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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 March 31, 2012

Or

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

For the transition period from                     to                    

Commission file number 001-34529

STR Holdings, Inc.

(Exact name of registrant as specified in its charter)

(860) 758-7300

(Registrant’s telephone number, including area code)

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

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

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

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

At April 26, 2012 there was 41,621,276 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 Months Ended March 31, 2012

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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 and per share amounts

See accompanying notes to these condensed consolidated financial statements.

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STR Holdings, Inc. and Subsidiaries

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

All amounts in thousands except share and per share amounts

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

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

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, 2011, included in the Company’s Form 10–K filed with the SEC on March 14, 2012. 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 presentation 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 Quality Assurance (“QA”) business historical operating results and the interest expense associated with the Company’s prior first lien credit agreement and the second lien credit agreement (together, the “2007 Credit Agreements”) are recorded in discontinued operations in the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Cash Flows for all periods presented.

The year—end Condensed Consolidated 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.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011—05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The FASB Accounting Standards Codification (“ASC”) 220 established standards for the reporting and presentation of comprehensive income and its components in a full set of general—purpose financial statements. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net earnings and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. In both choices, an entity is required to present each component of net earnings along with total net earnings, each financial component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net earnings in the statement(s) where the components of net earnings and the components of other comprehensive income are presented. The amendments should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures. The Company early adopted this standard effective June 30, 2011, and it did not have a material impact on the Company’s condensed consolidated financial statements since the Company previously presented net earnings, other comprehensive income and its components and total comprehensive income in a continuous statement.

The FASB has subsequently issued ASU No. 2011—12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU No. 2011—05. The amendments to the Codification in ASU No. 2011—12 are effective at the same time as the amendments in ASU No. 2011—05, Comprehensive Income, so that entities will not be required to comply with the presentation requirements in ASU No. 2011—05 that ASU No. 2011—12 is deferring. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011—05. All other requirements in ASU No. 2011—05 are not affected by ASU No. 2011—12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate, but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This standard did not have a material 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—DISCONTINUED OPERATIONS

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

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

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

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

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

The following table sets forth the operating results of the QA business being presented as a discontinued operation for the three months ended March 31, 2012 and 2011, respectively:

NOTE 4—EARNINGS PER SHARE

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

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 4—EARNINGS PER SHARE (Continued)

Due to a loss from continuing operations for the three months ended March 31, 2012, the diluted weighted—average common shares outstanding does not include 11,193 shares of restricted stock as these potential awards do not share in any net loss generated by the Company and are anti—dilutive.

Because the effect would be anti—dilutive, there were 3,400,121 and 314,236 stock options outstanding that were not included in the computation of diluted weighted—average shares outstanding for the three months ended March 31, 2012 and March 31, 2011, respectively.

NOTE 5—INVENTORIES

Inventories consist of the following:

NOTE 6—LONG—LIVED ASSETS AND GOODWILL

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

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

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

The Company tested its long—lived assets for impairment as of March 31, 2012. The Company has concluded that no impairment exists as the sum of the undiscounted expected future cash flows exceeded its long—lived assets’ carrying values as of March 31, 2012. The Company also determined that no change to the estimated useful lives was required. However, if the Company continues to experience a significant reduction in sales volume or profitability in the future, or any adverse circumstances as discussed above, certain of its long—lived assets may be subject to accelerated depreciation/amortization and/or future impairment.

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

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

NOTE 7—STOCKHOLDERS’ EQUITY

Changes in stockholders’ equity for the three months ended March 31, 2012 are as follows:

Preferred Stock

The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock, $0.01 par value. At March 31, 2012, 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 March 31, 2012, there were 41,621,815 shares issued and 41,618,093 shares outstanding of common stock. Each share of common stock is entitled to one vote per share. Included in the 41,618,093 shares outstanding are 41,261,517 shares of common stock and 356,576 shares of restricted unvested common stock.

Treasury Stock

In connection with the Company’s former debt agreements, the Company was allowed to repurchase its equity interest owned by terminated employees in connection with the exercise of stock options or similar equity based incentives in an aggregate

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 7—STOCKHOLDERS’ EQUITY (Continued)

amount not to exceed $2,000 in any fiscal year. At March 31, 2012, there were 3,722 shares held in treasury that were purchased at a cost of $57.

