UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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|
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 1-8403
ENERGY CONVERSION DEVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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38-1749884
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.)
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organization)
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2956 Waterview Drive, Rochester Hills, Michigan
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48309
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(248) 293-0440
Former name, former address and former fiscal year, if changed since last report
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, 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
o
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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. Yes
o
No
o
Large accelerated filer
o
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Accelerated
filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
As
of November 4, 2010, there were 49,835,935 shares of the registrants Common Stock outstanding.
TABLE OF CONTENTS
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2010
1
PART I FINANCIAL INFORMATION
Item 1
:
Financial Statements
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
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Three Months Ended
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September 30,
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2010
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2009
(1)
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Revenues
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Product sales
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$
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53,397
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$
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34,143
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System sales
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11,650
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2,567
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Royalties
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2,115
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1,959
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Revenues from product development agreements
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827
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3,991
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License and other revenues
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408
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284
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Total Revenues
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68,397
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42,944
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Expenses
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Cost of product sales
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45,016
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24,107
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Cost of system sales
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10,555
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3,726
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Cost of revenues from product development agreements
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329
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3,281
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Product development and research
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2,399
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2,245
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Preproduction costs
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64
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10
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Selling, general and administrative
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17,644
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16,202
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Net (gain) loss on disposal of property, plant and equipment
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(76
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)
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974
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Restructuring charges
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491
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677
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Total Expenses
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76,422
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51,222
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Operating Loss
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(8,025
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)
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(8,278
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)
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Other Income (Expense)
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Interest income
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344
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292
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Interest expense
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(6,986
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)
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(7,170
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)
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Gain on debt extinguishment
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1,189
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Distribution from joint venture
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1,309
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Other nonoperating income, net
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132
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885
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Total Other Income (Expense)
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(5,321
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)
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(4,684
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)
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Loss before Income Taxes and Equity Loss
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(13,346
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)
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(12,962
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)
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Income tax expense (benefit)
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155
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(915
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)
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Loss before Equity Loss
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(13,501
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)
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(12,047
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)
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Equity loss
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(34
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)
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Net Loss
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(13,535
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)
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(12,047
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)
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Net Loss Attributable to Noncontrolling Interest
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(79
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)
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(74
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)
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Net Loss Attributable to ECD Stockholders
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$
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(13,456
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)
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$
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(11,973
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)
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Loss Per Share, Attributable to ECD Stockholders
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$
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(0.29
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)
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$
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(0.28
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)
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Diluted Loss Per Share, Attributable to ECD Stockholders
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$
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(0.29
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)
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$
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(0.28
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)
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(1)
As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
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See notes to consolidated financial statements.
2
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
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September 30,
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June 30,
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2010
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2010
(1)
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(Unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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68,963
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$
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79,158
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Short-term investments
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125,369
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113,771
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Accounts receivable, net
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58,366
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72,021
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Inventories, net
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63,596
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61,495
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Other current assets
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33,321
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27,237
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Total Current Assets
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349,615
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353,682
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Property, Plant and Equipment, net
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303,296
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301,056
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Other Assets:
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Restricted cash
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12,157
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11,749
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Lease receivable, net
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10,592
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10,854
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Other assets
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13,727
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14,606
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Total Other Assets
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36,476
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37,209
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Total Assets
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$
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689,387
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$
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691,947
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable and accrued expenses
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$
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60,383
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$
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56,035
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Current portion of warranty liability
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11,166
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12,125
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Other current liabilities
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10,523
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9,130
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Total Current Liabilities
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82,072
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77,290
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Long-Term Liabilities:
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Convertible senior notes
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239,645
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243,654
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Capital lease obligations
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19,988
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20,296
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Warranty liability
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30,952
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29,210
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Other liabilities
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19,268
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19,872
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Total Long-Term Liabilities
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309,853
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313,032
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Commitments and Contingencies (Note 10)
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Stockholders Equity
|
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Common stock, $0.01 par value, 100
million shares authorized,
49,863,710 and
48,554,812 issued at
September 30, 2010
and June 30, 2010,
respectively
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|
499
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|
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|
486
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Additional paid-in capital
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|
1,087,005
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1,079,910
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Treasury stock
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(700
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)
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|
|
(700
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)
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Accumulated deficit
|
|
|
(787,844
|
)
|
|
|
(774,388
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)
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Accumulated other comprehensive loss, net
|
|
|
(1,306
|
)
|
|
|
(3,570
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)
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|
|
|
|
|
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|
Total ECD stockholders equity
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|
|
297,654
|
|
|
|
301,738
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|
Accumulated deficit noncontrolling interest
|
|
|
(192
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
297,462
|
|
|
|
301,625
|
|
|
|
|
|
|
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|
Total Liabilities and Stockholders Equity
|
|
$
|
689,387
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|
|
$
|
691,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
|
See notes to consolidated financial statements.
3
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
|
|
|
|
|
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|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
(1)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,535
|
)
|
|
$
|
(12,047
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
5,409
|
|
|
|
8,892
|
|
Amortization of debt discount and deferred financing fees
|
|
|
4,242
|
|
|
|
4,115
|
|
Share-based compensation
|
|
|
881
|
|
|
|
1,051
|
|
Gain on debt extinguishment
|
|
|
(1,189
|
)
|
|
|
|
|
Net (gain) loss on disposal of property, plant and equipment
|
|
|
(76
|
)
|
|
|
974
|
|
Equity loss
|
|
|
34
|
|
|
|
|
|
Changes in operating assets and liabilities, net of foreign exchange:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
14,350
|
|
|
|
8,924
|
|
Inventories
|
|
|
(868
|
)
|
|
|
(29,880
|
)
|
Other assets
|
|
|
(229
|
)
|
|
|
446
|
|
Accounts payable and accrued expenses
|
|
|
9,410
|
|
|
|
(7,442
|
)
|
Other liabilities
|
|
|
769
|
|
|
|
(954
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
19,198
|
|
|
|
(25,921
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(12,068
|
)
|
|
|
(12,157
|
)
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
(2,088
|
)
|
Purchases of investments
|
|
|
(45,478
|
)
|
|
|
|
|
Proceeds from maturities of investments
|
|
|
14,200
|
|
|
|
34,069
|
|
Proceeds from sale of investments
|
|
|
19,259
|
|
|
|
9,771
|
|
Proceeds from sale of property, plant and equipment
|
|
|
126
|
|
|
|
|
|
Development loans
|
|
|
(3,275
|
)
|
|
|
|
|
Increase in restricted cash
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(27,644
|
)
|
|
|
29,595
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments under capitalized lease obligations and other debt
|
|
|
(426
|
)
|
|
|
(174
|
)
|
Repayment of revolving credit facility
|
|
|
|
|
|
|
(5,705
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(426
|
)
|
|
|
(5,879
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,323
|
)
|
|
|
233
|
|
Net decrease in cash and cash equivalents
|
|
|
(10,195
|
)
|
|
|
(1,972
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
79,158
|
|
|
|
56,379
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
68,963
|
|
|
$
|
54,407
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As adjusted due to the implementation of FASB ASC 470-20 (See Note 1).
|
See notes to consolidated financial statements.
4
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Energy Conversion Devices, Inc. (the Company or ECD), through its subsidiaries,
commercializes materials, products and production processes for the alternative energy generation
(primarily solar energy), energy storage and information technology markets.
On August 19, 2009, the Company acquired 100% of the outstanding common shares of Solar
Integrated Technologies, Inc. (SIT), a Los Angeles-based company that manufactures, designs and
installs building integrated photovoltaic roofing systems for commercial rooftops. The results of
SITs operations have been included in the Companys Consolidated Financial Statements beginning
August 19, 2009.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial reporting, and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, the financial statements for interim reporting do not include all of
the information and notes or disclosures required by GAAP for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair presentation have been
included and such adjustments are of a normal recurring nature. Results for interim periods should
not be considered indicative of results for a full year. For further information, refer to the
consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K for the period ended June 30, 2010, as filed with the Securities and Exchange Commission
(SEC).
