)
|
|
202
|
|
|
(86
|
)
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(83,106
|
)
|
|
(3,896
|
)
|
|
(6,379
|
)
|
|
(184,458
|
)
|
|
Income tax benefit from continuing operations
|
|
|
(975
|
)
|
|
(1,475
|
)
|
|
(2,800
|
)
|
|
(61,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(82,131
|
)
|
$
|
(2,421
|
)
|
$
|
(3,579
|
)
|
$
|
(123,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
$
|
2,108
|
|
$
|
2,108
|
|
$
|
2,107
|
|
$
|
2,109
|
|
|
Depreciation expense
|
|
$
|
1,838
|
|
$
|
2,277
|
|
$
|
2,042
|
|
$
|
5,098
|
|
|
Stock-based compensation
|
|
$
|
1,474
|
|
$
|
1,504
|
|
$
|
704
|
|
$
|
(188
|
)
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
4,981
|
|
$
|
2,124
|
|
$
|
(540
|
)
|
$
|
(3,442
|
)
|
|
Depreciation and amortization
|
|
|
(3,946
|
)
|
|
(4,385
|
)
|
|
(4,149
|
)
|
|
(7,207
|
)
|
|
Amortization of deferred financing costs
|
|
|
(82
|
)
|
|
(81
|
)
|
|
(899
|
)
|
|
(17
|
)
|
|
Interest (expense) income, net
|
|
|
(61
|
)
|
|
(50
|
)
|
|
(85
|
)
|
|
—
|
|
|
Income tax benefit
|
|
|
975
|
|
|
1,475
|
|
|
2,800
|
|
|
61,014
|
|
|
Goodwill impairment
|
|
|
(82,524
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Intangible asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(135,480
|
)
|
|
Asset impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,431
|
)
|
|
Restructuring
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,069
|
)
|
|
Stock-based compensation
|
|
|
(1,474
|
)
|
|
(1,504
|
)
|
|
(704
|
)
|
|
188
|
|
|
Loss on disposal of property, plant and equipment
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(82,131
|
)
|
$
|
(2,421
|
)
|
$
|
(3,579
|
)
|
$
|
(123,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition, Liquidity and Capital Resources
We have funded our operations primarily through cash provided by operations. As of December 31, 2013, our principal source of
liquidity was $58.2 million of cash. Our principal needs for liquidity have been and for the foreseeable future will continue to be for capital expenditures, execution of the Offer and working
capital. The use of cash for the Offer is not reflected as of December 31, 2013. We believe that our available cash will be sufficient to meet our liquidity needs, including for capital
expenditures, through at least the next 12 months.
72
Table of Contents
Payment
terms are currently longer in China than in many other locations. In order to mitigate this risk, we are attempting to obtain guarantees from financial institutions with respect
to the accounts receivables from certain of our customers. If we are unable to collect our accounts receivable or obtain financial guarantees, or fail to receive payment of accounts receivable in a
timely fashion, our financial condition and results of operations will be negatively affected.
Our
cash and cash equivalents balance is located in the following geographies:
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
|
United States
|
|
$
|
51.7
|
|
|
Spain
|
|
|
4.2
|
|
|
Malaysia
|
|
|
1.1
|
|
|
China
|
|
|
0.9
|
|
|
Hong Kong
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
disclosed in Note 13 to the Consolidated Financial Statements, we no longer permanently reinvest our Malaysia subsidiary's earnings. Based upon the Malaysia subsidiary's
liabilities, the undistributed earnings of our Malaysia subsidiary will be repatriated in a tax free manner. We do not permanently invest our Spain earnings and as such, this cash balance is available
for dividend repatriation. We have accrued for this tax liability. We have not elected to permanently re-invest our Hong Kong and China earnings. However, we plan to utilize our cash located in Hong
Kong and China to fund a portion of our capital investment in China.