NOTE 8—STOCK—BASED COMPENSATION

On November 6, 2009, the Company’s Board of Directors approved the Company’s 2009 Equity Incentive Plan (the “2009 Plan”) which became effective on the same day. A total of 4,750,000 shares of common stock are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, “options,” stock appreciation rights, shares of restricted stock, or “restricted stock,” rights to dividend equivalents and other stock—based awards, collectively, the “awards.” The Board of Directors or the committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by the Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest over a four—year period and expire ten years from date of grant. There were 1,039,088 shares available for grant under the 2009 plan as of March 31, 2012.

The following table summarizes the options activity under the Company’s 2009 Plan for the three months ended March 31, 2012:

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $4.84 of the Company’s common stock on March 31, 2012.

As of March 31, 2012, there was $2,426 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 approximately two 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.

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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—STOCK—BASED COMPENSATION (Continued)

The following table summarizes the restricted shares activity of the Company for the three months ended March 31, 2012:

As of March 31, 2012, there was $2,145 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 approximately two years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock—based compensation related to these awards will be different from its expectations.

On November 9, 2010, the Company’s Board of Directors adopted the STR Holdings, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) and reserved 500,000 shares of the Company’s common stock for issuance thereunder. The ESPP became effective upon its approval by the votes of the Company’s stockholders on May 24, 2011 during the Company’s annual meeting for the purpose of qualifying such shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees may use payroll withholdings to purchase shares of the Company’s common stock at a 10% discount. The Company has established four offering periods in which eligible employees may participate. The Company will purchase the number of required shares each period based upon the employees’ contribution plus the 10% discount. The number of shares purchased times the 10% discount is recorded by the Company as stock—based compensation. As of March 31, 2012, the Company recorded $2 as stock-based compensation expense relating to the ESPP.

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

NOTE 9—INCOME TAXES

During the three months ended March 31, 2012, the Company recorded an income tax benefit of $975, resulting in an effective tax rate of 1.2%.  The tax provision reflects discrete items in the quarter relating to the goodwill impairment for which no tax benefit is recorded and settlement of income tax audits resulting in a $1,000 benefit in the quarter. The projected annual effective tax rate excluding these discrete items is a benefit of 15.3% as compared to the U.S. federal statutory rate of 35.0%. The lower projected annual effective tax rate is principally driven by the Company’s decision to permanently reinvest its Malaysia subsidiary’s earnings locally, eligibility for the United States Tax Code Section 199 Domestic Manufacturing Deduction and the mix of expected geographic earnings. The Company’s effective tax rate from continuing operations was approximately 31.8% for the three months ended March 31, 2011. The lower effective tax rate reflects the benefits of the Company’s decision to permanently reinvest its Malaysia subsidiary’s earnings locally and eligibility for the United States Tax Code Section 199 Domestic Manufacturing Deduction.

The decrease in the effective tax rate from 31.8% in March 2011 to a projected benefit of 15.3% in March 2012 is primarily a result of a shift in anticipated earnings by geography. A shift in the mix of the Company’s expected geographic earnings,

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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—INCOME TAXES (Continued)

primarily in Malaysia, could cause its expected annual effective tax rate to change significantly.

On March 7, 2012, the Internal Revenue Service (“IRS”) issued Revenue Procedures 2012-19 and 2012-20 (“Revenue Procedures”) that provide a procedure for a taxpayer to follow in order to obtain automatic consent of the Commissioner to change its methods of accounting. The Revenue Procedures were issued to comply with the tangible property temporary regulations that were issued on December 23, 2011. The Revenue Procedures allow taxpayers to change their method of accounting for tax years beginning on or after January 1, 2012. The Company is assessing the impact of the Revenue Procedures and whether any change to its method of accounting will be warranted.

NOTE 10—COMMITMENTS AND CONTINGENCIES

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

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

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

During 2010, the Company performed a Phase II environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site was found to contain a presence of volatile organic compounds. The Company has been in contact with the Department of Environmental Protection and has engaged a licensed contractor to remediate this circumstance. Based on ASC 450—Contingencies, the Company has accrued the estimated cost to remediate of $350. During the three months ended March 31, 2012, the Company has not yet utilized this accrual, leaving a balance of $350 as of March 31, 2012.

