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STR Holdings: 2014 results

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ENFIELD - STR Holdings, Inc. (NYSE:STRI) announced its financial results for the fourth quarter and full-year ended December 31, 2014.

Advisory Note
All share amounts and per share amounts below have been adjusted to reflect the one-for-three reverse stock split effected January 30, 2015.

Fourth Quarter 2014 Summary:

    Closed common stock issuance to Zhen Fa New Energy (U.S.) Co., Ltd.
    Paid a special cash dividend of approximately $22.6 million to all stockholders, other than Zhen Fa
    Net sales of $9.2 million
    Diluted GAAP loss per share from continuing operations of $(1.36); Diluted non-GAAP loss per share from continuing operations of $(1.32)
    Adjusted EBITDA of $(5.7) million, which included $(3.3) million of special items
    Finished the quarter with $16.6 million in cash, $8.3 million in tax receivables and no debt

2014 Financial Summary:

    Net sales of $39.3 million which increased 23% compared to 2013
    Diluted GAAP loss per share from continuing operations of $(2.08); Diluted non-GAAP loss per share from continuing operations of $(2.09)
    Returned $46.6 million to stockholders via share repurchase and special cash dividend

Zhenfa Transaction Closing

On December 15, 2014, the Company sold approximately 9.2 million shares of common stock, representing a 51% interest in STR, for an aggregate purchase price of approximately $21.7 million to Zhen Fa New Energy (U.S.) Co., Ltd. ("Zhenfa U.S."), an indirect wholly owned subsidiary of Zhenfa Energy Group Co., Ltd., a Chinese company ("Zhenfa"). As part of the transaction, the STR Board of Directors declared a special cash dividend of $2.55 per share payable to stockholders of record, excluding Zhenfa U.S., as of December 26, 2014. The dividend payment date was January 2, 2015. The Company transferred the funds to its transfer agent prior to December 31, 2014 and recorded the special dividend in its 2014 consolidated financial statements.

Leveraging Synergies with Zhenfa

As contemplated by its Sales Service Agreement with Zhenfa, on March 2, 2015, Mr. Kong Weijie, a Zhenfa Vice General Manager, was appointed STR Sales Director for China. Under Mr. Kong's leadership, the STR China sales team is currently focusing on increasing sales to STR's existing customer base, and also developing new sales to Chinese module manufacturers having commercial relationships with Zhenfa. In certain cases, STR expects to secure new encapsulant sales to module manufacturers under a proposed three-party arrangement wherein Zhenfa will also commit to purchase solar modules from STR's customers, to be deployed into Zhenfa solar power stations. STR believes this multi-party approach represents a competitive advantage and will help to accelerate sales volume beginning in the second quarter of 2015. Zhenfa remains keenly interested in assisting STR to grow sales in China, as well as securing the highest quality solar panels available for their power stations and therefore values the long-term protection afforded by the use of STR encapsulant products within the panels they deploy.

In addition, the Company has entered into a supply agreement with module manufacturer Zhangjiagang Huhui Segpv Co. Ltd ("Huhui"), an affiliate of Zhenfa. Pursuant to the exclusive one-year renewable supply contract, Huhui has agreed to purchase approximately 500 MW worth of encapsulants annually, subject to the Company's satisfactory completion of qualification testing, currently underway. The Company expects to start receiving purchase orders from Huhui during the second quarter of 2015.

The Company has also held substantive discussions with Zhenfa to explore opportunities for cooperation beyond the sale of solar encapsulants.

"I have been very pleased so far with our collaboration with Zhenfa and I remain confident that together, we will be able to bring STR back to scale and restore profitability," stated Robert S. Yorgensen, STR's Chairman, President and Chief Executive Officer. "Our goal is to have the Company's stock valued on a multiple of EBITDA before the close of 2015."

Financial Results

Net sales for the quarter ended December 31, 2014 were $9.2 million, a decrease of 3% sequentially and an increase of 38% from Q4 2013. The sequential decrease was driven by approximately 1% lower volume and a 2% decline in average selling price ("ASP"). The sequential volume decrease was primarily due to many of our European customers pushing orders to 2015, which more than offset higher net sales in China. The decline in ASP was primarily due to a weaker Euro. On a year-over-year basis, volume increased by approximately 57% and ASP declined by approximately 22%. The volume increase was primarily driven by growth with Chinese customers, including certain of their OEM partners.

Net sales for the year ended December 31, 2014 were $39.3 million, an increase of 23% driven by a 57% volume increase that more than offset a 22% ASP decline. When removing the impact of net sales to our former largest customer in 2013 of $5.7 million, our net sales increased by 50% during 2014 driven by an approximate 85% increase in sales volume.

Gross loss for the fourth quarter of 2014 was $(2.3) million, or (25)% of net sales, compared to $(1.0) million, or (11)% of net sales, from the third quarter of 2014 and gross loss of $(1.1) million, or (16)% of net sales from the fourth quarter of 2013. The sequential increase in gross loss was driven by $1.0 million of charges related to inventory reserves and product performance matters, $0.4 million of increased facility costs due to the build-out of our Suzhou factory and the 2% ASP reduction, which were partially offset by reduced material costs. The Company's manufacturing operations continue to be impacted with inefficiencies associated with low sales volume.

