- Quarterly Report (10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34529

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		27-1023344
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1699 King Street Enfield, Connecticut		06082
(Address of principal executive offices)		(Zip Code)

(860) 758-7300

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

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

At November 10, 2010, there were 41,366,878 shares of Common Stock, par value $0.01 per share, outstanding.

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INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STR Holdings, Inc. and Subsidiaries

Three and Nine Months Ended September 30, 2010

	PAGE
	NUMBER

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)	2
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)	3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)	4
Notes to Condensed Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 6. Exhibits	29
SIGNATURE	30

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

All amounts in thousands except share amounts

	September 30, 2010		December 31, 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	96,718	$	69,149
Short-term investments	1,002		1,001
Accounts receivable, less allowances for doubtful accounts of $1,917 and $2,468, respectively	49,943		33,744
Unbilled receivables	2,568		2,462
Inventories	24,361		12,267
Other current assets	9,763		6,500
Total current assets	184,355		125,123
Property, plant and equipment, net	67,984		68,895
Intangible assets, net	207,535		216,163
Goodwill	223,359		223,359
Deferred financing costs	4,802		5,797
Other noncurrent assets	6,737		6,523
Total assets	$	694,772	$	645,860
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	1,850	$	1,981
Book overdraft	—		685
Interest rate swap liability	—		4,018
Accounts payable	17,751		10,404
Billings in excess of earned revenues	5,541		4,630
Accrued liabilities	15,387		14,680
Income taxes payable	6,402		3,587
Total current liabilities	46,931		39,985
Long-term debt, less current portion	237,138		238,525
Deferred tax liabilities	94,431		92,962
Other long-term liabilities	2,498		3,118
Total liabilities	380,998		374,590
COMMITMENTS AND CONTINGENCIES (Note 9)
Stockholders’ equity
Preferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.01 par value, 200,000,000 shares authorized; 41,359,882 issued and outstanding (Note 5)	405		402
Additional paid-in capital	221,061		214,954
Retained earnings	91,312		55,205
Accumulated other comprehensive income, net	996		709
Total stockholders’ equity	313,774		271,270
Total liabilities and stockholders’ equity	$	694,772	$	645,860

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

All amounts in thousands except shares and per share amounts

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
Net sales—Solar	$	68,285		$	35,362		$	190,093		$	99,192
Net sales—Quality Assurance	29,491			31,956			84,110			85,804
Total net sales	97,776			67,318			274,203			184,996
Cost of sales—Solar	40,831			21,837			110,591			62,904
Cost of sales—Quality Assurance	19,292			20,155			56,508			56,259
Total cost of sales	60,123			41,992			167,099			119,163
Gross profit	37,653			25,326			107,104			65,833
Selling, general and administrative expenses	14,423			9,566			43,488			29,987
Provision for bad debt expense	157			20			900			1,372
Earnings on equity-method investments	(30		)	(68		)	(103		)	(227		)
Operating income	23,103			15,808			62,819			34,701
Interest income	26			46			90			116
Interest expense	(4,228		)	(4,195		)	(12,870		)	(12,463		)
Foreign currency transaction loss	(841		)	(133		)	(511		)	(576		)
Unrealized gain on interest rate swap	1,356			316			4,018			903
Income before income tax expense	19,416			11,842			53,546			22,681
Income tax expense	6,095			3,955			17,439			8,551
Net income	$	13,321		$	7,887		$	36,107		$	14,130
Other Comprehensive Income:
Foreign currency translation gain	4,824			1,648			287			1,672
Total comprehensive income	$	18,145		$	9,535		$	36,394		$	15,802
Earnings per share (Note 3):
Basic	$	0.33		$	0.22		$	0.90		$	0.39
Diluted	$	0.31		$	0.21		$	0.86		$	0.38
Weighted-average common shares outstanding:
Basic	40,433,681			36,665,586			40,257,091			36,490,833
Diluted	42,327,366			37,298,120			41,994,980			37,201,579

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

All amounts in thousands

	Nine Months Ended September 30,
	2010			2009
OPERATING ACTIVITIES
Net income	$	36,107		$	14,130
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	10,040			8,822
Amortization of intangibles	8,628			8,628
Amortization of deferred financing costs	995			863
Stock-based compensation expense	6,551			1,852
Unrealized gain on interest rate swap	(4,018		)	(903		)
Earnings on equity investments	(103		)	(227		)
Loss on disposal of property, plant and equipment	9			10
Provision for bad debt expense	900			1,372
Provision for deferred taxes	1,372			(573		)
Changes in operating assets and liabilities:
Accounts receivable	(16,980		)	2,629
Inventories	(12,193		)	8,476
Accounts payable	7,422			(5,195		)
Accrued liabilities	3,135			(2,076		)
Income taxes payable	1,321			(337		)
Other, net	(2,818		)	(861		)
Net cash provided by operating activities	40,368			36,610

INVESTING ACTIVITIES
Capital expenditures	(10,071		)	(13,443		)
Purchase of short-term investments	—			(1,000		)
Proceeds from sale of fixed assets	16			—
Net cash used in investing activities	(10,055		)	(14,443		)

FINANCING ACTIVITIES
Long-term debt repayments	(1,387		)	(1,388		)
Principal payments on capital lease obligations	(131		)	(122		)
Proceeds from exercise of stock options	20			—
Option exercise recognized tax benefit	9			—
Other issuance costs	(1,535		)	(893		)
Net cash used in financing activities	(3,024		)	(2,403		)
Effect of exchange rate changes on cash	280			1,708
Net increase in cash and cash equivalents	27,569			21,472
Cash and cash equivalents, Beginning of period	69,149			27,868
Cash and cash equivalents, End of period	$	96,718		$	49,340

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

NOTE 1—BASIS OF PRESENTATION

Basis of Presentation

The accompanying condensed consolidated financial statements and the related interim information contained within the notes to the condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and quarterly reports on the Form 10-Q. Accordingly, they do not include all of the information and the notes required for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009, included in the Company’s Form 10-K filed with the SEC on March 19, 2010. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of only normal and recurring adjustments, necessary for the fair statement of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative of future results.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management’s estimates.

Certain prior period disclosures have been reclassified to conform to the current period’s presentation.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard which has been codified under Accounting Standards Codification (“ASC”) 860-10 Transfers and Servicing. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard was effective for the first annual reporting period that began after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application was prohibited. The standard did not have an impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued a standard related to Amendments to FASB Interpretation No. 46(R) . The standard requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on the Company’s condensed consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather than as a combined unit. The amendments will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on the Company’s condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 3—EARNINGS PER SHARE

In connection with the Company’s initial public offering (“IPO”) that occurred in November 2009, existing holders of Class A, B, C, D, E and F units were issued shares of common stock in exchange for their units. Shares of common stock were issued for vested units and restricted common stock for unvested units based upon the equity value of the Company on the IPO date, in accordance with the STR Holdings LLC agreement relating to priority distribution of units for shares.

The impact of this issuance has been applied on a retrospective basis to determine earnings per share for the Company’s three and nine month periods ended September 30, 2009. The number of common shares reflected in the calculation is the total number of shares (vested and unvested) issued to the Company’s unitholders based upon their units held on the IPO date. The vesting provisions of the units have been applied to the total common shares issued to determine basic earnings per share (based upon vested common shares equivalent to vested units) and diluted earnings per share (based upon the treasury stock method for unvested restricted common shares equivalent to unvested units).

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Basic and diluted net income per share
Numerator:
Net income	$	13,321	$	7,887	$	36,107	$	14,130

Denominator:
Basic weighted-average common shares outstanding	40,433,681		36,665,586		40,257,091		36,490,833
Add: dilutive effect of stock options	1,210,810		—		987,103		—
Add: dilutive effect of restricted common shares	682,875		632,534		750,786		710,746
Diluted weighted-average common shares outstanding	42,327,366		37,298,120		41,994,980		37,201,579

Basic earnings per share	$	0.33	$	0.22	$	0.90	$	0.39

Diluted earnings per share	$	0.31	$	0.21	$	0.86	$	0.38

185,000 and 193,236 stock options outstanding were not included in the computation of diluted weighted-average shares outstanding for the three months and nine months ended September 30, 2010, respectively, because the effect would be anti-dilutive. There were no options outstanding for both the three months and nine months ended September 30, 2009.

NOTE 4—INVENTORIES

Inventories consist of the following:

	September 30, 2010		December 31, 2009
Finished goods	$	5,296	$	2,547
Raw materials	19,065		9,720
	$	24,361	$	12,267

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 5—STOCKHOLDERS’ EQUITY

Changes in stockholders’ equity for the nine months ended September 30, 2010 are as follows:

							Accumulated
				Additional			Other				Total
	Common Stock			Paid-In			Comprehensive		Retained		Stockholders’
	Issued	Amount		Capital			Income		Earnings		Equity

Balance at December 31, 2009	40,166,397	$	402	$	214,954		$	709	$	55,205	$	271,270
Stock-based compensation	315,064	3		6,548			—		—		6,551
Net income	—	—		—			—		36,107		36,107
Offering costs from IPO	—	—		(467		)	—		—		(467		)
Proceeds from exercise of stock options	1,954	—		20			—		—		20
Option exercise recognized tax benefit	—	—		6			—		—		6
Foreign currency translation	—	—		—			287		—		287
Balance at September 30, 2010	40,483,415	$	405	$	221,061		$	996	$	91,312	$	313,774

Preferred Stock

The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value. At September 30, 2010, there were no shares issued or outstanding.