The consolidated financial statements include the accounts of the Company and the accounts of
the Companys subsidiaries in which it holds a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in consolidation. The Companys share
of earnings or losses of nonconsolidated affiliates are included in our consolidated operating
results using the equity method of accounting when the Company is able to exercise significant
influence over the operating and financial decisions of the affiliate.
The Company has performed an evaluation of subsequent events through the date the Companys
financial statements were issued. No material subsequent events have occurred that required
recognition or disclosure in these financial statements.
Summary of Significant Accounting Policies
Use of
Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods could differ from those
estimates.
5
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized
Interest
Interest is capitalized during periods of active equipment construction. During the three
months ended September 30, 2010 and 2009, the Company incurred total interest costs of $7.3 million
and $7.1 million, respectively, of which $0.3 million and $0.1 million, respectively, were
capitalized.
General
The Companys significant accounting policies are disclosed in the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2010 and have not materially changed as of the date of
this Report with the exception of the following:
Restricted
Cash
In September 2010, the Company entered into a letter of credit facility, which requires cash
collateral equal to 102% of any exposure under letters of credit issued under the facility. Such
collateral is recorded as restricted cash on the Companys Consolidated Balance Sheets.
Revenues
from Product Development Agreements
In July 2010, the Company began recording research and development cost sharing arrangements
as research and development expense as incurred. The amounts funded by the customer will be
recognized as an offset to the aggregate research and development expense rather than as contract
revenues.
Recently Adopted Accounting Pronouncements
On July 1, 2010, the Company adopted the provisions of the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC), which amends Topic 810 Consolidations
(ASC 810) to change the consolidation guidance applicable to a variable interest entity (VIE).
It also amends the guidance governing the determination of whether an enterprise is the primary
beneficiary of a VIE (and is therefore required to consolidate the VIE), by requiring a qualitative
analysis rather than a quantitative analysis. The qualitative analysis will include, among other
things, consideration of which enterprise has the power to direct the activities of the entity that
most significantly impact the entitys economic performance and which enterprise has the obligation
to absorb losses or the right to receive benefits of the VIE that could potentially be significant
to the VIE. This standard also requires continuous reassessments of whether an enterprise is the
primary beneficiary of a VIE. Previously, reconsideration of whether an enterprise was the primary
beneficiary of a VIE only was required when specific events had occurred. Qualifying special
purpose entities, which were previously exempt from the application of this standard, will be
subject to the provisions of this standard when it becomes effective. ASC 810 also requires
enhanced disclosures about an enterprises involvement with a VIE. ASC 810 is
effective as of the beginning of the Companys first annual reporting period that begins after
November 15, 2009. The adoption of ASC 810 did not have any impact on the Companys consolidated
financial statements.
On July 1, 2010, the Company adopted FASB Accounting Standards Update (ASU) 2009-13,
Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a Consensus of the
FASB Emerging Issues Task Force
(ASU 2009-13), which amends ASC Subtopic 605-25 for separate
consideration in multiple-deliverable arrangements. ASU 2009-13 eliminates the use of the residual
6
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method for allocating consideration, as well as the criteria that requires objective and reliable
evidence of fair value of undelivered elements in order to separate the elements in a
multiple-element arrangement. Upon adoption of the guidance the delivered element(s) will be
considered a separate unit of accounting only if both of the following criteria are met: (i) the
delivered item(s) has stand-alone value to the customer and (ii) if a general right of return
exists relative to the delivered item(s), delivery or performance of the undelivered item(s) is
substantially in the control of the vendor and is considered probable. ASU 2009-13 is effective
for fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-13 did not have any
impact on the Companys consolidated financial statements.
On
July 1, 2010, the Company adopted the FASB ASU 2009-15,
Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing
(ASU 2009-15),
which amends ASC 470-20 clarifies that share lending arrangements that are executed in connection
with convertible debt offerings or other financings should be measured at fair value and recognized
as a debt issuance cost which is amortized using the effective interest method over the life of the
financing arrangement as interest cost. In addition, ASU 2009-15 states that the loaned shares
should be excluded from basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the common and diluted
earnings per share calculation. The amended provisions of ASC 470-20 is effective for all
arrangements outstanding as of the fiscal year beginning on or after December 15, 2009, and
retrospective application is required for all periods presented. In addition, ASC 470-20 is
effective for arrangements entered into on or after the beginning of the first reporting period
that begins on or after June 15, 2009.
The following table summarizes the effect of adopting ASC 470-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations for the
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
ASC 470-20
|
|
|
As Reported
|
|
|
|
(in thousands, except per share amounts)
|
|
Interest expense
|
|
$
|
(6,963
|
)
|
|
$
|
(207
|
)
|
|
$
|
(7,170
|
)
|
Total Other Income (Expense)
|
|
|
(4,477
|
)
|
|
|
(207
|
)
|
|
|
(4,684
|
)
|
Net Loss before Income Taxes
|
|
|
(12,755
|
)
|
|
|
(207
|
)
|
|
|
(12,962
|
)
|
Net Loss
|
|
|
(11,840
|
)
|
|
|
(207
|
)
|
|
|
(12,047
|
)
|
Net loss attributable to ECD Stockholders
|
|
|
(11,766
|
)
|
|
|
(207
|
)
|
|
|
(11,973
|
)
|
Loss per share
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
(0.28
|
)
|
Diluted loss per share
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
(0.28
|
)
|
7
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of June 30, 2010
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
ASC 470-20
|
|
|
As Reported
|
|
|
|
(in thousands)
|
|
Other assets
|
|
$
|
10,980
|
|
|
$
|
3,626
|
|
|
$
|
14,606
|
|
Total assets
|
|
|
688,321
|
|
|
|
3,626
|
|
|
|
691,947
|
|
Additional paid-in capital
|
|
|
1,074,410
|
|
|
|
5,500
|
|
|
|
1,079,910
|
|
Accumulated deficit
|
|
|
(772,514
|
)
|
|
|
(1,874
|
)
|
|
|
(774,388
|
)
|
Total ECD stockholders equity
|
|
|
298,112
|
|
|
|
3,626
|
|
|
|
301,738
|
|
Total stockholders equity
|
|
|
297,999
|
|
|
|
3,626
|
|
|
|
301,625
|
|
Total liabilities and stockholders equity
|
|
|
688,321
|
|
|
|
3,626
|
|
|
|
691,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows for the
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
ASC 470-20
|
|
|
As Reported
|
|
|
|
(in thousands)
|
|
Net loss
|
|
$
|
(11,840
|
)
|
|
$
|
(207
|
)
|
|
$
|
(12,047
|
)
|
Amortization of
debt discount and
deferred financing
fees
|
|
|
3,908
|
|
|
|
207
|
|
|
|
4,115
|
|
Note 2 Loss Per Share
Basic loss per common share attributable to ECD stockholders is computed by dividing the net
loss attributable to ECD stockholders by the weighted average number of common shares outstanding
for the period. Diluted loss per share attributable to ECD stockholders reflect the potential
dilution that could occur if securities or other contracts to issue common stock were exercised and
converted into common stock or resulted in the issuance of common stock that then shared in the net
loss attributable to ECD stockholders. The following table reconciles the numerator and
denominator to calculate basic and diluted loss per share attributable to ECD stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
|
|
to ECD
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amounts
|
|
|
|
(in thousands, except per share amounts)
|
|
Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(13,456
|
)
|
|
|
46,128
|
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(11,973
|
)
|
|
|
42,299
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
8
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following securities would have had an anti-dilutive effect on earnings per share and are
therefore excluded from the computations above.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Share-based payment arrangements
|
|
|
1,428
|
|
|
|
1,311
|
|
As part of the agreement for the Convertible Senior Notes (Notes) issued in June 2008, the
Company also issued 3,444,975 shares as part of a share-lending arrangement with the underwriter.
The purpose of the share-lending agreement is to facilitate transactions which allow the investors
in the Notes to hedge their investments in the Notes. The underwriter received all proceeds from
any sale of shares pursuant to the share lending agreement. The shares must be returned to the
Company no later than the maturity date of the Notes. These shares are considered issued and
outstanding and have all the rights of any holder of the Companys common stock. However, because
the shares must be returned to the Company, the shares are not considered outstanding for purposes
of calculating earnings per share.