Cash Flows
Cash Flow from Operating Activities from Continuing Operations
Net cash used in operating activities was $22.8 million for the year ended December 31, 2013 compared to cash generated
of $33.9 million for the year ended December 31, 2012. Net loss plus non-cash adjustments ("cash earnings") decreased by approximately $22.6 million for the year ended
December 31, 2013 compared to the same period in 2012. The reduction was driven by the $7.2 million trade secret settlement received in 2012 that did not recur in 2013, reduced net sales
and lower gross profit compared to the prior year. In addition, we incurred approximately $2.6 million of restructuring payments during 2013 and received less working capital benefit, primarily
from a decrease in the amount of inventory reduction.
Net
cash provided by operating activities was $33.9 million for the year ended December 31, 2012 compared to $46.8 million for the year ended December 31,
2011. Cash earnings decreased by approximately $39.2 million for the year ended December 31, 2012 compared to the same period in 2011. These reductions were driven by reduced net sales
and lower gross profit in 2012 compared to the prior year. These were offset by $7.2 million received in connection with the settlement of the JPS lawsuit that occurred in the first quarter of
2012, lower income tax payments and improved working capital, including lower accounts receivable and raw material inventory.
Net
cash provided by operating activities was $46.8 million for the year ended December 31, 2011 compared to $55.0 million for the year ended December 31,
2010. Cash earnings decreased by approximately $25.6 million for the year ended December 31, 2011 compared to the same period in 2010.
This was primarily due to lower sales volume and pricing driven by the inventory build that existed throughout the solar supply chain. The lower earnings were partially offset by improved working
capital due to increased focus on the collection of accounts receivable and reduced procurement of raw materials during the difficult operating environment.
73
Table of Contents
Cash Flow from Operating Activities from Discontinued Operations
Net cash provided by operating activities from discontinued operations was $0.8 million for the year ended December 31,
2013 primarily due to cash received for our prior state tax receivable relating to the final gain on the sale of the QA business.
Net
cash used in operating activities from discontinued operations was less than $0.1 million for the year ended December 31, 2012 primarily due to the payment of accrued
state taxes relating to the gain on the sale of the QA business. Net cash used in operating activities from discontinued operations was $109.3 million for the year ended December 31,
2011.
Cash Flow from Investing Activities from Continuing Operations
Net cash used in investing activities was $2.1 million for the year ended December 31, 2013. The 2013 capital
expenditures mainly related to building out our leased facility in China and enhancements to our production equipment to further our conversion to paperless products.
We
anticipate 2014 consolidated capital expenditures to be approximately $2.5 million, and we expect to fund these from our anticipated operating cash flow and existing cash
balance.
Net
cash used in investing activities was $10.7 million for the year ended December 31, 2012. The 2012 capital expenditures mainly related to our 20,000 square-foot
state-of-the-art research and development laboratory, purchase of land near Shanghai and the completion of the retrofit of our East Windsor building.
Net
cash used for investing activities was $21.5 million for the year ended December 31, 2011 and was related to capital expenditures. Our capital expenditures for this
period were mainly for expansion of our Malaysia plant and investments associated with our East Windsor, Connecticut facility.
We
use an alternative non-GAAP measure of liquidity called free cash flow. We define free cash flow as cash provided by operating activities from continuing operations less capital
expenditures. Free cash flow was $(25.0) million, $23.2 million and $25.3 million in the years ended December 31, 2013, 2012 and 2011, respectively. We believe that free cash flow
is an important measure of our overall liquidity and our ability to fund future growth and provide a return to stockholders. Free cash flow does not reflect, among other things, mandatory debt
service, other borrowing activity, discretionary dividends on our common stock and acquisitions.
We
consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the
acquisition of property and equipment, including information technology infrastructure, land and buildings, can be used for strategic opportunities, including reinvestment in our business, making
strategic acquisitions, and strengthening the Consolidated Balance Sheets. We also use this non-GAAP financial measure for financial and operational decision making and as a means to evaluate
period-to-period comparisons.