Common Stock

The Company’s Board of Directors has authorized 200,000,000 shares of common stock, $0.01 par value. At September 30, 2010, there were 41,359,882 shares of issued and outstanding common stock. Each share of common stock is entitled to one vote per share. Included in the 41,359,882 shares are 40,483,415 shares of common stock and 876,467 shares of restricted unvested common stock.

NOTE 6—STOCK-BASED COMPENSATION

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

During the third quarter of 2010, the Company issued 71,000 options to purchase shares of the Company’s common stock at an exercise price of $18.80 to various employees and issued 8,218 restricted stock awards of the Company’s common stock at a fair value of $24.34 per award to two members of the Company’s Board of Directors under the 2009 Plan.

During the second quarter of 2010, the Company issued 185,000 options to purchase shares of the Company’s common stock at exercise prices ranging from $22.60 to $23.06 to two employees under the 2009 Plan.

On November 6, 2009, the Company issued 3,495,685 options to purchase shares of the Company’s common stock at exercise prices ranging from $10.00 to $21.50 to certain employees and directors under the 2009 Plan. There were also 40,000 restricted shares issued on the same date to certain directors that are included in the unvested restricted shares at September 30, 2010. There were 950,097 shares available for grant under the 2009 Plan as of September 30, 2010.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 6—STOCK-BASED COMPENSATION (Continued)

In connection with the 256,000 options granted during the first nine months of 2010, there are varying service terms. Following is a summary of the characteristics of each of these shares:

Shares		Service/Performance Condition
60,000		Vests ratably in 48 equal monthly installments as of the last day of each month beginning May 31, 2010.
125,000		Vests ratably in 48 equal monthly installments as of the last day of each month beginning June 30, 2010.
71,000		Vests ratably in 16 equal quarterly installments as of the last day of each calendar quarter beginning September 30, 2010.
256,000

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

The following table presents the assumptions used to estimate the fair values of the stock options granted during the periods presented below:

	Three Months Ended	Nine Months Ended
	September 30, 2010	September 30, 2010
Risk-free interest rate	2.00%	2.38%
Expected volatility	59.0%	57.9%
Expected life (in years)	4.95	4.85-4.95
Dividend yield	—	—
Weighted-average estimated fair value of options granted during the period	$9.65	$11.06

There were no options granted during the three or nine months ended September 30, 2009.

The following table summarizes the options activity under the Company’s 2009 Plan for the nine months ended September 30, 2010:

	Options Outstanding
	Number of Shares		Weighted - Average Exercise Price		Weighted - Average Remaining Contractual Term (in years)	Weighted - Average Grant-Date Fair Value		Aggregate Intrinsic Value(1)
Balance at December 31, 2009	3,495,685		$	10.65
Options granted	256,000		21.77
Exercised	(1,954	)	10.00
Canceled/forfeited	—		—
Balance at September 30, 2010	3,749,731		$	11.41		$	5.03	$	37,985
Vested and exercisable as of September 30, 2010	2,128,865		$	10.78		$	4.53	$	22,907
Vested and exercisable as of September 30, 2010 and expected to vest thereafter	3,749,731		$	11.41		$	5.03	$	37,985

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 6—STOCK-BASED COMPENSATION (Continued)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $21.54 of the Company’s common stock on September 30, 2010.

As of September 30, 2010, there was $8.5 million of unrecognized compensation cost related to outstanding employee and director stock option awards. This amount is expected to be recognized over a weighted-average remaining vesting period of 2.49 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

The following table summarizes the restricted shares activity for the nine months ended September 30, 2010:

	Unvested Restricted Shares
	Number of Shares		Weighted- Average Grant- Date Fair Value
Unvested at December 31, 2009	1,183,313		$	10.00
Granted	8,218		24.34
Vested	(315,064	)	10.00
Canceled	—
Unvested at September 30, 2010	876,467		$	10.13
Expected to vest after September 30, 2010	876,467		$	10.13

As of September 30, 2010, there was $4.7 million of unrecognized compensation cost related to employee and director unvested restricted shares. This amount is expected to be recognized over a weighted-average remaining vesting period of 2.67 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

Stock-based compensation expense was included in the following condensed consolidated statement of operations and comprehensive income categories:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Selling, general and administrative expense	$	1,377	$	859	$	6,551	$	1,852
Total recognized tax benefit	$	9	$	—	$	9	$	—

NOTE 7—INCOME TAXES

The Company’s effective income tax rate for the three and nine months ended September 30, 2010 was 31.4% and 32.6%, respectively, compared to the United States federal statutory tax rate of 35.0%. Included in the Company’s effective rate for the nine months ended September 30, 2010 is a $481 Advanced Energy Project tax credit that the Company received in January 2010 under the American Recovery and Reinvestment Act of 2009. The tax credit was partially offset by its related deferred tax liability, with a net impact of $313, providing a one-time 0.6% benefit to the Company’s effective tax rate for the nine months ended September 30, 2010. For both the three and nine month periods ended September 30, 2010, the Company benefited from a higher mix of its domestic taxable income being eligible for the United States Tax Code Section 199 Domestic Manufacturing Deduction due to increased transfer pricing payments received from certain subsidiaries with increased earnings. The Company’s effective tax rate was approximately 33.4% and 37.7%, respectively, for the three and nine months ended September 30, 2009.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 8—FAIR VALUE MEASUREMENTS AND INTEREST RATE SWAP

Fair Value Measurements

The following table provides the Company’s financial assets and liabilities reported at fair value and measured on a recurring basis as of September 30, 2010 and December 31, 2009:

Description	Total			Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swap liability at December 31, 2009	$	4,018		$	—	$	4,018		$	—
Unrealized gain included in net income	(4,018		)	—		(4,018		)	—
Interest rate swap liability at September 30, 2010	$	—		$	—	$	—		$	—

The fair value for the Company’s interest rate swap is determined using observable current market information as of the reporting date.

Interest Rate Swap

Effective September 13, 2007, the Company entered into an interest rate swap contract for $200 million notional principal amount of its variable rate debt. The notional principal amount decreased to $130 million on October 1, 2008 and the contract expired on September 30, 2010. The Company was required under the terms of both its First Lien and Second Lien debt agreements to fix its interest costs on at least 50% of its funded indebtedness for a minimum of three years to economically hedge against the potential rise in interest rates. The interest rate swap was not designated by the Company as a cash flow hedge under ASC 815-10—Accounting for Derivative Instruments and Hedging Activities, as amended. As a result, changes in the fair value of the swap were recorded in the condensed consolidated statement of operations. The fair value of the swap was a liability of $0 and $4,018 at September 30, 2010 and December 31, 2009, respectively.

NOTE 9—COMMITMENTS AND CONTINGENCIES

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

As previously disclosed, in October 2007, the Company filed a complaint against James P. Galica (“Galica”) and JPS Elastomerics Corp. (“JPS”) in the Massachusetts Superior Court in Hampshire County (the “Court”). The Company alleged that the defendants misappropriated trade secrets and violated the Massachusetts Unfair and Deceptive Trade Practices Act as well as breaches of contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the “State Court Action”). The Court determined that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act, finding that the technology for the Company’s polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated the Company’s trade secrets. The Court awarded the Company compensatory and punitive damages, attorneys’ fees and costs and issued a temporary injunction preventing JPS from manufacturing, marketing or selling products based in whole or in part on the Company’s trade secrets. Commencing on August 23, 2010, the Court conducted a hearing to decide the scope and duration of injunctive relief as well as the amount of attorney’s fees and damages to be paid by JPS to the Company. On October 1, 2010, the parties filed post-hearing briefs with the Court.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 9—COMMITMENTS AND CONTINGENCIES (Continued)

On September 17, 2010, JPS filed an amended complaint against the Company’s wholly owned subsidiary, Specialized Technology Resources, Inc. (“STR”), in the U.S. District Court for the District of Massachusetts which amended complaint alleges various antitrust and unfair competition claims and that the State Court Action (described above) was sham litigation initiated by STR in an attempt to monopolize the domestic and international market for low-shrink EVA encapsulants. JPS also alleges other schemes to monopolize and unfair competition in violation of federal and state laws. JPS seeks $60 million in compensatory damages, and treble damages, a permanent injunction against STR for various activities, reimbursement of legal fees for the State Court Action as well as for this matter, and disgorgement of proceeds obtained by STR from allegedly anti-competitive and tortious acts. On October 13, 2010, the Company filed a motion to dismiss the amended complaint.

Given that the Company prevailed in the State Court Action, the Company believes the sham litigation claims by JPS are, by definition, without merit. Further, the Company believes the Federal Court Action is an attempt by JPS to relitigate claims decided in the State Court Action. In the Company’s view, the Federal Court Action fails to state a valid claim and the Company intends to defend vigorously the Federal Court Action. Also, management defines any such possible losses to be remote under the definition of ASC 450.