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Companys common stock, the price of the Notes, and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, with respect to any amounts in excess of the principal amount, if
applicable, shares of the Companys common stock initially at a conversion rate of 10.8932 shares
(equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal
amount of the Notes. The holders of the Notes are only entitled to amounts in excess of the
principal amount if shares of the Companys common stock exceed a market price of $91.80 for a
period of 20 consecutive trading days during the applicable cash settlement averaging period.
During the three months ended September 30, 2010 and 2009, the Companys common stock price did not
exceed the conversion price. Therefore, there are no contingently issuable shares to include in
the diluted earnings per share calculation.
Note 3 Supplemental Cash Flow Information
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest, including capitalized interest
|
|
$
|
849
|
|
|
$
|
680
|
|
Cash paid for income taxes
|
|
|
36
|
|
|
|
6
|
|
Decrease in accounts payable for capital expenditures
|
|
|
4,679
|
|
|
|
3,845
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred to finance capital equipment
|
|
|
|
|
|
|
50
|
|
9
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4
Acquisition
On August 19, 2009, the Company acquired 100% of the outstanding common shares of SIT, a Los
Angeles-based company that manufactures, designs and installs building integrated photovoltaic
roofing systems for commercial rooftops. The acquisition is an important element of the Companys
future growth plan as it transitions from manufacturing and selling a product to a company that
provides complete solar solutions, project implementation and value-added services. The Company
expects to enhance its downstream presence by combining its strengths as a product innovator with
the proven installation expertise and global footprint of SIT. The acquisition also strengthens
and diversifies the Companys business.
The Company paid 6.75 pence per share, or approximately $11.3 million cash consideration for
all of outstanding shares of SIT. The Company also recognized a gain of $0.4 million due to the
effective settlement of the Companys and SITs preexisting contractual supply relationship. The
gain was determined using a discounted cash flow analysis and was recorded in Selling, general and
administrative expenses in the Companys Consolidated Statements of Operations. The Company
incurred $3.0 million of acquisition-related costs during the quarter ended September 30, 2009
which are included in Selling, general and administrative expenses in the Companys Consolidated
Statements of Operations.
Purchase Price Allocation
The following table summarizes the final amounts of assets acquired and liabilities assumed
recognized at the acquisition date.
|
|
|
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
9,180
|
|
Accounts receivable
|
|
|
9,962
|
|
Inventory
|
|
|
24,031
|
|
Other current assets
|
|
|
2,372
|
|
Long-term receivables
|
|
|
11,769
|
|
Property, plant and equipment
|
|
|
2,030
|
|
Other long-term assets
|
|
|
2,010
|
|
Identifiable intangible assets
|
|
|
2,780
|
|
Goodwill
|
|
|
35,299
|
|
Warranty liability
|
|
|
(38,548
|
)
|
Current liabilities
|
|
|
(27,293
|
)
|
Long-term liabilities
|
|
|
(21,913
|
)
|
|
|
|
|
Total net assets acquired
|
|
$
|
11,679
|
|
|
|
|
|
The fair value of the accounts receivable acquired was $10.0 million. The gross contractual
amount due is $10.0 million, of which an insignificant amount is expected to be uncollectible. In
addition, sales-type lease receivables with a fair value of $12.7 million were acquired. The gross
contractual amount due is $18.8 million. A liability of $38.5 million has been recognized for
estimated warranty claims on products sold by SIT.
10
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of operations for SIT are included in the Companys consolidated financial statements
beginning August 19, 2009. The unaudited pro forma combined historical results for the amounts of
SITs revenue and earnings that would have been included in the Companys Consolidated Statements of Operations had the acquisition date been July 1, 2009 is as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30, 2009
(1)
|
|
|
(in thousands, except per share amounts)
|
Pro Forma Information
|
|
|
|
|
Revenues
|
|
$
|
47,838
|
|
Net loss attributable to ECD stockholders
|
|
|
(15,640
|
)
|
Loss per share
|
|
|
(0.37
|
)
|
Diluted loss per share
|
|
|
(0.37
|
)
|
|
|
|
(1)
|
|
As adjusted due to implementation of FASB ASC 470-20
|
The pro forma information includes adjustments for depreciation and the effect of the
amortization of intangible assets recognized in the acquisition, along with intercompany
elimination entries. This pro forma information is not necessarily indicative of future operating
results.
Goodwill and Intangible Assets
In conjunction with the SIT acquisition, goodwill of approximately $35.3 million was recorded
and consisted largely of the synergies and economies of scale from combining the operations of the
Company and SIT. All of the goodwill has been allocated to the Companys United Solar Ovonic
Segment. It is estimated that none of the goodwill recognized will be deductible for income tax
purposes.
In addition, intangible assets with a fair value of $2.8 million were recorded, including
trade name intangible assets with an indefinite life of $1.1 million. Amortization expense was
$0.1 million for the three months ended September 30, 2009.
During the third quarter of fiscal year 2010, changing market conditions, losses incurred
to-date and the increased near-term capacity anticipated from our Technology Roadmap developed
during the third quarter, caused us to evaluate the recoverability of our long-lived assets and
goodwill. As a result, we wrote off all of our goodwill and intangible assets.
11
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Investments
Short-Term Investments
The following schedule summarizes the unrealized gains and losses on the Companys short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
118,092
|
|
|
$
|
350
|
|
|
$
|
(1,050
|
)
|
|
$
|
117,392
|
|
Commercial paper
|
|
|
6,979
|
|
|
|
5
|
|
|
|
(9
|
)
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,073
|
|
|
$
|
355
|
|
|
$
|
(1,059
|
)
|
|
$
|
125,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
89,935
|
|
|
$
|
5
|
|
|
$
|
(1,377
|
)
|
|
$
|
88,563
|
|
U.S. Government securities
|
|
|
11,001
|
|
|
|
4
|
|
|
|
|
|
|
|
11,005
|
|
Auction rate certificates
|
|
|
14,200
|
|
|
|
|
|
|
|
(1,731
|
)
|
|
|
12,469
|
|
Auction rate securities rights
|
|
|
|
|
|
|
1,734
|
|
|
|
|
|
|
|
1,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,136
|
|
|
$
|
1,743
|
|
|
$
|
(3,108
|
)
|
|
$
|
113,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes the contractual maturities of the Companys short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
June 30, 2010
|
|
|
|
Amortized Cost
|
|
|
Market value
|
|
|
Amortized Cost
|
|
|
Market Value
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Due in less than one year
|
|
$
|
65,504
|
|
|
$
|
64,723
|
|
|
$
|
38,586
|
|
|
$
|
39,189
|
|
Due after one year
through five years
|
|
|
60,569
|
|
|
|
60,646
|
|
|
|
76,550
|
|
|
|
74,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,073
|
|
|
$
|
125,369
|
|
|
$
|
115,136
|
|
|
$
|
113,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The corporate bonds and U.S. government securities are classified as available-for-sale. On
June 30, 2010, the Company elected its right to sell the remaining ARCs and liquidate its ARSRs.
These transactions settled in July 2010.
Note 6
-
Sales-Type Lease Receivables
In 2005 and 2006, SIT entered into Energy Services Agreements (ESAs) whereby customers
agreed to pay SIT, on a monthly basis over a 20-year period, for the electricity generated from the
BIPV roofing systems installed on their buildings. The customers pay for the energy produced by
solar systems at a rate specified in each contract. SIT recorded a lease receivable to reflect the
future stream of energy services payments from customers over the 20-year period.