Analysis
of free cash flow also facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP
measure of cash provided by operating activities from continuing operations as a means for evaluating our business is that free cash flow does not represent the total increase or decrease in the cash
balance from operations for the period because it excludes cash used for capital expenditures during the period. Our
74
Table of Contents
management
compensates for this limitation by providing information about our capital expenditures on the face of the Consolidated Statements of Cash Flows and in the above discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
(unaudited)
|
|
Year Ended
December 31, 2012
(unaudited)
|
|
Year Ended
December 31, 2011
(unaudited)
|
|
|
Cash (used in) provided by operating activities from continuing operations
|
|
$
|
(22.8
|
)
|
$
|
33.9
|
|
$
|
46.8
|
|
|
Less: capital expenditures
|
|
|
(2.2
|
)
|
|
(10.7
|
)
|
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(25.0
|
)
|
$
|
23.2
|
|
$
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow from Investing Activities from Discontinued Operations
Net cash provided by investing activities from discontinued operations for the year ended December 31, 2011 is primarily related
to $283.4 million of cash received upon the completion of the sale of the QA business on September 1, 2011 that more than offset capital expenditures related to the QA business.
Cash Flow from Financing Activities from Continuing Operations
Net cash provided by financing activities was less than $0.1 million for the year ended December 31, 2013 resulting from
proceeds received from common stock issued under our employee stock purchase plan.
Net
cash used in financing activities was less than $0.1 million for the year ended December 31, 2012 due to proceeds received from common stock issued under the employee
stock purchase plan partially offset by transaction costs related to the amendment of our revolving credit facility.
Net
cash used in financing activities was $0.8 million for the year ended December 31, 2011 primarily for the costs associated with securing the prior Credit Agreement
offset by proceeds received from the exercise of stock options and related tax benefits received from the disqualifying dispositions of certain of those option exercises.
Cash Flow from Financing Activities from Discontinued Operations
Net cash used in financing activities from discontinued operations was $238.5 million for the year ended December 31,
2011 for debt payments made on the prior 2007 Credit Agreements.
Cash Flow from Discontinued Operations
In the third quarter of 2011, we sold our QA business for $275.0 million, plus assumed cash. This resulted in an estimated tax
liability of $105.9 million, which related to the gain on the sale and cash repatriated from certain foreign QA locations. The tax expense along with our historical interest expense related to
our 2007 Credit Agreements is shown net against the QA operations as part of the net cash used in discontinued operations in the operating section of our cash flow statement. The $275.0 million
purchase price received and $3.4 million of capital expenditures incurred by QA are included as part of the net cash provided by discontinued operations in the investing section of our cash
flow statement. Also, the repayment of the debt outstanding as of September 1, 2011 and prior debt payments totaling $238.5 million are included in the net cash used in discontinued
operations in the financing section of our cash flow statement.
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Table of Contents
Credit Facilities
2007 Credit Agreements
In connection with the DLJ Acquisition, we entered into a first lien credit facility and a second lien credit facility on
June 15, 2007, which we refer to collectively as the "2007 Credit Agreements," in each case with Credit Suisse, as administrative agent and collateral agent. The first lien credit facility
consisted of a $185.0 million term loan facility, which was to mature on June 15, 2014, and a $20.0 million revolving credit facility, which was to mature on June 15, 2012.
The second lien credit facility consisted of a $75.0 million term loan facility, which was to mature on December 15, 2014. The revolving credit facility included a sublimit of
$15.0 million for letters of credit.
As
anticipated and in conjunction with the closing of the sale of the QA business, we 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, we terminated the 2007
Credit Agreements and used approximately $237.7 million from the proceeds of the sale to repay all amounts due to Credit Suisse AG, as administrative agent and collateral agent.
In
connection with the payoff of all the debt, we also wrote-off $3.6 million of the remaining unamortized deferred financing costs associated with such loan arrangements.
2011 Credit Agreement
On October 7, 2011 we entered into a multicurrency credit agreement (the "Credit Agreement") with certain of our domestic
subsidiaries, as guarantors (the "Guarantors"), the lenders from time to time party thereto ("the Lenders") and Bank of America, N.A., as administrative agent, swing line lender and letter of credit
issuer ("the Administrative Agent"). The Credit Agreement originally provided for a revolving senior credit facility of up to $150.0 million which was to mature on October 7, 2015. The
Credit Agreement originally included a $50.0 million sublimit for multicurrency borrowings, a $25.0 million sublimit for the issuance of letters of credit and a $5.0 million
sublimit for swing line loans. The Credit Agreement also contained an expansion option permitting us to request an increase of the revolving senior credit facility from time to time up to an aggregate
additional $50.0 million from any of the lenders or other eligible lenders as may have been invited to join the Credit Agreement, that elected to make such increase available, upon the
satisfaction of certain conditions.