The Company typically does not provide contractual warranties on its products. However, on limited occasions, the Company incurs costs to service its products in connection with specific product performance matters. The Company has accrued for specific product performance matters that are probable and estimable based on its best estimate of ultimate cash expenditures that it will incur for such items.

The following table summarizes the Company’s product performance liability that is recorded in accrued liabilities in the condensed consolidated balance sheets:

	Nine Months Ended
	September 30, 2010			September 30, 2009
Balance as of beginning of period	$	4,210		$	4,736
Additions	744			502
Settlements	(479		)	(925		)
Balance as of end of period	$	4,475		$	4,313

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION

ASC 280-10-50—Disclosure about Segments of an Enterprise and Related Information, establishes standards for the manner in which companies report information about operating segments, products, services, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the enterprise for making operating decisions and assessing financial performance. Based on the nature of its products and services, the Company has two reporting segments: Solar and Quality Assurance. Information as to each of these operations is set forth below.

Adjusted EBITDA is the main metric used by the management team and the Board of Directors to plan, forecast and review the Company’s segment performance. Adjusted EBITDA represents net income before interest income and expense, income tax expense, depreciation, amortization of intangible assets, stock-based compensation expense, transaction fees, equity earnings on investments and certain non-recurring income and expenses from the results of operations.

The following table sets forth information about the Company’s operations by its two reportable segments and by geographic area:

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

Operations by Reportable Segment

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Segment Adjusted EBITDA
Solar	$	28,190	$	16,485	$	84,288	$	43,244
Quality Assurance	5,061		7,137		11,238		17,008
Segment Adjusted EBITDA	$	33,251	$	23,622	$	95,526	$	60,252

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Reconciliation of Adjusted EBITDA to Net Income
Segment Adjusted EBITDA	$	33,251		$	23,622		$	95,526		$	60,252
Corporate Adjusted EBITDA	(3,009		)	(1,069		)	(7,559		)	(6,593		)
Adjusted EBITDA	30,242			22,553			87,967			53,659
Depreciation and amortization	(6,634		)	(5,938		)	(18,668		)	(17,450		)
Interest income	26			46			90			116
Interest expense	(4,228		)	(4,195		)	(12,870		)	(12,463		)
Income taxes	(6,095		)	(3,955		)	(17,439		)	(8,551		)
Management advisory fees	—			(149		)	—			(449		)
Unrealized gain on interest rate swap	1,356			316			4,018			903
Secondary offering expense	—			—			(534		)	—
Stock-based compensation	(1,377		)	(859		)	(6,551		)	(1,852		)
Gain (loss) on disposal of property, plant and equipment	1			—			(9		)	(10		)
Earnings on equity-method investments	30			68			103			227
Net Income	$	13,321		$	7,887		$	36,107		$	14,130

Operations by Geographic Area

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Net Sales
United States	$	40,981	$	38,098	$	119,319	$	108,143
Spain	32,005		13,297		86,820		36,160
Malaysia	10,804		1,235		28,392		1,403
Hong Kong	8,708		8,562		23,035		23,235
Other	5,278		6,126		16,637		16,055
Total Net Sales	$	97,776	$	67,318	$	274,203	$	184,996

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 10—REPORTABLE SEGMENTS AND GEOGRAPHICAL INFORMATION (Continued)

Depreciation and Amortization by Reportable Segment

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Depreciation and Amortization
Solar	$	3,778	$	3,652	$	10,824	$	10,259
Quality Assurance	2,664		2,255		7,287		6,806
Corporate	192		31		557		385
Total Depreciation and Amortization	$	6,634	$	5,938	$	18,668	$	17,450

Capital Expenditures by Reportable Segment

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009

Capital Expenditures
Solar	$	2,795	$	1,252	$	6,650	$	5,597
Quality Assurance	686		1,570		3,141		7,826
Corporate	—		10		280		20
Total Capital Expenditures	$	3,481	$	2,832	$	10,071	$	13,443

Total Assets by Reportable Segment

	September 30, 2010		December 31, 2009
Assets
Solar	$	447,410	$	416,853
Quality Assurance	231,597		214,787
Corporate	15,765		14,220
Total Assets	$	694,772	$	645,860

Long-Lived Assets by Geographic Area

	September 30, 2010		December 31, 2009
Long-Lived Assets
United States	$	23,006	$	23,854
Spain	18,490		22,308
Malaysia	15,200		9,576
China	6,169		7,038
Hong Kong	1,755		2,098
Other countries	3,364		4,021
Total Long-Lived Assets	$	67,984	$	68,895

Foreign sales are based on the country in which the sales originate. Solar sales to two of the Company’s major customers for the three months ended September 30, 2010 was $17,446 and to one major customer for the same period in 2009 was $9,128. Solar sales to two of the Company’s major customers for the nine months ended September 30, 2010 was $54,231 and to one major customer for the same period in 2009 was $29,250. Accounts receivable from those customers amounted to $6,157 and $3,179 as of September 30, 2010 and December 31, 2009, respectively.

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 11—COST REDUCTION PLAN

During the first nine months of 2010, the Company recorded $203 of expense in cost of sales for severance benefits related to the termination of approximately 100 employees in its Quality Assurance segment. The cost reduction plan was initiated to reduce the Quality Assurance segment’s cost structure as a result of lower than anticipated forecasted revenue for 2010.

Changes in the cost reduction accrual for the nine months ended September 30, 2010 were as follows:

	September 30, 2010
Balance at December 31, 2009	$	—
Additions	219
Adjustments	(16		)
Cash utilization	(203		)
Balance at September 30, 2010	$	—

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We were founded in 1944 as a plastics research and development company and evolved into two core businesses: Solar encapsulant manufacturing and Quality Assurance services. We launched our Quality Assurance business in 1973 and we commenced sales of our Solar encapsulant products in the late 1970s.

We are a leading global provider of encapsulants to the solar module industry. The encapsulant is a critical component used in solar modules. We supply encapsulants to many of the major solar module manufacturers and believe we were the primary supplier of encapsulants to the majority of our top 10 customers in the nine months ended September 30, 2010, which we believe is due to our superior product performance, customer service and technical support. Our encapsulants are used in both crystalline and thin-film solar modules.

Our Quality Assurance business is a leader in the consumer products quality assurance market. We believe our Quality Assurance business represents the only global testing services provider exclusively focused on the consumer products market. Our Quality Assurance business provides inspection, testing, auditing and consulting services that enable retailers and manufacturers to determine whether products and facilities meet applicable safety, regulatory, quality, performance and social standards.

STRATEGIC FOCUS

Our objective for our Solar business is to enhance our position as a leading global provider of encapsulants to solar module manufacturers. We plan to accomplish this by continuing to invest in product development to enhance our superior product technologies, optimizing our global manufacturing and distribution footprint and increasing our market share in the rapidly growing Asia-Pacific region via our ‘One Plus China’ growth strategy. The opening and expansions of our plant in Malaysia represent the first milestone of this strategy. The second milestone will be to establish production capability in China. Events associated with our strategic initiatives during the nine months of 2010 are:

· We believe we increased our solar market share in the Asia Pacific region, including China. Solar net sales into the Asia Pacific region increased by approximately 124% in the first nine months of 2010 compared to the corresponding 2009 period.

· We appointed Bernardo E. Alvarez to the position of Director of Business Development - STR Solar for the People’s Republic of China. Mr. Alvarez previously served as General Manager of Specialized Technology Resources España, S.A., Asturias, Spain, since its inception in 2002 and was instrumental in its start-up and development. Mr. Alvarez is expected to relocate to China by the end of 2010.

· Through engineering and manufacturing process improvements, we have increased the capacity of our existing production lines by approximately 20%. As a result, we estimate our current world-wide capacity to be approximately 7.5 GW. We believe this positions us to be able to increase market share as well as to service the growing global solar market.

· We expanded our Malaysia encapsulant facility’s capacity from 1.0 GW to 2.4 GW. We also ordered an additional 1.2 GW of production capacity that is expected to become operational in the third quarter of 2011. In addition, we plan to double the size of the existing production and warehouse space by the end of the first quarter of 2011 to provide for total capacity of up to approximately 5.0 GW.

· We entered into an agreement to acquire a 275,000 square foot manufacturing facility in East Windsor, Connecticut. This facility will provide us needed space for capacity to meet future demand and enable us to consolidate our Connecticut-based Solar operations. The facility will also house a 20,000 square foot, state-of-the-art research and development laboratory. We expect the transition of manufacturing operations to occur over the next nine to twelve months. In addition, we have ordered an additional 1.2 GW of production capacity to be installed in the East Windsor facility during the third quarter of 2011.

· We continued our investment in innovation with the appointment of a Chief Technology Officer who oversees the Solar segment’s research and development and technical service functions with the intent of accelerating our development of next generation encapsulant technology and creating a pipeline of innovative products. Also, we began commercialization of our new “Generation 3” fast-cure formulation that can double laminator throughput. We believe this innovative product provides a strong value proposition to our customers by increasing their manufacturing throughput, improving yields and reducing their overall cost of manufacturing.