12
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales-type lease receivables consisted of the following:
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
(in thousands)
|
|
Total minimum lease payments receivable
|
|
$
|
17,567
|
|
Less: Unearned income
|
|
|
(6,054
|
)
|
|
|
|
|
Net investment in sales-type leases
|
|
$
|
11,513
|
|
|
|
|
|
Executory costs included in total minimum lease payments were not significant. In addition,
no value was assigned to the estimated residual value of the leased equipment due to the 20-year
lease term. Future minimum receivables under all noncancelable sales-type leases as of September
30, 2010 are as follows:
|
|
|
|
|
Fiscal Year
|
|
(in thousands)
|
|
2011
|
|
$
|
1,000
|
|
2012
|
|
|
1,020
|
|
2013
|
|
|
1,040
|
|
2014
|
|
|
1,061
|
|
2015
|
|
|
1,082
|
|
Thereafter
|
|
|
12,364
|
|
|
|
|
|
|
|
$
|
17,567
|
|
|
|
|
|
Note 7
-
Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Finished products
|
|
$
|
31,420
|
|
|
$
|
27,690
|
|
Work in process
|
|
|
17,430
|
|
|
|
13,905
|
|
Raw materials
|
|
|
14,746
|
|
|
|
19,900
|
|
|
|
|
|
|
|
|
|
|
$
|
63,596
|
|
|
$
|
61,495
|
|
|
|
|
|
|
|
|
Substantially all of the Companys inventories are included in its United Solar Ovonic
Segment. The above amounts are net of a reserve for slow moving and obsolete inventory of $12.9
million and $15.9 million as of September 30, 2010 and June 30, 2010, respectively.
13
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 Liabilities
Warranty Liability
A summary of the warranty liability is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Liability at June 30, 2010
|
|
$
|
41,335
|
|
Warranty expense
|
|
|
1,578
|
|
Warranty claims
|
|
|
(1,659
|
)
|
Foreign currency impact
|
|
|
864
|
|
|
|
|
|
Liability at September 30, 2010
|
|
$
|
42,118
|
|
|
|
|
|
Other Long-Term Liabilities
A summary of the Companys other long-term liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Structured financing
|
|
$
|
12,717
|
|
|
$
|
12,929
|
|
Long-term retirement
|
|
|
1,608
|
|
|
|
1,663
|
|
Customer deposits
|
|
|
|
|
|
|
120
|
|
Deferred patent license fees
|
|
|
3,095
|
|
|
|
3,333
|
|
Deferred revenue and royalties
|
|
|
297
|
|
|
|
297
|
|
Rent payable
|
|
|
1,195
|
|
|
|
1,145
|
|
Other
|
|
|
356
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
$
|
19,268
|
|
|
$
|
19,872
|
|
|
|
|
|
|
|
|
Note 9 Long-Term Debt
Lines of Credit
During September 2010, the Company terminated its $30.0 million and $25.0 million secured
revolving credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The
security provided under the secured revolving credit facility has been released. The secured
revolving credit facility was replaced with a Letter of Credit Facility, also with JP Morgan Chase
Bank, N.A. Under the Letter of Credit Facility, we may issue up to $25.0 million in letters of
credit, which will be secured by cash equal to 102% of the letters of credit exposure. The Letter
of Credit Facility matures on February 4, 2013. Letters of credit totaling approximately $8.6
million as of September 30, 2010 were transferred from the cancelled secured revolving credit
facility to the new Letter of Credit Facility.
Convertible Senior Notes
In June 2008, the Company completed an offering of $316.3 million of Convertible Senior Notes
(Notes). The Notes bear interest at a rate of 3.0% per year, payable semi-annually on June 15
and December 15 of each year, commencing on December 15, 2008. If the Notes are not converted,
they will mature on June 15, 2013.
14
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes are only convertible prior to March 15, 2013 under specific circumstances involving
the price of the Companys common stock, the price of the Notes and certain corporate transactions
including, but not limited to, an offering of common stock at a price less than market, a
distribution of cash or other assets to stockholders, a merger, consolidation or other share
exchange, or a change in control. The holders of the Notes may convert the principal amount of
their notes into cash and, if applicable, shares of the Companys common stock initially at a
conversion rate of 10.8932 shares (equivalent to an initial conversion price of approximately
$91.80 per share) per $1,000 principal amount of the Notes. The holders of the Notes are only
entitled to amounts in excess of the principal amount if shares of the Companys common stock
exceed a market price of $91.80 for a period of 20 consecutive trading days during the applicable
cash settlement averaging period.
During September 2010, the Company entered into exchange agreements with certain holders of
the Companys Notes whereby the Company issued an aggregate of 1,309,263 shares of its common stock
in exchange for an aggregate principal amount of $9.1 million held by the holders of the Notes. In
connection with this exchange the Company recorded a gain on debt extinguishment of $1.2 million.
The effective interest rate for the three month periods ended September 30, 2010 and 2009 was
11.0% and 10.4%, respectively. At September 30, 2010 and June 30, 2010, the carrying amount of the
conversion option recorded in stockholders equity was $81.8 million and $81.9 million,
respectively.
The net carrying amount of the Notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
June 30, 2010
|
|
|
|
(in thousands)
|
|
Outstanding principal
|
|
$
|
284,153
|
|
|
$
|
293,250
|
|
Less: unamortized discount
|
|
|
44,508
|
|
|
|
49,596
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
239,645
|
|
|
$
|
243,654
|
|
|
|
|
|
|
|
|
The gross interest expense recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Contractual interest
|
|
$
|
2,199
|
|
|
$
|
2,372
|
|
Amortization of discount
|
|
|
3,663
|
|
|
|
3,599
|
|
Amortization of debt issue costs
|
|
|
579
|
|
|
|
516
|
|
|
|
|
|
|
|
|
Gross interest expense recognized
|
|
$
|
6,441
|
|
|
$
|
6,487
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of ASC 470-20 on July 1, 2010, with retrospective
application to prior periods. (See Note 1 Nature of Operations, Basis of Presentation and
Summary of Significant Accounting Policies for additional information). As part of the agreement
for the Notes issued in June 2008, the Company also issued 3,444,975 shares as part of a
share-lending arrangement with the
15
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underwriter. The shares issued as part of the share lending arrangement coincide with the
Notes term and will terminate on June 15, 2013. The fair value of the outstanding loaned shares as
of September 30, 2010 and June 30, 2010 was $17.3 million and $14.1 million, respectively. The
Company recognized debt issuance costs of $5.5 million which are amortized using the effective
interest method over the life of the financing arrangement as interest cost and are included in
Other assets in the Companys Consolidated Balance Sheets. The Company has $3.7 million and $3.9
million of unamortized issuance costs associated with the share-lending arrangement as of September
30, 2010 and June 30, 2010, respectively. In addition, the Company recognized an additional $0.2
million of interest costs relating to the amortization of the issuance costs associated with the
share lending arrangement for both of the periods ended September 30, 2010 and 2009, respectively.
The counterparty to the share lending agreement is required to provide collateral at least equal to
100% of the market value of the loaned shares when the rating from Standard and Poors Ratings
Group for its indebtedness falls below A-. No collateral was required as of September 30, 2010.
Note 10 Commitments and Contingencies
The Company is subject to certain legal actions and claims arising in the ordinary course of
business, including, without limitation, commercial disputes, intellectual property matters,
personal injury claims, tax claims and employment matters. Although the outcome of any legal
matter cannot be predicted with certainty, management does not believe that any of these legal
proceedings or matters will have a material adverse effect on the consolidated financial position,
results of operations, or liquidity of the Company.
Note 11 Restructuring Charges
The Company has incurred ongoing restructuring charges to better align operating expenses with
near-term revenue expectations. In September 2010, the Company incurred additional restructuring
charges as part of its manufacturing capacity realignment. The Company estimates that it will
incur total restructuring costs of $0.5 million, all of which was recognized during the three
months ended September 30, 2010 and was primarily related to employee severance. The restructuring
is expected to be completed in the second quarter of fiscal year 2011. The restructuring charges
were primarily incurred in the United Solar Ovonic segment.
A summary of the Companys restructuring liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-Related
|
|
|
Other
|
|
|
|
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Total
|
|
|
|
(in thousands)
|
Balance June 30, 2010
|
|
$
|
3,311
|
|
|
$
|
|
|
|
$
|
3,311
|
|
Charges
|
|
|
473
|
|
|
|
18
|
|
|
|
491
|
|
Utilization or payment
|
|
|
(1,800
|
)
|
|
|
(18
|
)
|
|
|
(1,818
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2010
|
|
$
|
1,984
|
|
|
$
|
|
|
|
$
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 Share-Based Compensation
The Company records the fair value of stock-based compensation grants as an expense. Total
share-based compensation expense for the three month periods ended September 30, 2010 and 2009 was
$0.9 million and $1.1 million, respectively.