Galica/JPS

As previously disclosed, the Company, entered into a Global Settlement Agreement and Release (the “Settlement Agreement”) with JPS Industries, JPS Elastomerics Corp. and James P. Galica. Pursuant to the Settlement Agreement, the parties agreed to, (i) payment by JPS of $7,131 to the Company (which was received on February 16, 2012), (ii) dismissals of the State Court Action, the Federal Court Action, and all associated appeals and proceedings, (iii) the satisfaction of outstanding judgments in the State Court Action, (iv) the disbursement to the Company of $70, deposited with and held in escrow by the Court, (v) the discharge of

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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—COMMITMENTS AND CONTINGENCIES (Continued)

attachments of certain assets of JPS, (vi) the modification of the injunction issued in the State Court Action: (a) reducing the term of the Production Injunction from five years to four years, (b) permitting JPS to permanently bond encapsulant to fiberglass mesh and laminate non—low shrink encapsulant to paper, (c) the deletion of JPS’s obligations with respect to the review and deletion of certain documents, (vii) the delivery to the Company by JPS of certain components of an equipment line purchased by it, (viii) the deletion by JPS of certain data, (ix) the general release of claims by the parties related to the State Court Action and the Federal Court Action, subject to the retention by the Company of certain rights, (x) the covenant by JPS not to sue the Company (and its affiliates) with respect to matters related to the Federal Court Action, (xi) the agreement by JPS and Galica to cooperate with the Company in connection with investigations related to the potential dissemination of the Company’s trade secrets, and (xii) certain other customary terms and conditions.

The Company received the $7,201 payment during the three months ended March 31, 2012, which was recorded as Other income on its Condensed Consolidated Statements of Comprehensive Income.

Alpha Marathon

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

NOTE 11—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION

ASC 280—10—50—Disclosure about Segment of an Enterprise and Related Information, establishes standards for the manner in which companies report information about operating segments, products, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the operating segment within the enterprise for making operating decisions and assessing financial performance. Since the Company has one product, sells to global customers in one industry, procures raw materials from similar vendors and expects similar long—term economic characteristics, the Company has one reporting segment and the information as to its operation is set forth below.

Adjusted EBITDA is the main metric used by the management team and the Board of Directors to plan, forecast and review the Company’s segment performance. Adjusted EBITDA represents net earnings from continuing operations before interest income and expense, income tax expense, depreciation, amortization of intangible assets, goodwill impairment, stock—based compensation expense, amortization of deferred financing costs and certain non—recurring income and expenses from the results of operations.

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

Operations by Reportable Segment

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STR Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

NOTE 11—REPORTABLE SEGMENT AND GEOGRAPHICAL INFORMATION (Continued)

Operations by Geographic Area

Long—Lived Assets by Geographic Area

Foreign sales are based on the country in which the sales originate. Net sales to one of the Company’s major customers for the three months ended March 31, 2012 was $10,540. For the three months ended March 31, 2011, net sales to two of the Company’s major customers were $19,076. Accounts receivable from those customers amounted to $1,458 and $8,985 as of March 31, 2012 and December 31, 2011, respectively.

NOTE 12—RESEARCH AND DEVELOPMENT EXPENSE

The Company has a long history of innovation dating back to its establishment in 1944 as a plastic and polymer research and development firm. As the Company’s operations have expanded from solely providing research and development activities into the manufacturing of encapsulants, it has created a separate research and development function for employees and costs that are fully dedicated to research and development activities. Research and development expense is recorded in selling, general and administrative expenses. The Company incurred $1,077 and $546 of research and development expense for the three months ended March 31, 2012 and 2011, respectively.

Due to the Company’s legacy of innovation, other employees spend some of their time related to research and development activities. However, the Company does not allocate such costs or allocate overhead to research and development.

NOTE 13—COST REDUCTION ACTIONS

During the first quarter of 2012, the Company reduced headcount by 18 employees at its Connecticut facilities. In conjunction with the headcount reduction, the Company recognized severance of $42 in cost of sales and $14 in selling, general and administrative expense. Estimated savings associated with this cost reduction action is approximately $1,122 on a pre—tax annual basis. The Company also entered into a Labor Force Adjustment Plan with the union and the local government at its Spain facility that will temporarily furlough approximately 63 employees for the period of February 1, 2012 to July 31, 2012. Estimated 2012 savings associated with this cost reduction action is approximately $710.