The
obligations under the Credit Agreement were unconditional and were guaranteed by substantially all of our existing and subsequently acquired or organized domestic subsidiaries. The
Credit Agreement and related guarantees were secured on a first-priority basis, and by security interests (subject to liens
permitted under the Credit Agreement) in substantially all tangible and intangible assets owned by us and each of our domestic subsidiaries, subject to certain exceptions, including limiting pledges
to 66% of the voting stock of foreign subsidiaries.
Borrowings
under the Credit Agreement may have been used to finance working capital, capital expenditures and other lawful corporate purposes, including the financing of certain
permitted acquisitions, payment of dividends and/or stock repurchases, subject to certain restrictions.
Each
Eurocurrency rate loan bore interest at the Eurocurrency rate (as was defined in the Credit Agreement) plus an applicable rate that ranged from 200 basis points to 250 basis points
based on our Consolidated Leverage Ratio (as was defined in the Credit Agreement) plus, when funds were lent by certain overseas lending offices, an additional cost.
Base
rate loans and swing line loans bore interest at the base rate (as defined below) plus the applicable rate, which ranged from 100 basis points to 150 basis points based on our
Consolidated
76
Table of Contents
Leverage
Ratio. The base rate was the highest of (i) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus
1
/
2
of 1%,
(ii) Bank of America's "prime rate" as publicly announced from time to time, and (iii) the Eurocurrency rate for Eurocurrency loans of one month plus 1%.
If
any amount was not paid when due under the Credit Agreement or an event of default existed, then, at the request of the lenders holding a majority of the unfunded commitments and
outstanding loans, obligations under the Credit Agreement would have bore interest at a rate per annum equal to 200 basis points higher than the interest rate otherwise applicable. In addition, we are
required to pay the Lenders a commitment fee equal to an applicable rate, which ranged from 25 basis points to 35 basis points based on our Consolidated Leverage Ratio from time to time, multiplied by
the actual daily amount of the Lender's aggregate unused commitments under the Credit Agreement. The facility fee was payable quarterly in arrears. We would also pay a letter of credit fee equal to
the applicable rate for Eurocurrency rate loans times the dollar equivalent of the daily amount available to be drawn under such letter of credit.
We
could have optionally prepaid the loans or irrevocably reduced or terminated the unutilized portion of the commitments under the Credit Agreement, in whole or in part, without premium
or penalty (other than if Eurocurrency loans were prepaid prior to the end of the applicable interest period) at any time by the delivery of a notice to that effect as provided under the Credit
Agreement.
2012 Amendment to the Credit Agreement
On September 28, 2012 (the "Effective Date"), we, the Guarantors, the Lenders and the Administrative Agent entered into the
First Amendment to Credit Agreement and Security Agreement (the "First Amendment"), amending (i) the Credit Agreement and (ii) the Security Agreement and dated as of October 7,
2011, among us, the Guarantors and the Administrative Agent.
The
First Amendment reduced the amount available under the revolving senior credit facility from $150.0 million to $25.0 million. During the cash collateral period, we may
have borrowed under the revolving senior credit facility. However, we must have maintained cash collateral deposited by us and/or our subsidiaries in an account controlled by the Administrative Agent
in an amount equal to any outstanding borrowing under the Credit Agreement, as amended. In addition, we were not required to comply with the financial covenants set forth in the Credit Agreement, as
amended, during the cash collateral period.
Termination of Credit Agreement
On September 16, 2013, we terminated our Credit Agreement. We had no outstanding indebtedness pursuant to the amended Credit
Agreement. We cancelled the Credit Agreement since we were not able to draw on it without posting cash collateral and we have liquidity with our existing cash balance to run our operations. As a part
of the termination, we wrote-off approximately $0.1 million of the remaining unamortized deferred financing costs associated with the Credit Agreement.