16
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
In order to determine the fair value of stock options on the date of grant, the Company
applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to
expected stock-price volatility, option life, risk-free interest rate and dividend yield. While
the risk-free interest rate and dividend yield are less subjective assumptions, typically based on
factual data derived from public sources, the expected stock-price volatility and option life
assumptions require a greater level of judgment.
The Company uses an expected stock-price volatility assumption that is based on historical
implied volatilities of the underlying stock which is obtained from public data sources. The
risk-free interest rate is based on the yield of U.S. Treasury securities with a term equal to that
of the option. With regard to the weighted-average option life assumption, the Company considers
the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are
determined on specific criteria of the aggregate pool of optionees. Forfeiture rates are based on
the Companys historical data for stock option forfeitures.
A summary of the transactions during the three months ended September 30, 2010 with respect to
the Companys stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Value
(1)
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in thousands)
|
|
Outstanding at June 30, 2010
|
|
|
864,849
|
|
|
$
|
25.06
|
|
|
$
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(15,625
|
)
|
|
|
24.94
|
|
|
|
|
|
Forfeited
|
|
|
(4,988
|
)
|
|
|
46.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September
30, 2010
|
|
|
844,236
|
|
|
|
24.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the exercise price of the option.
|
The table below sets forth stock options exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Life
|
|
|
|
|
|
|
|
Exercise
|
|
|
Value
(1)
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in thousands)
|
|
|
in Years
|
|
Exercisable at September 30, 2010
|
|
|
740,913
|
|
|
$
|
23.60
|
|
|
$
|
|
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
|
726,944
|
|
|
|
22.75
|
|
|
|
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the exercise price of the option.
|
17
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2010, there was $1.0 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the plan. The cost is
expected to be recognized over a weighted-average period of 1.3 years.
Restricted Stock Awards
Restricted stock awards (RSAs) consist of shares of common stock the Company issued to
employees and nonemployee directors. Upon issuance, RSAs become outstanding and have voting
rights. The shares issued to employees are subject to forfeiture and to restrictions which limit
the sale or transfer during the restriction period. The fair value of the RSAs is determined on
the date of grant based on the market price of the Companys common stock and is recognized as
compensation expense. The value of RSAs granted to employees is amortized over their three-year
vesting period, while the value of RSAs granted to nonemployee directors is amortized over a two-
to nine-year vesting period.
Information concerning RSAs awarded during the three month period ended September 30, 2010 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
Nonvested at June 30, 2010
|
|
|
101,668
|
|
|
$
|
31.14
|
|
Awarded
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,435
|
)
|
|
|
20.81
|
|
Released from restriction
|
|
|
(30,285
|
)
|
|
|
25.76
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010
|
|
|
69,948
|
|
|
|
33.68
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there was $2.1 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the plan. The cost is
expected to be recognized over a weighted-average period of 1.4 years.
Restricted Stock Units RSUs
RSUs settle on a one-for-one basis in shares of the Companys common stock and vest in
accordance with the terms of the 2006 Stock Incentive Plan or the Executive Severance Plan and the
2009 Long Term Incentive Plan (collectively the Plans), as applicable. On September 30, 2009,
the Companys Board of Directors approved an offer to exchange approximately 98,000 previously
issued RSUs for new RSUs on a one-for-one basis.
18
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the RSUs is determined on the date of grant based on the market price of the
Companys common stock and is recognized as compensation expense. Information concerning RSUs
awarded during the three month period ended September 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested at June 30, 2010
|
|
|
309,622
|
|
|
$
|
18.57
|
|
Awarded
|
|
|
399,500
|
|
|
|
3.95
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(132,570
|
)
|
|
|
12.52
|
|
Released from restriction
|
|
|
(1,070
|
)
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010
|
|
|
575,482
|
|
|
|
9.84
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there was $1.7 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the Plans. The cost is
expected to be recognized over a weighted-average period of 2.6 years.
Note 13 Fair Value Measurements
Financial instruments held by the Company include corporate bonds, U.S. government securities,
and money market funds. The Company measures certain financial assets at fair value on a recurring
basis, including cash equivalents and available-for-sale securities. The fair value of these
financial assets was determined based on observable and unobservable inputs.
Observable inputs consist of market data obtained from independent sources while unobservable
inputs reflect the Companys own market assumptions. These inputs create the following fair value
hierarchy:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
Level 2 Valuations based on quoted prices in markets that are not active,
quoted prices for similar assets or liabilities or all other inputs that are
observable
|
|
|
|
|
Level 3 Unobservable inputs for which there is little or no market data which
require the Company to develop its own assumptions
|
If the inputs used to measure the fair value of a financial instrument fall within different
levels of the hierarchy, the financial instrument is categorized based upon the lowest level input
that is significant to the fair value measurement.
Whenever possible, the Company uses quoted market prices to determine fair value. In the
absence of quoted market prices, the Company uses independent sources and data to determine fair
value. At September 30, 2010, the fair value of the Companys investments in corporate bonds, U.S.
government securities, and money market funds was determined using quoted prices in active markets.
The carrying values of the Companys cash, cash equivalents, short-term investments, accounts
receivable, and accounts payable approximate their fair values. The fair value of the derivative
instruments recorded in
19
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Companys Consolidated Balance Sheets as of September 30, 2010 was not significant. The
fair value of the Companys convertible senior notes was estimated at $196.1 million as of
September 30, 2010 using level 1 inputs. In addition, the fair
value of the Companys outstanding loaned shares related to the share-lending agreement was estimated at $17.3 million as of September 30, 2010 using level 1
inputs.
Information regarding the Companys assets measured at fair value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
Fair Value Measurements at
|
|
|
and Carrying
|
|
|
|
Reporting Date Using
|
|
|
Value on our
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance Sheet
|
|
|
|
(in thousands)
|
|
Investments in corporate bonds
|
|
$
|
117,392
|
|
|
|
|
|
|
|
|
|
|
$
|
117,392
|
|
Investments in commercial paper
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
6,975
|
|
Investments in U.S. government securities
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Investments in money market funds
|
|
|
52,141
|
|
|
|
|
|
|
|
|
|
|
|
52,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
|
Fair Value Measurements at
|
|
|
and Carrying
|
|
|
|
Reporting Date Using
|
|
|
Value on our
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance Sheet
|
|
|
|
(in thousands)
|
|
Auction rate certificates
|
|
|
|
|
|
|
|
|
|
$
|
12,469
|
|
|
$
|
12,469
|
|
Auction rate securities rights
|
|
|
|
|
|
|
|
|
|
|
1,734
|
|
|
|
1,734
|
|
Investments in corporate bonds
|
|
$
|
88,563
|
|
|
|
|
|
|
|
|
|
|
|
88,563
|
|
Investments in U.S. government
securities
|
|
|
11,005
|
|
|
|
|
|
|
|
|
|
|
|
11,005
|
|
Investments in money market funds
|
|
|
59,375
|
|
|
|
|
|
|
|
|
|
|
|
59,375
|
|
The following table presents the changes in Level 3 assets for the period ended September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
Auction Rate
|
|
|
|
Certificates
|
|
|
Securities Rights
|
|
|
|
(in thousands)
|
|
Balance at June 30, 2010
|
|
$
|
12,469
|
|
|
$
|
1,734
|
|
Redeemed by UBS
|
|
|
(14,200
|
)
|
|
|
|
|
Net gain (loss) recognized in earnings
|
|
|
1,731
|
|
|
|
(1,734
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
20
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 Income Taxes
The net tax expense of $0.2 million for the three months ended September 30, 2010 primarily
relates to the Companys non-U.S. operations.
At September 30, 2010, the Company had a net deferred tax asset of $1.1 million resulting from
the release of the valuation allowance in the second quarter of fiscal 2010 on the realizable
portion of its net deferred tax assets.
Included within the Companys net operating losses (NOLs) of $422.8 million, are acquired
NOLs of approximately $61.7 million in connection with the acquisition of SIT. Section 382 and 383
of the Internal Revenue Code limits the utilization of these NOLs and certain other tax attributes.