Selling, general and administrative expenses for the fourth quarter of 2014 were $5.0 million compared to $2.5 million in the third quarter of 2014 and $5.3 million in the fourth quarter of 2013. On a sequential basis, SG&A increased $2.5 million. The increase was driven by the following special items that the Company anticipates will not recur: $1.0 million of accelerated stock-based compensation expense due to the cancellation of the Company's outstanding options and acceleration of unvested restricted stock resulting from the closing of the Zhenfa transaction; $1.2 million of non-capitalizable professional fees and other costs relating to the closing of the Zhenfa transaction; $0.5 million of additional Connecticut franchise fee expense associated with selling its East Windsor, CT facility; and $0.2 million related to the Company's move to its Enfield, CT facility. When removing the impact of these special items, SG&A decreased $0.4 million on a sequential quarterly basis driven by continued cost-reduction efforts. The year-over-year decrease of $0.3 million was primarily driven by $1.9 million of lower restructuring charges, $0.4 million of lower professional fees and $0.2 million of reduced labor and benefits, partially offset by the $2.9 million of fourth quarter 2014 special items described above.

Adjusted EBITDA for the fourth quarter of 2014 was $(5.7) million compared to $(2.9) million from the third quarter of 2014. This sequential decline was primarily driven by the 2% ASP decline, lower sales volume and the $(3.3) million of special items reflected above. When removing the impact of the special items, adjusted EBITDA was $(2.4) million or a 17% sequential improvement, as benefits from cost-reduction efforts exceeded the Company's net sales decline. This compares to Adjusted EBITDA from continuing operations of $(3.6) million for the fourth quarter of 2013.

Net loss from continuing operations for the fourth quarter of 2014 was $(13.2) million, or $(1.36) per diluted share. This compares to a net loss from continuing operations of $(3.2) million, or $(0.37) per diluted share, for the third quarter of 2014 and net loss from continuing operations of $(3.7) million, or $(0.26) per diluted share, for the fourth quarter of 2013. The sequentially higher net loss of $13.0 million was due to the special items described above and $6.4 million of income tax expense. The higher income tax expense was primarily driven by recording non-cash valuation allowances on its deferred tax assets as of December 31, 2014. On a year-over-year basis, net loss from continuing operations increased by $9.7 million mainly driven by increased income tax expense of $9.6 million and the $4.3 million of special items disclosed above that more than offset $0.9 million of net, non-cash reversals of prior loss contingencies that were recorded to Other Income, $1.7 million in reduced restructuring charges and benefits from prior cost-reduction actions.

Non-GAAP net loss from continuing operations for the fourth quarter of 2014, which excludes certain tax-effected adjustments (as disclosed following the non-GAAP reconciliation table at the end of this press release), was $(12.8) million, or $(1.32) per diluted share. This compares to non-GAAP net loss from continuing operations of $(3.0) million, or $(0.34) per diluted share, for the third quarter of 2014 and non-GAAP net loss from continuing operations of $(1.9) million, or $(0.14) per diluted share, for the fourth quarter of 2013.

Operations Update

In October, the Company completed the sale of its East Windsor, CT facility for $4.4 million in net proceeds. As a result of the sale, the Company also recorded an income tax receivable of approximately $4.4 million in the fourth quarter of 2014. The Company has relocated its corporate and research and development functions to its owned-facility located in Enfield, Connecticut, at a cost of approximately $1.5 million, including building renovations and moving costs. The Company anticipates ongoing operational savings of approximately $0.4 million per year resulting from the move.

The Company's Suzhou factory became fully operational in November, with approximately 1.2 GW of production capacity. Taken together with available tolling capacity, the Company currently has approximately 2.2 GW of production capacity on-line in China.

The Company continues to retrofit its existing production equipment to produce low-shrink paperless encapsulants and has achieved a product mix of approximately 60% paperless in the fourth quarter of 2014. The Company expects to continue to increase its product mix to the paperless configuration during 2015.

Balance Sheet and Liquidity

The Company finished the quarter with $16.6 million of cash and no debt. As of December 31, 2014, the Company also had $8.3 million of income tax receivables.

During the fourth quarter of 2014, the Company had a net financing cash outflow of $5.7 million relating to payment of the special dividend and closing costs associated with the Zhenfa transaction. Such amounts were partially offset by $4.0 million of net cash received from investing activities due to receiving $4.4 million of cash proceeds from the sale of its East Windsor facility, partially offset by capital investments.

The Company generated negative operating cash flow of $4.1 million during the fourth quarter of 2014. The Company received $5.7 million of income tax refunds, which was more than offset by the negative adjusted EBITDA and higher working capital investment. The higher working capital was driven by $2.4 million of increased accounts receivable due to longer collection times in China and lower accounts payable of $2.6 million due to timing of resin payments.

The Company is currently seeking working capital financing to support expected sales volume growth.

"Our fourth quarter results were negatively impacted by costs associated with successfully executing strategic transactions with Zhenfa and closing the sale of our East Windsor facility," stated Joseph C. Radziewicz, STR's Vice President and Chief Financial Officer. "We remain committed to our turnaround strategy as our cost-reduction programs are solidly entrenched and our balance sheet remains strong with no debt. As we enter 2015, we believe that we are well-positioned to achieve our goal of returning STR to profitability."


About STR Holdings, Inc.

STR Holdings, Inc. is a provider of encapsulants to the photovoltaic module industry. Further information about STR Holdings, Inc. can be obtained via the Company's website at www.strsolar.com. 

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