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· We continued to strengthen our customer relationships. As of September 30, 2010, we had formal contractual relationships with seven of our top ten customers, the most in STR Solar’s history. These contracts provide for better operational and capital efficiency as well as improved manufacturing visibility, allowing us to better serve the needs of our growing customers.

Our Quality Assurance business will focus on leveraging our global footprint and cost base, technical and industry knowledge, breadth of service offerings and superior client service to drive sales growth. We remain focused on strengthening the global alignment of our operating units, expanding services with existing clients and aggressively targeting new clients on a global scale.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our condensed consolidated financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, valuation of inventory, long-lived intangible and tangible assets, goodwill, product performance matters, income taxes and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The accounting policies we believe to be most critical to understand our financial results and condition and that require complex and subjective management judgments are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2010. All amounts in the tables are in thousands unless otherwise noted.

There have been no changes in such policies during the nine months ended September 30, 2010.

RESULTS OF OPERATIONS

Condensed Consolidated Results of Operations

Net Sales

	Three Months Ended September 30,													Nine Months Ended September 30,
	2010				2009				Change					2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount			%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount			%

Net sales—Solar	$	68,285	70	%	$	35,362	53	%	$	32,923		93	%	$	190,093	69	%	$	99,192	54	%	$	90,901		92	%
Net sales—Quality Assurance	$	29,491	30	%	$	31,956	47	%	$	(2,465	)	(8	)%	$	84,110	31	%	$	85,804	46	%	$	(1,694	)	(2	)%
Total net sales	$	97,776	100	%	$	67,318	100	%	$	30,458		45	%	$	274,203	100	%	$	184,996	100	%	$	89,207		48	%

Net sales increased $30.5 million, or 45%, to $97.8 million for the three months ended September 30, 2010 from $67.3 million for the corresponding 2009 period. Net sales increased $89.2 million, or 48%, to $274.2 million for the nine months ended September 30, 2010 from $185.0 million for the corresponding 2009 period. The increase in both periods was mainly driven by strong sales volume growth achieved in our Solar segment that more than offset a decline in service volume experienced by our Quality Assurance business.

Net Sales—Solar

Net sales for the three months ended September 30, 2010 increased by $32.9 million or 93% over the same period in 2009 from net sales of $35.4 million. The majority of this increase was due to increased volume of 132% driven by strong user demand for solar modules in Europe and continued market penetration with Asian module manufacturers. The volume increase was partially offset by an average sales price (“ASP”) decline of 17% and the Euro decline of 10% affecting translation of our European sales.

Net sales in our Solar segment increased $90.9 million, or 92%, to $190.1 million for the nine months ended September 30, 2010 from $99.2 million for the corresponding 2009 period. Volume increased 132% mainly due to an industry wide improvement in the solar marketplace that increased demand for our encapsulants. Our 2009 results were negatively impacted by the Spanish government change in its feed-in tariff policy that occurred in 2008. This change resulted in reduced end user solar module demand that created

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excess module inventory in the supply chain. Additionally, there was a lack of available financing for solar projects due to global banking conditions. During the latter part of 2009 and through the first nine months of 2010, overall solar industry conditions have improved and we believe we have increased our market share with Asian module manufacturers. Demand in the first half of 2010 also benefited from increased orders ahead of changes to feed-in tariffs in Germany that occurred at the end of June. The European market continued to be strong during the third quarter after the feed-in tariffs were changed. This has led to an increase in solar module sales and increased demand for our encapsulants. The volume increase was partially offset by an average ASP decline of 17% and the Euro decline of 4% affecting translation of our European sales.

Net Sales—Quality Assurance

Net sales in our Quality Assurance segment decreased $2.5 million, or 8%, to $29.5 million for the three months ended September 30, 2010 from $32.0 million in 2009. Net sales in our Quality Assurance segment decreased $1.7 million, or 2%, to $84.1 million for the nine months ended September 30, 2010 from $85.8 million in 2009. The net sales declines in both comparison periods were driven by a reduction in services procured from us by certain clients in North America and Europe as well as overall softness in the consumer product quality assurance industry as retailers continue to rationalize discretionary spending in the uncertain economic environment. The Quality Assurance leadership team is keenly focused on increasing sales to existing clients as well as aggressively targeting new business.

Cost of Sales

	Three Months Ended September 30,													Nine Months Ended September 30,
	2010				2009				Change					2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount			%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Cost of sales—Solar	$	40,831	42	%	$	21,837	32	%	$	18,994		87	%	$	110,591	40	%	$	62,904	34	%	$	47,687	76	%
Cost of sales—Quality Assurance	$	19,292	20	%	$	20,155	30	%	$	(863	)	(4	)%	$	56,508	21	%	$	56,259	30	%	$	249	—	%
Total cost of sales	$	60,123	62	%	$	41,992	62	%	$	18,131		43	%	$	167,099	61	%	$	119,163	64	%	$	47,936	40	%

Cost of sales increased $18.1 million, or 43%, to $60.1 million for the three months ended September 30, 2010 from $42.0 million for the corresponding 2009 period. For the nine months ended September 30, 2010, cost of sales increased $47.9 million, or 40%, to $167.1 million from $119.2 million for the corresponding 2009 period. The increase in both periods was primarily driven by increased raw material and direct labor costs associated with the increase in our Solar net sales as discussed above.

Cost of Sales—Solar

Cost of sales in our Solar segment increased $19.0 million, or 87%, to $40.8 million for the three months ended September 30, 2010 from $21.8 million in the same period in 2009. The increase in our Solar segment’s cost of sales was mainly due to increased variable costs associated with the increase in sales volume, raw material inflation and higher labor and benefits of $1.3 million.

Cost of sales in our Solar segment increased $47.7 million, or 76%, to $110.6 million for the nine months ended September 30, 2010 from $62.9 million in the same period in 2009. The increase in our Solar segment’s cost of sales was mainly due to increased variable costs associated with the increase in sales volume, raw material inflation of $4.4 million and higher labor and benefits of $2.7 million. The expansion of our Malaysia facility, which became operational in August 2009, provided an incremental impact of $16.3 million for the nine months ended September 30, 2010 from the same period in 2009.

Non-cash intangible asset amortization expense of $2.1 million and $6.3 million was included in cost of sales for the three and nine month periods in 2010 and 2009, respectively.

Cost of Sales—Quality Assurance

Cost of sales in our Quality Assurance segment decreased $0.9 million, or 4% to $19.3 million for the three months ended September 30, 2010 compared to $20.2 million for the same period in 2009. The decrease was mainly due to the decline in net sales. Cost of sales in our Quality Assurance segment of $56.5 million for the nine months ended September 30, 2010 was essentially flat compared to $56.3 million for the same period in 2009, consistent with relatively flat net sales over the same period.

Non-cash intangible asset amortization expense of $0.8 million and $2.3 million was included in cost of sales for the three and nine month periods in 2010 and 2009, respectively.

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Gross Profit

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Gross profit	$	37,653	39	%	$	25,326	38	%	$	12,327	49	%	$	107,104	39	%	$	65,833	36	%	$	41,271	63	%

Gross profit increased $12.3 million, or 49%, to $37.7 million for the three months ended September 30, 2010 from $25.3 million for the same period in 2009 primarily due to the sales increase in our Solar segment. As a percentage of net sales, gross profit increased 90 basis points from 37.6% for the three months ended September 30, 2009 to 38.5% for the same period in 2010. Gross profit increased as a percentage of net sales primarily due to a higher mix of net sales in our higher margin Solar business, which accounted for 70% and 53% of our consolidated net sales for the three months ended September 30, 2010 and 2009, respectively.

Gross profit increased $41.3 million, or 63%, to $107.1 million for the nine months ended September 30, 2010 from $65.8 million for the same period in 2009 primarily due to the sales increase in our Solar segment. As a percentage of net sales, gross profit increased 350 basis points from 35.6% for the nine months ended September 30, 2009 to 39.1% for the same period in 2010. Gross profit increased as a percentage of net sales primarily due to a higher mix of net sales in our higher margin Solar segment which accounted for 69% and 54% of our consolidated net sales for the nine months ended September 30, 2010 and 2009, respectively. Also, our Solar segment experienced increased operating leverage of fixed costs associated with our volume increase and reduced inventory write-offs, partially offset by lower pricing and increased raw material costs.

Non-cash intangible asset amortization expense of $2.9 million and $8.6 million reduced gross profit for the three and nine months ended September 30, 2010 and 2009, respectively.

Selling, General and Administrative Expenses (“SG&A”)

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

SG&A	$	14,423	15	%	$	9,566	14	%	$	4,857	51	%	$	43,488	16	%	$	29,987	16	%	$	13,501	45	%

SG&A increased 51% for the three months ended September 30, 2010 compared to the corresponding period in the prior year. The increase was mainly driven by $0.5 million of increased non-cash stock-based compensation expense, $1.9 million of higher professional fees relating to increased legal costs associated with our continued litigation with JPS Elastomerics Corporation (“JPS”) and accounting fees associated with Sarbanes-Oxley compliance. Additionally, we incurred $2.6 million of higher labor and benefit cost related to increased headcount necessary to support our growth and operating as a public company. These increases were partially offset by the elimination of DLJ management advisory fees of $0.3 million that were paid in the prior year relating to the DLJ acquisition agreements.