These provisions apply after a Company has undergone an ownership change and is based on the value
of the stock of the acquired loss corporation before the ownership change times a long-term tax
exempt rate, a rate published by the Internal Revenue Service (IRS). The estimated annual
limitation of the acquired SIT NOLs is approximately $0.5 million.
The Company has a full valuation allowance against its remaining net deferred tax assets of
$302.3 million (consisting primarily of U.S. net operating loss carryforwards which expire in
various amounts between the current year and 2030, and basis differences in property, plant and
equipment and intangible assets). Based on the Companys operating results for the preceding
years, it was determined that it was more likely than not that the deferred tax assets would not be
realized.
Note 15 Variable Interest Entity
A variable interest entity (VIE) is an entity that by design has (i) insufficient equity to
permit it to finance its activities without additional subordinated financial support or (ii)
equity holders that lack the characteristics of a controlling financial interest. VIEs are
consolidated by the primary beneficiary, which is the entity that has both the power to direct the
activities that most significantly impact the entitys economic performance and the obligation to
absorb losses of the entity or the right to receive benefits from the entity that potentially could
be significant to the entity. Variable interests in a VIE are contractual, ownership, or other
financial interests in a VIE that change with changes in the fair value of the VIEs net assets.
In 2010, the Company entered into a development loan agreement and a development services
agreement with Winch Energia S.R.L. and its affiliates (collectively, Winch) whereby it would
fund Winchs acquisition of development rights for solar installation projects in Italy and France.
As part of these agreements, the Company provides Winch with the funding necessary to procure the
development rights and defray third party development expenditures through the time permanent
financing is obtained. The Company will also procure the solar modules for the projects. Winch
manages the development of the solar projects, arranges the construction debt financing and
procures the turnkey Engineering, Procurement and Construction (EPC) contractor, who will install
the solar modules procured by the Company. In the event of a loan default, the Company may request
that the Winch shareholders transfer 100% of their equity interests to it for a fee of 1 Euro. If
this provision is enforced and the Company realizes the value of its loan by selling or otherwise
monetizing the development rights, the net proceeds (after deducting costs, interest, and other
amounts owed to it) are to be remitted to Winch. As of September 30, 2010 and June 30, 2010 the
balance of the outstanding loan was $17.4 million and $14.2 million, respectively. The loan bears
interest at 5% per annum and the Company will also receive a fee
21
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equivalent to a 10% annual interest rate on the outstanding borrowings under the loan as
compensation for services provided to support the development of the projects. These amounts are
payable upon maturity of the development loan.
The Company determined Winch was a VIE because its equity investment at risk is insufficient
to permit it to finance its activities without additional financial support. As a result of a
qualitative and quantitative analysis of Winch, the Company determined it was the primary
beneficiary of the VIE because it has the power to direct the activities that most significantly
impact Winchs economic performance and it is expected to absorb a majority of Winchs expected
losses, should losses be incurred. Although the Company is the primary beneficiary, Winch has not
been consolidated because it is not material to the Companys results of operations, financial
condition, or liquidity as of and for the period ended September 30, 2010. The Winch VIE had
assets of $19.3 million and an insignificant amount of liabilities (other than amounts owed to the
Company).
Note 16 Business Segments
The Company has two segments, United Solar Ovonic and Ovonic Materials. The Company includes
SIT in its United Solar Ovonic segment.
The following table lists the Companys segment information and reconciliation to the
Companys consolidated financial statement amounts. The grouping Corporate and Other below does
not meet the definition of an operating segment as it contains the Companys headquarter costs,
consolidating entries, and the Companys investments in joint ventures, which are not allocated to
the above segments; however, it is included below for reconciliation purposes only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar
|
|
|
Ovonic
|
|
|
Corporate
|
|
|
|
|
|
|
Ovonic
|
|
|
Materials
|
|
|
and Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Three Months Ended
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
65,284
|
|
|
$
|
3,061
|
|
|
$
|
52
|
|
|
$
|
68,397
|
|
Operating (loss) income
|
|
|
(4,486
|
)
|
|
|
1,824
|
|
|
|
(5,363
|
)
|
|
|
(8,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
39,520
|
|
|
|
3,405
|
|
|
|
19
|
|
|
|
42,944
|
|
Operating (loss) income
|
|
|
(1,714
|
)
|
|
|
1,605
|
|
|
|
(8,169
|
)
|
|
|
(8,278
|
)
|
Note 17 Litigation
On July 13, 2009, Ovonic Battery Company (OBC), a majority-owned subsidiary of the Company,
and Chevron Technology Ventures LLC (CTV) completed a sale of 100% of the membership interests in
Cobasys to SB LiMotive Co. Ltd. for $1. In connection with the sale of Cobasys, the Amended and
Restated Operating Agreement dated July 2, 2004 was terminated effective as of the transaction
date. Termination of the Operating Agreement was effectuated by a Termination Agreement dated as
of the transaction date. This transaction coincides with settlement of a pending lawsuit against
Cobasys filed in August 2008 by Mercedes-Benz U.S. International, Inc. (MBUSI). In connection
with settling the lawsuit, OBC paid MBUSI $1.1 million from the $1.3 million in royalties
distributed to it by Cobasys and
22
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entered into a mutual release with MBUSI of all Cobasys-related claims. In addition, Cobasys
restructured its intellectual property licenses with the Company and OBC so that OBC has
royalty-free, exclusive rights to the technology for defined non-transportation uses and Cobasys
has royalty-free exclusive rights for defined transportation uses.
In connection with these transactions, OBC, CTV and the Company settled and jointly dismissed
their pending arbitration without any finding of financial liability. These parties entered into
mutual releases and agreed to the terms of the Cobasys sale transaction. In July 2009, the Company
recorded the $1.3 million received in connection with this settlement as a Distribution from joint
venture and the $1.1 million paid to MBUSI as Selling, general and administrative expenses.
23
Item 2
:
Managements Discussion and Analysis of Financial Condition and
Results of Operations
This section summarizes significant factors affecting the Companys consolidated operating
results, financial condition and liquidity for the three month period ended September 30, 2010.
The Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
included in the Report should be read in conjunction with the MD&A included in our Annual Report on
Form 10-K for the year ended June 30, 2010 as filed with the Securities and Exchange Commission and
with the Companys Consolidated Financial Statements and related notes appearing elsewhere in this
Report.
Overview
We design, manufacture and sell photovoltaic (PV) products, known as PV or solar laminates
that generate clean, renewable energy by converting sunlight into electricity. We also receive
fees and royalties from licensees of our nickel metal hydride (NiMH) battery technology and sell
high performance nickel hydroxide used in NiMH batteries, and receive funds for product development
agreements under government sponsored programs.
In August 2009, we acquired SIT, a company that manufactures, designs, and installs building
integrated PV systems for commercial rooftops. As a result of this acquisition, we are
transitioning our business from focusing primarily on manufacturing and selling our PV products to
providing complete solar solutions, project implementation and value-added services. The SIT
business is included in our United Solar Ovonic segment, which represents more than 90% of our
revenues.
We continue to adjust our production in our United Solar Ovonic segment and reduce costs to
respond to near-term market conditions and improve our overall competitiveness. We have incurred
restructuring expenses, including expenses of approximately $0.6 million in the three months ended
September 30, 2010, as a result of certain of these activities and may incur additional
restructuring expenses as we pursue further cost reduction activities in the future. We have also
recognized under-absorption of overhead costs, and associated period costs, resulting from our
production adjustments and may recognize similar costs in the future if we do not sustainably
operate our facilities at full productive capacity. In addition, in August 2010, we announced a
plan to realign our solar manufacturing capacity in our United Solar Ovonic segment among our
existing facilities as part of our overall cost reduction activities. Effective in the fall of
2010, we will shift certain final assembly operations from our Auburn Hills, Michigan campus to our
Tijuana, Mexico facility. We will continue to manufacture our proprietary solar cells at the Auburn
Hills campus and continue to refine our production plans as we implement our Technology Roadmap
designed to increase the conversion efficiency of our PV laminates and substantially reduce our
cost per watt during fiscal year 2011.