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

OVERVIEW

STR Holdings, Inc. and its subsidiaries (“we”, “us” or “our”), are one of the leading global providers of encapsulants to the solar module industry. The encapsulant is a critical component used in solar modules. We were the first to develop the original ethylene—vinyl—acetate (“EVA”) encapsulants used in commercial solar module manufacturing in the 1970s in conjunction with the Jet Propulsion Laboratory of the California Institute of Technology under a NASA contract for the U.S. Energy Research and Development Administration, which later became known as the U.S. Department of Energy. We supply encapsulants globally to many of the world’s large solar module manufacturers. We believe this is due to our product performance, global manufacturing base, customer service and technical support. Our encapsulants are used in both crystalline silicon and thin—film solar modules.

STRATEGIC FOCUS

Our objective is to enhance our position as a leading global provider of encapsulants to solar module manufacturers. Some of our strategies to meet that objective are to (i) continue our history of product innovation, (ii) further reduce our manufacturing costs, (iii) strengthen our balance sheet, (iv) leverage our global infrastructure and (v) continue to execute our Asia Growth Strategy. We have recently executed on these strategic objectives as follows:

Innovation

·                  We have continued to increase our investments in research and development, including the addition of technical personnel and research scientists. Our East Windsor, Connecticut facility houses a new, 20,000 square foot, state—of—the—art research and development laboratory that became operational early in the second quarter of 2012. Our goal is to continue to develop high value—add products that can be commercialized quickly and with scale.

·                  We have developed a premium high—light transmission formulation that enables light to better penetrate certain cells, which may enhance module output by approximately 1%. We also continue to invest in the development of products engineered for the specific requirements of Chinese module manufacturers.

Cost Reduction

·                  We have recently expanded our manufacturing and supply chain expertise with the hiring of Chief Operating Officer, STR Solar and Director of Global Supply Chain. Both individuals focus their efforts on cost reduction, supply chain optimization and process improvement.

·                  During the first quarter of 2012, we reduced headcount by 18 employees at our Connecticut facilities. In conjunction with the headcount reduction, we recognized severance of less than $0.1 million. Estimated savings associated with this cost reduction action is approximately $1.1 million on a pre—tax annual basis. We also entered into a Labor Force Adjustment Plan with the union and the local government at our Spain facility that will temporarily furlough approximately 63 employees for the period of February 1, 2012 to July 31, 2012. Estimated savings associated with this cost reduction action is approximately $0.7 million for 2012.

·                  We are in the process of introducing a paperless encapsulant that will offer a less expensive option to our customers while retaining the long—term quality benefits that we believe our encapsulants provide. Since this product does not require paper backing, we believe that it can be commercialized at a lower price, yet generate similar gross margin as our existing products.

·                  We ceased production at our St. Augustine, Florida plant in October 2011 and exited the 20,000 square foot leased facility as of December 31, 2011. The closure resulted in approximately $0.8 million in pre—tax charges, $0.5 million of which were non—cash. We expect annual pre—tax savings of $1.1 million as a result of this consolidation. We also expect the consolidation will have a positive impact on gross margin with improved absorption from higher capacity utilization.

Strengthen our Balance Sheet

·                  On August 16, 2011, we entered into an equity purchase agreement to sell our Quality Assurance (“QA”) business to Underwriters Laboratories (“UL”) for $275.0 million plus assumed cash. The QA business provided consumer product testing, inspection, auditing and consulting services that enabled retailers and manufacturers to determine whether products and facilities met applicable safety, regulatory, quality, performance, social and ethical standards. On September 1, 2011, we completed the sale of the QA business for total net cash proceeds of $283.4 million, which included $8.4 million of estimated

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cash assumed in certain QA locations. We decided to sell the QA business in order to focus exclusively on the solar encapsulant opportunity and to seek further product offerings related to the solar industry, as well as other growth markets related to our polymer manufacturing capabilities, and to retire our long—term debt.