SG&A increased 45% for the nine months ended September 30, 2010 compared to the corresponding period in the prior year. Non-cash stock-based compensation expense increased by approximately $4.7 million, mainly due to the issuance of stock options, which have accelerated vesting clauses, in connection with our initial public offering (“IPO”) that occurred in November 2009. At the IPO date, we issued stock options for incentive units that only partially converted or did not convert to common shares. These stock options began vesting on January 31, 2010. Additional awards of options and stock were also granted through the first nine months ended September 30, 2010. We project that, based on current stock options issued and outstanding, our stock-based compensation expense will be approximately $1.4 million in the fourth quarter of 2010. Salaries and benefits increased $6.9 million for the nine months ended September 30, 2010 due to increased headcount in our sales, information technology and finance functions necessary to support our anticipated growth and operations as a public company. The increase in information technology costs was partially the result of a portion of such expense being capitalized in the prior year’s nine month period when the projects were in the development phase. We incurred $1.6 million of higher professional fees as described above for the three month period comparison. Last, we incurred incremental expenses of $0.5 million in 2010 associated with the secondary offering by certain selling stockholders. These increases were partially offset by the elimination of DLJ management advisory fees of $0.5 million that were paid in the prior year relating to the DLJ acquisition agreements.

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Interest Expense

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Interest expense	$	4,228	4	%	$	4,195	6	%	$	33	1	%	$	12,870	5	%	$	12,463	7	%	$	407	3	%

Interest expense remained relatively flat at $4.2 million for the three months ended September 30, 2010 from $4.2 million in the corresponding 2009 period. On a year-to-date basis, interest expense increased $0.4 million, or 3%, to $12.9 million for the nine months ended September 30, 2010 from $12.5 million in the corresponding 2009 period. The increase in both periods was primarily the result of higher non-cash amortization expense of deferred financing costs and lower proceeds received on our interest rate swap that more than offset lower interest rates and lower debt levels.

Other Income (Expense) Items

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Other income (expense)	$	541	1	%	$	229	—	%	$	312	136	%	$	3,597	1	%	$	443	—	%	$	3,154	712	%

During the three months ended September 30, 2010, we recognized a $1.4 million unrealized gain on our interest rate swap entered into during 2007 as a requirement under our credit facilities compared to a $0.3 million gain in the corresponding 2009 period. Foreign currency transaction losses increased $0.7 million during the three months ended September 30, 2010 to a loss of approximately $0.8 million from a loss of $0.1 million in the corresponding 2009 period. During the nine months ended September 30, 2010, we recognized a $4.0 million unrealized gain on our interest rate swap entered into during 2007 as a requirement under our credit facilities compared to a $0.9 million gain in the corresponding 2009 period.

Income Taxes

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Income taxes	$	6,095	6	%	$	3,955	6	%	$	2,140	54	%	$	17,439	6	%	$	8,551	5	%	$	8,888	104	%

Income tax expense increased $2.1 million to $6.1 million for the three months ended September 30, 2010 from $4.0 million in the 2009 period and increased $8.9 million to $17.4 million for the nine months ended September 30, 2010 from $8.6 million in the 2009 period. Our effective income tax rate for the three and nine months ended September 30, 2010 was 31.4% and 32.6%, respectively, compared to the United States federal statutory tax rate of 35.0%. Included in our effective rate for the nine months ended September 30, 2010 is a $481 Advanced Energy Project tax credit that we received in January 2010 under the American Recovery and Reinvestment Act of 2009. The tax credit was partially offset by its related deferred tax liability, with a net impact of $313, providing a one-time 0.6% benefit to our effective tax rate for the nine months ended September 30, 2010. For both the three and nine month periods ended September 30, 2010, we benefited from a higher mix of our domestic taxable income being eligible for the United States Tax Code Section 199 Domestic Manufacturing Deduction due to increased transfer pricing payments received from certain subsidiaries with increased earnings. Our effective tax rate was approximately 33.4% and 37.7%, respectively, for the three and nine months ended September 30, 2009.

Net Income

	Three Months Ended September 30,												Nine Months Ended September 30,
	2010				2009				Change				2010				2009				Change
	Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%		Amount		% of Total Revenue		Amount		% of Total Revenue		Amount		%

Net income	$	13,321	14	%	$	7,887	12	%	$	5,434	69	%	$	36,107	13	%	$	14,130	8	%	$	21,977	156	%

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Net income increased $5.4 million to $13.3 million for the three months ended September 30, 2010 from net income of $7.9 million in the same period of 2009 and increased $22.0 million to $36.1 million for the nine months ended September 30, 2010 from net income of $14.1 million in the same period in 2009. The increase in both periods is primarily due to the increased Solar Adjusted EBITDA as discussed below and gain on our interest rate swap that more than offset the Quality Assurance Adjusted EBITDA decline as discussed below. The year-to-date comparison also benefited from a lower effective tax rate.

Non-GAAP Earnings Per Share

To supplement our condensed consolidated financial statements, we use a non-GAAP financial measure called non-GAAP earnings per share (“EPS”). Non-GAAP EPS is defined for the periods presented in the following table. It should be noted that diluted weighted-average common shares outstanding are determined on a GAAP basis and the resulting share count is used for computing both GAAP and non-GAAP diluted EPS.

Management believes that non-GAAP EPS provides meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of the core business operating results and may help in comparing current-period results with those of prior periods as well as with our peers. Non-GAAP EPS is one of the main metrics used by management and our Board of Directors to plan and measure our operating performance. In addition, non-GAAP EPS is the only metric used for our chief executive officer and chief financial officer, and is also used in conjunction with segment Adjusted EBITDA to determine annual bonus compensation for our segment presidents under our management incentive plan.

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
Net income	$	13,321		$	7,887		$	36,107		$	14,130
Adjustments to net income:
Amortization of intangibles	2,876			2,876			8,628			8,628
Amortization of deferred financing costs	332			288			995			863
Stock-based compensation expense	1,377			859			6,551			1,852
Secondary offering expense	—			—			534			—
Tax effect of adjustments	(1,337		)	(1,344		)	(5,080		)	(4,435		)
Non-GAAP net income	$	16,569		$	10,566		$	47,735		$	21,038

Diluted shares outstanding	42,327,366			37,298,120			41,994,980			37,201,579

Diluted net earnings per share	$	0.31		$	0.21		$	0.86		$	0.38

Diluted non-GAAP net earnings per share	$	0.39		$	0.28		$	1.14		$	0.57

Segment Results of Operations

We report our business in two segments: Solar and Quality Assurance. The accounting policies of the segments are the same. We measure segment performance based on total revenues and Adjusted EBITDA. See Note 10-Reportable Segments and Geographical Information located in the Notes to the Condensed Consolidated Financial Statements for a definition of Adjusted EBITDA and further information. Revenues for each of our segments are described in further detail above. Corporate overhead is not allocated to our segments, and therefore not included in the presentation below. It is mainly comprised of expenses associated with corporate headquarters, the executive management team and certain centralized functions that benefit the Company but are not directly attributable to the segments such as finance and certain legal costs. The discussion that follows is a summary analysis of total revenues and the primary changes in Adjusted EBITDA by segment.

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Solar

	Three Months Ended September 30,										Nine Months Ended September 30,
	2010			2009			Change				2010			2009			Change
	Amount			Amount			Amount		%		Amount			Amount			Amount		%
Net Sales	$	68,285		$	35,362		$	32,923	93	%	$	190,093		$	99,192		$	90,901	92	%

Adjusted EBITDA	$	28,190		$	16,485		$	11,705	71	%	$	84,288		$	43,244		$	41,044	95	%

Adjusted EBITDA as % of Segment Net Sales	41.3		%	46.6		%					44.3		%	43.6		%

Adjusted EBITDA as percentage of net sales for this business segment decreased for the three months ended September 30, 2010 compared to the same period in 2009 driven by raw material price inflation of $1.8 million, $0.6 million of increased salaries and benefits, $0.8 million of higher professional fees relating to increased legal costs associated with continued litigation with JPS, $0.4 million of bad debt expense and $0.6 million of foreign exchange losses partially offset by operating leverage from increased net sales.

Adjusted EBITDA as percentage of net sales for this business segment increased for the nine months ended September 30, 2010 compared to the same period in 2009 driven by leverage of operating expenses resulting from the increase in net sales and the avoidance of approximately $0.8 million of inventory write downs. These favorable impacts were partially offset by raw material price inflation of $4.4 million, $1.7 million of increased salaries and benefits and $1.3 million of higher professional fees relating to increased legal costs associated with continued litigation with JPS.