Key Indicators of Financial Condition and Operating Performance
In evaluating our business, we use product and system sales, gross profit, pre-tax income,
earnings per share, net income, cash flow from operations and other key performance metrics. We
also use production and shipments, measured in megawatts (MW), and gross margins on product sales
as key performance metrics for our United Solar Ovonic segment, particularly in connection with the
manufacturing operations in this segment. During the quarter ended September 30, 2010, we produced 33.6 MW compared to 33.2 MW for the same period in 2009.
24
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
United Solar Ovonic Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
53,260
|
|
|
$
|
33,536
|
|
System sales
|
|
|
11,650
|
|
|
|
2,567
|
|
Revenues from product development agreements
|
|
|
374
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
65,284
|
|
|
|
39,520
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
44,919
|
|
|
|
23,595
|
|
Cost of system sales
|
|
|
10,555
|
|
|
|
3,726
|
|
Cost of revenues from product development agreements
|
|
|
89
|
|
|
|
2,880
|
|
Product development and research
|
|
|
1,862
|
|
|
|
1,526
|
|
Preproduction costs
|
|
|
64
|
|
|
|
10
|
|
Selling, general and administrative
|
|
|
11,644
|
|
|
|
7,862
|
|
Loss on disposal of property, plant and equipment
|
|
|
43
|
|
|
|
974
|
|
Restructuring charges
|
|
|
594
|
|
|
|
661
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
69,770
|
|
|
|
41,234
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
$
|
(4,486
|
)
|
|
$
|
(1,714
|
)
|
|
|
|
|
|
|
|
Total revenues for the three months ended September 30, 2010 were $65.3 million, an increase
of $25.8 million or 65.2%, compared to the same period in 2009. This increase in total revenues
was primarily due to $9.1 million in system sales and $19.7 million in product sales, offset by
$3.0 million in expenses from product development agreements due to an accounting reclassification.
See Note 1 Nature of Operations, Basis of Presentation and Summary of Significant Accounting
Policies paragraph Revenues from Product Development Agreements to our Notes to the Consolidated
Financial Statements for additional information. The $19.7 million in product sales is comprised
of an increase of $25.6 million due to higher sales volume, offset by $5.9 million due to lower
average selling prices.
Cost of product sales for the three months ended September 30, 2010 was $44.9 million, an
increase of $21.3 million or 90.4%, compared to the same period in 2009. The increase was
primarily due to $28.9 million comprised of increased sales volume and an unfavorable change in
product mix and $0.8 million in increased warranty costs, offset by $5.1 million due to improved
manufacturing efficiencies and $3.3 million of lower depreciation expense due to the impairment
recorded in the third quarter of 2010.
Cost of system sales for the three months ended September 30, 2010 was $10.6 million, an
increase of $6.8 million or 183.3%, compared to the same period in 2009. The increase was
primarily due to the completion of a large scale job in Italy.
The combined cost of revenues from product development agreements and product development and
research expenses for the three months ended September 30, 2010 was $2.0 million, a decrease of
$2.4 million or 55.7%, compared to the same period in 2009. The decrease was primarily due to
lower product
25
development and research expenses on funded projects. The $3.3 million gross expense in the
current quarter was partially offset by $1.3 million of funding from cost sharing agreements.
Effective in the first quarter of fiscal year 2011, funding from cost sharing agreements is
recorded net with product development and research expenses.
Selling, general and administrative expenses for the three months ended September 30, 2010
were $11.6 million, an increase of $3.8 million or 48.1%, compared to the same period in 2009. The
change is primarily related to a decrease in our allowance for doubtful accounts receivable by $2.5
million in 2009.
During the three months ended September 30, 2010, we incurred restructuring charges to better
align operating expenses with near-term revenue expectations. The $0.6 million of charges were
primarily for employee severance. See Note 11 Restructuring Charges to our Notes to the
Consolidated Financial Statements for additional information.
Ovonic Materials Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
137
|
|
|
$
|
607
|
|
Royalties
|
|
|
2,115
|
|
|
|
1,959
|
|
Revenues from product development agreements
|
|
|
453
|
|
|
|
574
|
|
License and other revenues
|
|
|
356
|
|
|
|
265
|
|
|
|
|
|
|
|
|
TOTAL REVENUES
|
|
|
3,061
|
|
|
|
3,405
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
97
|
|
|
|
512
|
|
Cost of revenues from product development agreements
|
|
|
240
|
|
|
|
400
|
|
Product development and research
|
|
|
537
|
|
|
|
720
|
|
Selling, general and administrative expenses
|
|
|
363
|
|
|
|
168
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
1,237
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
1,824
|
|
|
$
|
1,605
|
|
|
|
|
|
|
|
|
Total revenues for the three months ended September 30, 2010 were $3.1 million, a decrease of
$0.3 million or 10.1%, compared to the same period in 2009. The decrease in total revenues was
primarily due to a decrease in sales of nickel hydroxide materials.
Combined cost of revenues from product development agreements and product development and
research expenses were $0.8 million, a decrease of $0.3 million or 30.6%, compared to the same
period in 2009. The decrease was due to reduced research and development expenses resulting from
the completion of certain product development contracts.
Corporate and Other
Selling, general and administrative expenses, which consist primarily of corporate operations,
including human resources, legal, finance, strategy, information technology, business development,
and corporate governance, were $5.6 million for the three months ended September 30, 2010, a
decrease of
26
$2.6 million or 31.7%, compared to the same period in 2009. The decrease was primarily due to
costs related to the acquisition of SIT and the divestiture of our minority interest in Cobasys in
the prior period.
Other Income (Expense)
Other expense was $5.3 million for the three months ended September 30, 2010 compared to $4.7
million in the same period in 2009. The $0.6 million increase was principally due to decreased
interest expense and foreign currency transaction losses.
Income Taxes
Income tax expense was $0.2 million for the three months ended September 30, 2010 compared to
$0.9 million income tax benefit in the same period in 2009. The increase in income taxes primarily
relates to a $1.1 million benefit for certain refundable research and development tax credits
recorded by the Company during September 2009 that were not available in the current period. The
Internal Revenue Service has not extended the election under IRC Section 168(k)(4) to monetize
these credits as of September 30, 2010.
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents and short-term investments. We
believe that cash, cash equivalents and investments will be sufficient to meet our liquidity needs
for our current operations. At September 30, 2010, we had consolidated net working capital of
$267.5 million, including $194.3 million in cash, cash equivalents, and short-term investments
consisting of Floating Rate Corporate Notes (FRNs), corporate notes, and U.S. Government agency
notes.
Cash Flows
Net cash provided by (used in) operating activities increased $45.1 million to $19.2 million
for the three months ended September 30, 2010 from $(25.9) million for the three months ended
September 30, 2009. This increase was driven by $52.3 million of favorable changes in net working
capital, specifically due to inventory, accounts receivable, and accounts payable offset by $7.2
million of our net income (loss) adjusted for non-cash items.
Net cash (used in) provided by investing activities decreased $57.2 million to $(27.6) million
for the three months ended September 30, 2010 from $29.6 million for the three months ended
September 30, 2009. This decrease was principally due to increased purchases of investments of
$45.5 million, development loans of $3.3 million, offset by reduced proceeds from maturities and
sales of our investments of $10.4 million.
Net cash used in financing activities decreased $5.5 million to $0.4 million for the three
months ended September 30, 2010 from $5.9 million for the three months ended September 30, 2009.
This decrease was principally due to the $5.7 million repayment of the revolving credit facility
made in the prior year.
Short-term Borrowings
During September 2010, we terminated our $30.0 million and $25.0 million secured revolving
credit facilities entered into in February 2008 with JP Morgan Chase Bank, N.A. The security
provided under the secured revolving credit facility has been released. The secured revolving
credit facility was replaced
27
with a Letter of Credit Facility, also with JP Morgan Chase Bank, N.A. Under the Letter of
Credit Facility, we may issue up to $25.0 million in letters of credit, which will be secured by
cash equal to 102% of the letters of credit exposure. The Letter of Credit Facility matures on
February 4, 2013. Letters of credit totaling approximately $8.6 million as of September 30, 2010
were transferred from the cancelled secured revolving credit facility to the new Letter of Credit
Facility.