·                  On October 7, 2011, we entered into a multicurrency credit agreement (the “Credit Agreement”) among us, certain of our domestic subsidiaries, as guarantors (the “Guarantors”), the lenders from time to time party thereto and Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer. The Credit Agreement provides for a revolving senior credit facility of up to $150.0 million that matures on October 7, 2015. The Credit Agreement includes a $50.0 million sublimit for multicurrency borrowings, a $25.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for swing line loans. The Credit Agreement also contains an expansion option permitting us to request an increase of the revolving senior credit facility from time to time up to an aggregate additional $50.0 million from any of the lenders or other eligible lenders as may be invited to join the Credit Agreement, that elect to make such increase available, upon the satisfaction of certain conditions. Based on our forecasted 2012 EBITDA and the required minimum Consolidated Leverage Ratio, we expect to be able to draw down on at least $40.0 million of the $150.0 million Credit Agreement during 2012. If our actual EBITDA, as defined in the Credit Agreement, is less than forecasted, we may not be able to borrow as much, or any amounts, under the Credit Agreement.

Global Infrastructure and Asia Growth Strategy

·                  In the first quarter of 2012, we relocated our Global Director of Sales and Marketing to China and have expanded our local sales and technical service teams in the Asia Pacific region. We have also recently formed a wholly foreign owned enterprise, received a business license and purchased land near Shanghai.

·                  During 2011, we increased the floor space of our Malaysia facility to provide for total capacity of up to approximately 5.0 GW and increased our production capacity to 3.6 GW. We believe that our Malaysian plant has enhanced our competitive position in various Asian markets by allowing us to take advantage of reduced lead times, lower logistics costs and improved customer service.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our 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. We continually evaluate our estimates, including those related to bad debts, valuation of inventory, long—lived intangible and tangible assets, goodwill, product performance matters, income taxes, stock—based compensation and deferred tax assets and liabilities. 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 14, 2012.

In accordance with ASC 250—20—Presentation of Financial Statements—Discontinued Operations and ASC 740—20—Income Taxes—Intraperiod Tax Allocation, the accompanying Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Cash Flows present the results of the QA business as discontinued operations. Prior to the sale, the QA business was one of our segments. We have no continuing involvement in the operations of the QA business and have no direct cash flows from the QA business subsequent to the sale. Accordingly, we have presented QA as discontinued operations in all periods presented in the condensed consolidated financial statements.

There have been no changes in our critical accounting policies during the quarter ended March 31, 2012.

IMPAIRMENT ANALYSIS

In accordance with ASC 350—Intangibles—Goodwill and Other and ASC 360—Property, Plant and Equipment, we assess the impairment of our long—lived assets including our definite—lived intangible assets, property, plant and equipment and goodwill whenever changes in events or circumstances indicate that the carrying value of such assets may not be recoverable. During each reporting period, we assess if the following factors are present which would cause an impairment review: overall negative solar industry conditions; a significant or prolonged decrease in sales that are generated under its trademarks; loss of a significant customer

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or a reduction in demand for customers’ products; a significant adverse change in the extent to or manner in which we use our trademarks or proprietary technology; such assets becoming obsolete due to new technology or manufacturing processes entering the markets or an adverse change in legal factors; and the market capitalization of our common stock. During the first three months of 2012, the market capitalization of our common stock declined by approximately 50%. As a result of this decline that does not appear to be temporary, we determined that a triggering event occurred requiring vs to test our long—lived assets and our reporting unit for impairment as of March 31, 2012.

We tested our long—lived assets for impairment as of March 31, 2012. We have concluded that no impairment exists as the sum of the undiscounted expected future cash flows exceeded our long—lived assets’ carrying values as of March 31, 2012. We also determined that no change to the estimated useful lives was required. However, if we continue to experience a significant reduction in sales volume or profitability in the future, or any adverse circumstances as discussed above, certain of our long—lived assets may be subject to accelerated depreciation/amortization and/or future impairment.