Quality Assurance

	Three Months Ended September 30,											Nine Months Ended September 30,
	2010			2009			Change					2010			2009			Change
	Amount			Amount			Amount			%		Amount			Amount			Amount			%
Net Sales	$	29,491		$	31,956		$	(2,465	)	(8	)%	$	84,110		$	85,804		$	(1,694	)	(2	)%

Adjusted EBITDA	$	5,061		$	7,137		$	(2,076	)	(29	)%	$	11,238		$	17,008		$	(5,770	)	(34	)%

Adjusted EBITDA as % of Segment Net Sales	17.2		%	22.3		%						13.4		%	19.8		%

Adjusted EBITDA as a percentage of net sales for this business segment decreased for both the three and nine months ended September 30, 2010 compared to the same periods in 2009. SG&A expenses increased by $0.5 million and $2.4 million due to increased labor and benefits expense for both the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. This was mainly due to increased salaries and benefits of $0.7 million and $2.6 million for the three and nine months ended September 30, 2010, respectively, compared to the same periods in 2009 primarily related to headcount added in the prior year to support the full year 2009 sales increase of 8.6% and increased labor associated with information technology systems. These costs for the recently implemented systems were capitalized in the prior year’s corresponding periods as the projects were in the development phase. These increases were partially offset by improved operating efficiencies obtained during both comparable periods.

During the first nine months of 2010, we recorded $203 thousand of expense in cost of sales for severance benefits related to the termination of approximately 100 employees in our Quality Assurance segment. The cost reduction plan was initiated to reduce the Quality Assurance segment’s cost structure as a result of lower than anticipated forecasted revenue for 2010.

We expect pre-tax savings associated with the employee terminations to approximate $1.1 million in 2010 and overall savings to amount to $2.0 million, including planned reductions in professional fees, travel and other costs.

Changes in the cost reduction accrual for the nine months ended September 30, 2010 were as follows:

	September 30, 2010
Balance at December 31, 2009	$	—
Additions	219
Adjustments	(16		)
Cash utilization	(203		)
Balance at September 30, 2010	$	—

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Financial Condition, Liquidity and Capital Resources

We have financed our operations primarily through cash provided by operations. From 2003 through the first nine months of 2010, net cash provided by operating activities has been sufficient to fund our working capital needs, debt service and capital expenditures. As of September 30, 2010, our principal sources of liquidity consisted of $97.7 million of cash and short-term investments and $20.0 million of availability under the $20.0 million revolving portion of our first lien credit facilities. Our total indebtedness was $239.0 million as of September 30, 2010.

Our principal needs for liquidity have been, and for the foreseeable future will continue to be, for capital expenditures, debt service and working capital. The main portion of our capital expenditures has been and is expected to continue to be for expansion. Working capital requirements have increased as a result of our overall growth and the need to fund higher accounts receivable and inventory. We believe that our cash flow from operations, available cash and cash equivalents and available borrowings under the revolving portion of our credit facilities will be sufficient to meet our liquidity needs, including for capital expenditures, through at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through borrowings under our credit facilities, the incurrence of other indebtedness, additional equity issuances or a combination of these potential sources of liquidity.

If we decide to pursue one or more strategic acquisitions, we may incur additional debt, if permitted under our existing credit facilities, or sell additional equity to raise any needed capital. Due to the current historically low interest rate environment, we are assessing the potential to refinance our debt to lower our overall interest cost.

Cash Flows

Cash Flow from Operating Activities

Net cash provided by operating activities was $40.4 million for the nine months ended September 30, 2010 compared to $36.6 million for the nine months ended September 30, 2009. Due to the strength of our Solar segment, cash earnings increased by approximately $26.5 million for the nine months ended September 30, 2010 compared to the same period in 2009. This was mostly offset by increased working capital, primarily relating to increases in accounts receivable and inventory. The increase in working capital reflects the investment required to support our planned growth, timing related to strong net sales growth in 2010 and increased payment terms customary in certain foreign locations.

Cash Flow from Investing Activities

Net cash used for investing activities was $10.1 million and $14.4 million for the nine months ended September 30, 2010 and 2009, respectively and primarily related to capital expenditures.

For our Solar segment, we had capital expenditures of $6.7 million and $5.6 million for the nine months ended September 30, 2010 and 2009, respectively. Our Solar capital expenditures for these periods consisted primarily of equipment costs associated with the addition of new production lines and construction costs for our recently opened Malaysia facility.

For our Quality Assurance segment, we had capital expenditures of $3.1 million and $7.8 million for the nine months ended September 30, 2010 and 2009, respectively. Our Quality Assurance capital expenditures for these periods consisted primarily of costs associated with equipment purchases for testing, information systems and our laboratory expansion in China as well as associated capitalized labor related to the enhancement of our information systems.

We expect remaining 2010 consolidated capital expenditures to be approximately $14.0 million, of which Solar capital expenditures represent approximately $9.0 million, Quality Assurance capital expenditures represent approximately $4.0 million and corporate capital expenditures represent approximately $1.0 million.

Free cash flow, as defined in the following table, was $13.8 million in the three months ended September 30, 2010 compared to $12.9 million in the corresponding 2009 period. Free cash flow, was $30.3 million in the nine months ended September 30, 2010 compared to $23.2 million in the corresponding 2009 period. We believe free cash flow is an important measure of our overall liquidity and our ability to fund future growth and provide a return to stockholders. Free cash flow does not reflect, among other things, mandatory debt service, other borrowing activity, discretionary dividends on our common stock and acquisitions.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Cash provided by operating activities	$	17,307		$	15,704		$	40,368		$	36,610
Less: capital expenditures	(3,481		)	(2,832		)	(10,071		)	(13,443		)
Free cash flow	$	13,826		$	12,872		$	30,297		$	23,167

We use this non-GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons.

Cash Flow from Financing Activities

Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2010 primarily for payment of IPO issuance costs of $1.5 million and $1.5 million for debt repayments.

Net cash used in financing activities was $2.4 million for the nine months ended June 30, 2009 primarily for payment of IPO issuance costs of $0.9 million and $1.5 million for debt repayments.

Credit Facilities

On June 15, 2007, DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds (“DLJMB”), and its co-investors, together with members of our board of directors, our executive officers and other members of management, acquired 100% of the voting equity interests in our wholly-owned subsidiary, Specialized Technology Resources, Inc., for $365.6 million, including transaction costs. In connection with these transactions, we entered into a first lien credit facility and a second lien credit facility on June 15, 2007, which we refer to collectively as our “credit facilities”, in each case with Credit Suisse, as administrative agent and collateral agent. The first lien credit facility consists of a $185.0 million term loan facility, which matures on June 15, 2014, and a $20.0 million revolving credit facility, none of which was outstanding at September 30, 2010, which matures on June 15, 2012. The second lien credit facility consists of a $75.0 million term loan facility, which matures on December 15, 2014. The revolving credit facility includes a sublimit of $15.0 million for letters of credit.

The obligations under each credit facility are unconditional and are guaranteed by us and substantially all of our existing and subsequently acquired or organized domestic subsidiaries. The first lien credit facility and related guarantees are secured on a first-priority basis, and the second lien credit facility and related guarantees are secured on a second-priority basis, in each case, by security interests (subject to liens permitted under the credit agreements governing the credit facilities) in substantially all tangible and intangible assets owned by us, the obligors under the credit facilities, and each of our other domestic subsidiaries, subject to certain exceptions, including limiting pledges of voting stock of foreign subsidiaries to 66% of such voting stock.

Borrowings under the first lien credit facility bear interest at a rate equal to (1) in the case of term loans, at our option (i) the greater of (a) the rate of interest per annum determined by Credit Suisse, from time to time, as its prime rate in effect at its principal office in the City of New York, and (b) the federal funds rate plus 0.50% per annum (the “base rate”), and in each case plus 1.50% per annum or (ii) the LIBO plus 2.50% and (2) in the case of the revolving loans, at our option (subject to certain exceptions) (i) the base rate plus 1.50% when our total leverage ratio (as defined in the first lien credit facility) is greater than or equal to 5.25 to 1.00 (“leverage level 1”), the base rate plus 1.25% when our total leverage ratio is greater than or equal to 4.50 to 1.00 but less than 5.25 to 1.00 (“leverage level 2”) and the base rate plus 1.00% when our total leverage ratio is less than 4.50 to 1.00 (“leverage level 3”) or (ii) the LIBO plus 2.50% in the case of leverage level 1, 2.25% in the case of leverage level 2 and 2.00% in the case of leverage level 3. Borrowings under the second lien credit facility bear interest at a rate equal to, at our option (i) the base rate plus 6.00% or (ii) the LIBO plus 7.00%. For the first five years of the second lien credit facility, we have the option to pay interest in cash or in kind, by increasing the outstanding principal amount of the loans by the amount of accrued interest. Interest paid in kind on the second lien credit facility will be at the rate of interest applicable to such loan described above plus an additional 1.50% per annum. If we default on the payment of any principal, interest, or any other amounts due under the credit facilities, we will be obligated to pay default interest. The default interest rate on principal payments will equal the interest rate applicable to such loan plus 2.00% per annum, and the default interest rate on all other payments will equal the interest rate applicable to base rate loans plus 2.00% per annum.