Convertible Senior Notes
Our Convertible Senior Notes (Notes) bear interest at a rate of 3.0% per year, payable on
June 15 and December 15 of each year. If the Notes are not converted, they will mature on June 15,
2013. The Notes are only convertible prior to March 13, 2013 under specific circumstances involving
the price of our common stock, the price of the Notes and certain corporate transactions including,
but not limited to, an offering of common stock at a price less than market, a distribution of cash
or other assets to stockholders, a merger, consolidation or other share exchange, or a change in
control. The holders of the Notes may convert the principal amount of their notes into cash and,
if applicable, shares of our common stock initially at a conversion rate of 10.8932 shares
(equivalent to an initial conversion price of approximately $91.80 per share) per $1,000 principal
amount of the Notes. The holders of the Notes are only entitled to amounts in excess of the
principal amount if shares of our common stock exceed a market price of $91.80 for a period of 20
consecutive trading days during the applicable cash settlement averaging period. The applicable
conversion rate will be subject to adjustments in certain circumstances. The notes are senior
unsecured obligations of ECD and rank equal in right of payment with any future senior unsecured
debt of ECD, and senior in right of payment to all of ECDs existing and future debt, if any, that
is subordinated to the Notes.
In September 2010, we entered into exchange agreements with certain holders of our Notes
whereby we issued an aggregate of 1,309,263 shares of common stock in exchange for an aggregate
principal amount of $9.1 million of the Notes. In connection with this exchange we recorded a gain
on debt extinguishment of $1.2 million. During fiscal year 2011 we expect to pursue additional
debt-for-equity exchanges and other transactions to reduce the outstanding principal of our Notes
prior to their maturity.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies and critical accounting estimates are disclosed in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010. In addition, new
accounting policies adopted during the period are disclosed in Note 1 Nature of Operations, Basis
of Presentation and Summary of Significant Accounting Policies.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements that involve risks
and uncertainties. These forward-looking statements are made pursuant to safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
statements concerning our plans, objectives, goals, strategies, future events, future sales or
performance, capital expenditures, financing needs, plans or intentions relating to acquisitions,
business trends and other information that is not historical information. When used in this
report, the words estimates, expects, anticipates, projects, plans, intends,
believes, forecasts, foresees, likely, may, should, goal, target and variations of
such words or similar expressions are intended to identify forward-looking statements. All
forward-looking statements are based upon information available to us on the date of this report.
28
These forward-looking statements are subject to risks, uncertainties and other factors, many
of which are outside of our control that could cause actual results to differ materially from the
results discussed in the forward-looking statements, including, among other things, the matters
discussed in Item 1A Risk Factors, of this report and in our Annual Report on Form 10-K for
fiscal year ended June 30, 2010, and in other filings with the SEC from time to time. Any or all
of these factors could cause our actual results and financial or legal status for future periods to
differ materially from those expressed or referred to in any forward-looking statement. All
written or oral forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements. Forward-looking statements speak only as of the date on
which they are made. Except as required by law, we undertake no obligation to update, amend or
clarify forward-looking statements, whether as a result of new information, future events or
otherwise.
There may be other factors that could cause our actual results to differ materially from the
results referred to in the forward-looking statements. We undertake no obligation to publicly
update or revise forward-looking statements to reflect events or circumstances after the date made
or to reflect the occurrence of unanticipated events, except as required by law.
29
Item 3
:
Quantitative and Qualitative Disclosures about Market Risk
The following discussion about our exposure to market risk of financial instruments contains
forward-looking statements. Actual results may differ materially from those described.
Interest Rate Risk
Our investments in financial instruments are comprised of debt securities. All such
instruments are classified as securities available-for-sale. We do not invest in portfolio equity
securities, or commodities, or use financial derivatives for trading purposes. Our debt security
portfolio (corporate notes, commercial paper and U.S. Government agency notes) represents funds
held temporarily, pending use in our business and operations. We had $125.4 million of these
investments as of September 30, 2010. It is our policy that investments shall be rated A or
higher by Moodys or Standard and Poors, no single investment (excluding cash equivalents) shall
represent more than 10% of the portfolio and at least 10% of the total portfolio shall have
maturities of 90 days or less. Our market risk primarily relates to the risks of changes in the
credit quality of issuers. An interest rate increase or decrease of 1% would increase or decrease
the value of our portfolio by approximately $1.2 million as of September 30, 2010.
Foreign Exchange Risk
We primarily conduct our business in U.S. Dollars, which may impact our foreign customers and
suppliers as a result of changes in currency exchange rates. These factors may adversely impact
our existing or future sales agreements and require us to reallocate product shipments or pursue
other remedies.
The majority of SITs sales in Europe are denominated in Euros while the related costs of
sales are denominated in Euros and U.S. Dollars. For the three month period ended September 30,
2010, an increase or a decrease in exchange rates of 1% would increase or decrease our foreign
currency transaction gain by approximately $0.4 million.
We recognized a net foreign currency transaction loss of an insignificant amount for the three
month period ended September 30, 2010 and a gain of $0.7 million for the three month period ended
September 30, 2009.
Item 4
:
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, with the participation of
management, have reviewed and evaluated the effectiveness of our disclosure controls and procedures
as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act) as of the end of the period covered by this Report. Based upon this
evaluation, we have concluded that our disclosure controls and procedures were effective.
Remediation of Prior Material Weakness in Internal Control Over Financial Reporting
Our annual report on Form 10-K for the year ended June 30, 2010 disclosed that we had
identified a material weakness in internal control over financial reporting relating to inventory
accounting. A material weakness is a deficiency or a combination of deficiencies in internal
control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the companys annual
30
or interim financial statements will not be prevented or detected on a timely basis. The
material weakness disclosed in our annual report on Form 10-K related to the fact that the control
that ensures the accuracy of adjustments to value inventory at actual cost in the financial
statements did not operate effectively.
We have been actively engaged during the quarter developing and implementing remediation
efforts to address the material weakness in controls described above. In connection with these
efforts, we have simplified the accounting for standard costs and cost variances by increasing
automation of the calculation. In addition, we have enhanced our review procedures by performing
additional steps evaluating the overall reasonableness of the valuation adjustment.
Based upon these significant actions taken, as well as the testing and evaluation of the
effectiveness of this enhanced control, we have concluded the material weakness relating to
inventory accounting disclosed in our Form 10-K for the year ended June 30, 2010 has been
remediated as of September 30, 2010.
Changes in Internal Control over Financial Reporting
The only changes in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting are
described above under the heading Remediation of Prior Material Weakness in Internal Control Over
Financial Reporting.
31
PART II OTHER INFORMATION
Item 1
:
Legal Proceedings
We are involved in certain legal actions and claims arising in the ordinary course of
business, including, without limitation, commercial disputes, intellectual property matters,
personal injury claims, tax claims and employment matters. Although the outcome of any legal
matter cannot be predicted with certainty, we do not believe that any of these other legal
proceedings or matters in which we are currently involved, either individually or in the aggregate,
will have a material adverse effect on our business, liquidity, consolidated financial position or
results of operations.
Item 1A:
Risk Factors
There were no material changes from the risk factors previously disclosed in Item 1A: Risk
Factors, included in our Annual Report on Form 10-K for the year ended June 30, 2010.
Item 2
:
Unregistered Sales of Equity Securities and Use of Proceeds
During September 2010, we entered into exchange agreements with certain holders of our
convertible senior notes whereby we issued an aggregate of 1,309,263 shares of our common stock in
exchange for an aggregate principal amount of $9.1 million of the convertible senior notes.
Item 3
:
Defaults Upon Senior Securities
Not applicable.
Item 4
:
Removed and Reserved
Not applicable.
Item 5
:
Other Information
Not applicable.
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Item 6:
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Exhibits
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31.1
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Certificate of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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Certificate of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32
|
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Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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32
SIGNATURES
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.
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ENERGY CONVERSION DEVICES, INC.
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Dated: November 9, 2010
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By:
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/S/ William C. Andrews
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William C. Andrews
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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Dated: November 9, 2010
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By:
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/S/ Mark D. Morelli
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Mark D. Morelli
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President and Chief Executive Officer
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33
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