77
Table of Contents
Contractual Obligations and Other Commitments
As of December 31, 2013, our contractual obligations and other commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
2014
|
|
2015
|
|
2016
|
|
Thereafter
|
|
|
|
(dollars in thousands)
|
|
|
Operating lease obligations
|
|
$
|
743
|
|
$
|
171
|
|
$
|
168
|
|
$
|
167
|
|
$
|
237
|
|
|
Restructuring
|
|
$
|
1,934
|
|
$
|
1,934
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Other contractual obligations(a)
|
|
$
|
830
|
|
$
|
630
|
|
$
|
200
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,507
|
|
$
|
2,735
|
|
$
|
368
|
|
$
|
167
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Other
contractual obligations consist of a deferred compensation arrangement with certain members of management in the amount of $0.8 million. This
amount may increase to $1.2 million and may be paid out earlier if a change of control or termination of employment occurs for any reason. Other contractual obligations exclude our ASC 740
liabilities for unrecognized tax benefits. See Note 15 to our Consolidated Financial Statements included in footnote 15 in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Effects of Inflation
Inflation generally affects us by increasing costs of raw materials, labor and equipment. During the year ended 2013, we were not
materially affected by inflation.
Recently Issued Accounting Standards
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. We adopted ASU 2013-02 in 2013 and it did not have an impact on our financial
position, results of operations or cash flows.
In
July 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists. With the update, the FASB clarified the presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in a company's financial statements. The amended standard will
become effective for fiscal years and interim periods beginning after December 15, 2013. The amendments are applied prospectively to all unrecognized tax benefits that exist at the effective
date of the standard and retrospective application is permitted. We have early adopted this standard and it did not have a material impact on the our consolidated financial statements as we had
previously separately disclosed our tax benefits and liabilities for financial reporting purposes.
78
Table of Contents
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to inherent risks and uncertainties. These forward-looking statements present our current expectations and projections relating to our financial condition, results of
operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current
conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future
performance or financial or operating results. In addition to the risks and uncertainties discussed in this Annual Report on Form 10-K, we face risks and uncertainties that include, but are not
limited to, the following: (1) incurring substantial losses for the foreseeable future and our inability to achieve or sustain profitability in the future; (2) the potential impact of
pursuing strategic alternatives, including dissolution and liquidation of our company; (3) our reliance on a single product line; (4) our securing sales to new customers, growing sales
to existing key customers and increasing our market share, particularly in China; (5) customer concentration in our business and our relationships with and dependence on key customers;
(6) the outsourcing arrangements and reliance on third parties for the manufacture of a portion of our encapuslants; (7) technological changes in the solar energy industry or our failure
to develop and introduce or integrate new technologies could render our encapsulants uncompetitive or obsolete; (8) competition; (9) our failure to manufacture product in China
negatively affecting our ability to sell to Chinese solar module manufacturers; (10) excess capacity in the solar supply chain; (11) demand for solar energy in general and solar modules
in particular; (12) our operations and assets in China being subject to significant political and economic uncertainties; (13) limited legal recourse under the laws of China if disputes
arise. (14) our ability to adequately protect our intellectual property, particularly during the outsource manufacturing of our products in China; (15) our lack of credit facility and
our inability to obtain credit; (16) a significant reduction or elimination of government subsidies and economic incentives or a change in government policies that promote the use of solar
energy, particularly in China and the United States; (17) volatility in commodity costs; (18) our customers' financial profile causing additional credit risk on our accounts receivable;
(19) our dependence on a limited number of third-party suppliers for raw materials for our encapsulants and other significant materials used in our process; (20) potential product
performance matters and product liability; (21) our substantial international operations and shift of business focus to emerging markets; (22) the impact of changes in foreign currency
exchange rates on financial results, and the geographic distribution of revenues; (23) losses of financial incentives from government bodies in certain foreign jurisdictions;
(24) compliance with the Continued Listing Criteria of the NYSE; (25) the other risks and uncertainties described under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in subsequent periodic reports on Form 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings
which are available on http://www.sec.gov or http://www.strsolar.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual
results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Annual
Report, whether as a result of new information, future developments or otherwise, except as may be required by law.