As of September 30, 2010 and December 31, 2009, the weighted average interest rate under our credit facilities was 4.17% and 4.14%, respectively, before the effect of our interest rate swap which expired on September 30, 2010. At the rate in effect on September 30, 2010 and assuming an outstanding balance of $239.0 million as of September 30, 2010, our annual debt service obligations would be $11.9 million, consisting of $10.0 million of interest and $1.9 million of scheduled principal payments. No

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mandatory principal payment is required until June 30, 2011 due to the $15.0 million payment made in conjunction with the Company’s initial public offering in November 2009. However, we plan to continue to make such debt payments based on the original required maturity schedule.

In addition to paying interest on outstanding principal under the credit facilities, we are required to pay a commitment fee at a rate equal to 0.50% per annum on the daily unused commitments available to be drawn under the revolving portion of the first lien credit facility. We are also required to pay letter of credit fees, with respect to each letter of credit issued, at a rate per annum equal to the applicable LIBO margin for revolving credit loans on the average daily amount of undrawn letters of credit plus the aggregate amount of all letter of credit disbursements that have not been repaid by us. We are also required to pay fronting fees, with respect to each letter of credit issued, at a rate specified by the issuer of the letters of credit and to pay Credit Suisse certain administrative fees from time to time, in its role as administrative agent. The term loans under the first lien credit facilities amortize in quarterly installments of 0.25% of the principal amount. Under certain circumstances, we may be required to reimburse the lenders under our credit facilities for certain increased fees and expenses caused by a change of law.

We are generally required to prepay term loan borrowings under the credit facilities with (1) 100% of the net cash proceeds we receive from non-ordinary course asset sales or as a result of a casualty or condemnation, (2) 100% of the net cash proceeds we receive from the issuance of debt obligations other than debt obligations permitted under the credit agreements, (3) 50% of the net cash proceeds of a public offering of equity and (4) 50% (or, if our leverage ratio is less than 5.25 to 1.00 but greater than or equal to 4.50 to 1.00, 25%) of excess cash flow (as defined in the credit agreements). Under the credit facilities, we are not required to prepay borrowings with excess cash flow if our leverage ratio is less than 4.50 to 1.00. Subject to a limited exception, all mandatory prepayments will first be applied to the first lien credit facility until all first lien obligations are paid in full and then to the second lien facility.

The first lien credit facility requires us to maintain certain financial ratios, including a maximum first lien debt ratio (based upon the ratio of indebtedness under the first lien credit facility to consolidated EBITDA, as defined in the first lien credit facility), a maximum total leverage ratio (based upon the ratio of total indebtedness, net of unrestricted cash and cash equivalents, to consolidated EBITDA) and a minimum interest coverage ratio (based upon the ratio of consolidated EBITDA to consolidated interest expense), which are tested quarterly. Based on the formulas set forth in the first lien credit agreement, as of September 30, 2010, we were required to maintain a maximum first lien debt ratio of 4.00 to 1.00, a maximum total leverage ratio of 6.00 to 1.00 and a minimum interest coverage ratio of 1.80 to 1.00. The second lien credit facility requires us to maintain a maximum total leverage ratio tested quarterly. Based on the formulas set forth in the second lien credit agreement, as of September 30, 2010, we were required to maintain a maximum total leverage ratio of 6.25 to 1.00. As of September 30, 2010, our first lien debt ratio was 0.56 to 1.00, our total leverage ratio was 1.18 to 1.00 and our interest coverage ratio was 5.53 to 1.00.

The financial ratios required under the first and second lien facilities become more restrictive over time. Based on the formulas set forth in the first lien credit agreement, as of March 31, 2011 and March 31, 2012, we are required to maintain a maximum first lien debt ratio of 3.00 to 1.00, a maximum total leverage ratio of 5.00 to 1.00 and a minimum interest coverage ratio of 2.00 to 1.00. Based on the formulas set forth in the second lien credit agreement, as of March 31, 2011 and March 31, 2012, we are required to maintain a maximum total leverage ratio of 5.25 to 1.00.

The credit agreements also contain a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions; sales of assets; sale-leaseback transactions; investments and acquisitions; indebtedness; liens; affiliate transactions; the nature of our business; a prohibition on dividends and restrictions on other restricted payments; modifications or prepayments of our second lien credit facility or other material subordinated indebtedness; and issuing redeemable, convertible or exchangeable equity securities. Under the credit agreements, we are permitted maximum annual capital expenditures of $12.0 million in the fiscal year ending December 31, 2007, with such limit increasing by $1.0 to $2.0 million for each fiscal year thereafter. Capital expenditure limits in any fiscal year may be increased by 40.0% of the excess of consolidated EBITDA for such fiscal year over baseline EBITDA for that year, which is defined as $50.0 million for the fiscal year ending December 31, 2009 and increasing by $5.0 million per year thereafter. The capital expenditure limitations are subject to a two-year carry-forward of the unused amount from the previous fiscal year which will be approximately $15 million for the year ending December 31, 2010.

The credit agreements contain events of default that are customary for similar facilities and transactions, including a cross-default provision with respect to other material indebtedness (which, with respect to the first lien credit agreement, would include the second lien credit agreement and with respect to the second lien credit agreement, would include the first lien credit agreement) and an event of default that would be triggered by a change of control, as defined in the credit agreements. As of September 30, 2010, we were in compliance with all of our covenants and other obligations under the credit agreements.

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On October 5, 2009, we entered into an amendment to the first lien credit agreement and an amendment to the second lien credit agreement. The amendments for both credit agreements permitted us to enter into certain corporate reorganization transactions, including replacing STR Holdings LLC with STR Holdings (New) LLC as a guarantor under each credit agreement. STR Holdings, Inc. became a guarantor under each credit agreement as corporate successor to STR Holdings (New) LLC on November 6, 2009.

We were required under the terms of both our first lien and second lien credit facilities to fix our interest costs on at least 50% of the principal amount of our funded indebtedness within three months of entering into the credit facility for a minimum of three years. To manage our interest rate exposure and fulfill the requirements under our credit facilities, effective September 13, 2007, we entered into a $200.0 million notional principal amount interest rate swap agreement with Credit Suisse International that effectively converted a portion of our debt under our credit facilities from a floating interest rate to a fixed interest rate. The notional principal amount decreased to $130.0 million on October 1, 2008 and remained at that amount until the agreement expired on September 30, 2010. Under the interest rate swap agreement, we paid interest at 4.622% and received the floating three-month LIBOR rate from Credit Suisse International on the notional principal amount.

In addition, one of our foreign subsidiaries maintains a line of credit facility in the amount of approximately $0.5 million (0.5 million Swiss francs) bearing an interest rate of approximately 4.25% as of September 30, 2010 and December 31, 2009. The purpose of the credit facility is to provide funding for the subsidiary’s working capital as deemed necessary during the normal course of business. The facility was not utilized as of September 30, 2010 and December 31, 2009.

Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements.

Effects of Inflation

Inflation generally affects us by increasing costs of raw materials, labor and equipment. In the first nine months of 2010, we believe that raw material inflation negatively impacted our Solar segment’s cost of sales by approximately $4.4 million.

Recently Issued Accounting Standards

In June 2009, the FASB issued a standard Amendments to FASB Interpretation No. 46(R) . The standard requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. The standard is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The standard did not have an impact on our condensed consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASC 605-25 addresses the accounting for these arrangements and enables vendors to account for product and services (deliverables) separately rather than as a combined unit. The amendment will significantly improve the reporting of these transactions to more closely resemble their underlying economics, eliminate the residual method of allocation and improve financial reporting with greater transparency of how a vendor allocates revenue in its arrangements. The amendment in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The standard will not have an impact on our condensed consolidated financial statements.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to inherent risks and uncertainties. These forward-looking statements present our

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current expectations and projections relating to its financial condition, results of operations, plans, objectives, future performance and business and are based on assumptions that we have made in light of our industry experience and perceptions of historical trends, current conditions, expected future developments and other factors management believes are appropriate under the circumstances. However, these forward-looking statements are not guarantees of future performance or financial or operating results. In addition to the risks and uncertainties discussed in this Quarterly Report, we face risks and uncertainties that include, but are not limited to, the following: (i) demand for solar energy in general and solar modules in particular; (ii) the timing and effects of the implementation of recently announced government incentives and policies for renewable energy, primarily in China and the United States; (iii) the effects of the recently reduced solar incentives, and potential future reductions in solar incentives, primarily in Germany and Italy; (iv) customer concentration in our Solar business and our relationships with key customers; (v) any potential inflation of raw material costs, including paper and resin used in our encapsulants, and our ability to successfully manage any increases in these raw material costs; (vi) the continual operation of our Malaysia plant and the planned expansion of our Malaysia plant; (vii) the closing on the purchase of a new solar manufacturing facility and the integration of our existing Connecticut Solar operations into that facility; (viii) demand for our Quality Assurance services; (ix) the need to utilize our existing $20 million revolving credit facility, and the ability to further access the credit markets on acceptable terms; (x) maintaining sufficient liquidity in order to fund future profitable growth and long term vitality; (xi) pricing pressures and other competitive factors; (xii) loss of professional accreditations and memberships; (xiii) the extent to which we may be required to write-off accounts receivable or inventory; (xiv) our reliance on vendors and potential supply chain disruptions, including those resulting from bankruptcy filings by customers or vendors; (xv) potential product performance matters, product liability or professional liability claims and our ability to manage them; (xvi) the impact of changes in foreign currency exchange rates on financial results, and the geographic distribution of revenues and earnings; (xvii) the impact of changes in interest rates in relation to our variable rate debt; (xviii) the impact of events that cause or may cause disruption in our inspection, testing, manufacturing, distribution and sales networks such as war, terrorist activities, and political unrest; (xix) the extent of implemented cost reduction measures in our QA business providing benefit in the remainder of the year; (xx) outcomes of litigation and regulatory actions; (xxi) our ability to protect our intellectual property; and (xxii) the other risks and uncertainties described under “Risk Factors” and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our reports filed with the SEC on Forms 10-K, 10-Q and 8-K. You are urged to carefully review and consider the disclosure found in our filings which are available on www.sec.gov or www.strholdings.com. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, actual results may vary materially from those projected in these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement contained in this Quarterly Report, whether as a result of new information, future developments or otherwise, except as may be required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk Management