We valued our reporting unit with the assistance of a valuation specialist and determined that our reporting unit’s net book value exceeded its fair value. We then performed step two of the goodwill impairment assessment which involved calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all of our assets and liabilities other than goodwill and comparing the residual amount to the carrying amount of goodwill. We determined that our implied fair value of goodwill was lower than our carrying value and recorded a goodwill impairment of $82.5 million. We estimated the fair value of our reporting unit under the income approach using a discounted cash flow method which incorporated our cash flow projections. We also considered our market capitalization, control premiums and other valuation assumptions in reconciling the calculated fair value to the market capitalization at the assessment date. Based on the other than temporary decline in our stock price and our net book value exceeding the market capitalization of our common stock during the first quarter of 2012, the market approach was given a higher weighting in determining fair value. We believe the cash flow projections and valuation assumptions were reasonable and consistent with market participants. Inherent in our development of cash flow projections are assumptions and estimates, including those related to future earnings, growth prospects and the weighted average cost of capital. Many of the factors used in assessing the fair value are outside the our control, and these assumptions and estimates can change in future periods as a result of both our specific factors and overall economic conditions.

RESULTS OF OPERATIONS

Condensed Consolidated Results of Continuing Operations

The following tables set forth our financial results of continuing operations, for the three months ended March 31, 2012 and 2011. All amounts are stated in thousands except per share amounts and unless otherwise noted.

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Net Sales

The decrease in net sales for the three months ended March 31, 2012 compared to 2011 was primarily driven by a 22% decrease in our average selling price (“ASP”) combined with a 41% decrease in sales volume. Also, a weaker Euro resulted in a 4% negative impact in the foreign exchange translation of our European net sales.

The decrease in volume was the result of the continuation of events that impacted the solar industry in 2011. Specifically, lack of available financing to fund solar projects and increased uncertainty surrounding solar subsidies by governments weakened demand which caused module prices to decline rapidly. However, price elasticity did not materialize as end users delayed purchases until there was stabilization of module selling prices. These events drove excess channel inventory throughout the solar supply chain. Although end user demand for modules increased at the end of 2011 and into 2012, we estimate that much of this demand was satisfied by existing module inventories. As such, demand for our encapsulants was reduced. We also believe we were negatively impacted from some of our customers losing market share to certain Chinese module manufacturers that are currently not our customers. We expect that demand for our encapsulant will remain soft during the first half of 2012 until elasticity drives end user module demand, inventory levels normalize and we receive orders from new customers during the latter part of 2012.

The ASP decline was driven by price reductions granted during contract renewals for 2012 and continued overall pricing pressure experienced by most companies in the solar supply chain.

Cost of Sales

The decrease in our cost of sales reflects an approximate 41% decrease in sales volume partially offset by an approximate 25% increase in cost per square meter. Raw material costs decreased by $10.3 million due to lower volume, which was partially offset by the utilization of higher priced raw materials. Direct labor costs decreased by $0.5 million due to lower volume and the positive effect of prior cost reduction measures. Overhead costs increased by $0.2 million due to planned expansion costs associated with the Malaysia and East Windsor facilities, partially offset by savings from the closure of our Florida facility.

Gross Profit

Gross profit as a percentage of net sales decreased due to decreased average selling prices, increased raw material costs, unfavorable mix and lower cost absorption.

Non—cash intangible asset amortization expense of $2.1 million reduced gross profit for each of the three months ended March 31, 2012 and 2011.

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

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SG&A increased by $0.3 million for the three months ended March 31, 2012 compared to the corresponding period in 2011. This was primarily driven by $0.6 million of increased labor and benefit costs as a result of investing in our global infrastructure. Also, research and development expense increased by $0.5 million as we continued to expand this function with the goal of developing a pipeline of innovative encapsulant products. We also incurred approximately $0.4 million of increased non—cash stock—based compensation expense primarily related to the accelerated vesting of restricted stock under our Executive Chairman’s new employment agreement that became effective in the first quarter of 2012. These increases were partially offset by $1.0 million of lower professional fees primarily due to lower legal costs associated with the JPS settlement and $0.1 million of reduced travel expenses.

Provision for Bad Debt Expense

Bad debt expense increased as a result of aged receivable balances, primarily in Asia, and one of our European customers declaring bankruptcy. In 2011, we reached formal agreements with certain customers for the payment of past due invoices. Our future bad debt expense could increase significantly if such customers do not fulfill their obligations under such agreements.

Goodwill Impairment