We have foreign currency exposure related to our operations outside of the United States. This foreign currency exposure arises primarily from the translation or re-measurement of our foreign subsidiaries’ financial statements into U.S. dollars. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our condensed consolidated results of operations. For the three months ended September 30, 2010 and 2009, approximately $46.0 million, or 47% and $29.2 million, or 43%, respectively, of our net sales were denominated in foreign currencies. For the nine months ended September 30, 2010 and 2009, approximately $126.5 million, or 46% and $76.9 million, or 42%, respectively, of our net sales were denominated in foreign currencies.

We expect that the percentage of our net sales denominated in foreign currencies will increase in the foreseeable future as we expand our international operations. Selling, marketing and general costs related to these foreign currency net sales are largely denominated in the same respective currency, thereby partially offsetting our foreign exchange risk exposure. However, for net sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products or services in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency.

In addition, our assets and liabilities of foreign operations are recorded in foreign currencies and translated into U.S. dollars. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the

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value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency.

We do not engage in any hedging activities related to this exchange rate risk. As such, a 10% change in the U.S. dollar exchange rates in effect as of September 30, 2010 would cause a change in consolidated net assets of approximately $10.2 million and a change in net sales of approximately $12.6 million.

Interest Rate Risk

We are exposed to interest rate risk in connection with our first lien term loan facility, our second lien term loan facility and any borrowings under our revolving credit facility. Our first lien and second lien facilities bear interest at floating rates based on the LIBO or the greater of the prime rate or the federal funds rate plus an applicable borrowing margin. Borrowings under our revolving credit facility bear interest at floating rates based on the LIBO or a base rate plus an applicable borrowing margin. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant.

To manage our interest rate exposure and fulfill requirements under our credit facilities, effective September 13, 2007, we entered into an interest rate swap agreement with Credit Suisse International that effectively converted a portion of our debt under our credit facilities from a floating interest rate to a fixed interest rate. As of September 30, 2010, our interest rate swap agreement, which was for a $130.0 million notional principal amount, expired under our credit facilities. Due to the interest rate swap expiring on September 30, 2010, we do not have any of our variable interest rate debt hedged. We do not plan to hedge our variable rate interest debt in the short-term due to the current low interest rate environment. Based on the amount outstanding under our first lien and second lien facilities at September 30, 2010, a change of one percentage point in the applicable interest rate would cause an increase or decrease in interest expense of approximately $2.4 million on an annual basis. For further information on the interest rate swap agreement, see Note 8 to our Condensed Consolidated Financial Statements included in Item 1 in this Quarterly Report.

Raw Material Price Risk

The major raw material that we purchase for production of our encapsulants for our Solar segment is resin, and paper liner is the second largest raw material cost. The price and availability of these materials are subject to market conditions affecting supply and demand. In particular, the price of many of our raw materials can be impacted by fluctuations in petrochemical, pulp prices and supply and demand dynamics in other industries. In 2010, the price of resin has increased and negatively impacted our cost of sales by approximately $4.4 million. Additionally, our distribution costs can be impacted by fluctuations in diesel prices. We currently do not have a hedging program in place to manage fluctuations in raw material prices. In addition, increases in raw material prices could have a material adverse effect on our gross margins and results of operations, particularly in circumstances where we have entered into fixed price contracts with our Solar customers.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (“Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Controls Over Financial Reporting

We implemented a new accounting information system at certain of our Solar facilities effective May 1, 2010 and at another Solar location effective July 1, 2010. The implementation of the new accounting information system required us to modify and add certain internal controls and processes and procedures. Otherwise, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments during 2010 in the legal proceeding indentified in Part I, Item 3 of the Company’s annual report on Form 10-K for the year ended December 31, 2009, except as noted below.

Galica/JPS

As previously disclosed, in October 2007, we filed a complaint against James P. Galica (“Galica”) and JPS Elastomerics Corporation (“JPS”) in the Massachusetts Superior Court in Hampshire County (the “Court”). We alleged that the defendants misappropriated trade secrets and violated the Massachusetts Unfair and Deceptive Trade Practices Act as well as breaches of contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the “State Court Action”). The Court determined that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act, finding that the technology for our polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated our trade secrets. The Court awarded us compensatory and punitive damages, attorneys’ fees and costs and issued a temporary injunction preventing JPS from manufacturing, marketing or selling products based in whole or in part on our trade secrets. Commencing on August 23, 2010, the Court conducted a hearing to decide the scope and duration of injunctive relief as well as the amount of attorney’s fees and damages to be paid by JPS to us. On October 1, 2010, the parties filed post-hearing briefs with the Court.

On September 17, 2010, JPS filed an amended complaint against our wholly owned subsidiary, Specialized Technology Resources, Inc. (“STR”), in the U.S. District Court for the District of Massachusetts which amended complaint alleges various antitrust and unfair competition claims and that the State Court Action (described above) was sham litigation initiated by STR in an attempt to monopolize the domestic and international market for low-shrink EVA encapsulants. JPS also alleges other schemes to monopolize and unfair competition in violation of federal and state laws. JPS seeks $60 million in compensatory damages, and treble damages, a permanent injunction against STR for various activities, reimbursement of legal fees for the State Court Action as well as for this matter, and disgorgement of proceeds obtained by STR from allegedly anti-competitive and tortious acts. On October 13, 2010, we filed a motion to dismiss the amended complaint.

Given that we prevailed in the State Court Action, we believe the sham litigation claims by JPS are, by definition, without merit. Further, we believe the Federal Court Action is an attempt by JPS to relitigate claims decided in the State Court Action. In our view, the Federal Court Action fails to state a valid claim and we intend to defend vigorously the Federal Court Action. Also, management defines any such possible losses to be remote under the definition of ASC 450.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factor s” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial position and results of operations. There have been no material changes to the risk factors as disclosed in Part I, “Item 1A., Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 , except as noted below.

We typically rely upon trade secrets and contractual restrictions, and not patents, to protect our proprietary rights. Failure to protect our intellectual property rights may undermine our competitive position and protecting our rights or defending against third-party allegations of infringement may be costly.

Protection of proprietary processes, methods, documentation and other technology is critical to our business. Failure to protect, monitor and control the use of our existing intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. We typically rely on trade secrets, trademarks, copyrights and contractual restrictions to protect our intellectual

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property rights and currently do not hold any patents related to our Solar business. However, the measures we take to protect our trade secrets and other intellectual property rights may be insufficient. While we enter into confidentiality agreements with our Solar employees and third parties to protect our intellectual property rights, such confidentiality provisions related to our trade secrets could be breached and may not provide meaningful protection for our trade secrets. Also, others may independently develop technologies or products that are similar or identical to ours. In such case, our trade secrets would not prevent third parties from competing with us.

Third parties or employees may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could harm our business and operating results. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available.

As previously disclosed, in October 2007, we filed a complaint against James P. Galica (“Galica”) and JPS Elastomerics Corp. (“JPS”) in the Massachusetts Superior Court in Hampshire County (the “Court”). We alleged that the defendants misappropriated trade secrets and violated the Massachusetts Unfair and Deceptive Trade Practices Act as well as breaches of contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the “State Court Action”). The Court determined that JPS and Galica had violated the Massachusetts Unfair and Deceptive Trade Practices Act, finding that the technology for our polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated our trade secrets. The Court awarded us compensatory and punitive damages, attorneys’ fees and costs and issued a temporary injunction preventing JPS from manufacturing, marketing or selling products based in whole or in part on our trade secrets. Commencing on August 23, 2010, the Court conducted a hearing to decide the scope and duration of injunctive relief as well as the amount of attorney’s fees and damages to be paid by JPS to us. On October 1, 2010, the parties filed post-hearing briefs with the Court.

Item 6. Exhibits

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STR HOLDINGS, INC.
	(Registrant)

	By:	/s/ Barry A. Morris
Date: November 12, 2010	Barry A. Morris, Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)