STR Holdings: Q1 results
ENFIELD - STR Holdings, Inc. (NYSE:STRI) announced its financial results for the first quarter ended March 31, 2015.
All prior year share amounts and per share amounts below have been adjusted to reflect the one-for-three reverse stock split effected January 30, 2015.
First Quarter 2015 Summary:
Finalized one-for-three stock split effective January 30, 2015
Net sales of $6.9 million
Diluted GAAP loss per share from continuing operations of $(0.14); Diluted non-GAAP loss per share from continuing operations of $(0.13)
Adjusted EBITDA of $(1.8) million
Finished the quarter with $13.3 million in cash, $8.3 million in tax receivables and no debt
Zhenfa Coordination Update
In a separate transaction coincident with the recent sale of 51% of the Company's common shares to a subsidiary of Zhenfa Energy Group Co., Ltd. (the "Zhenfa Transaction"), the Company and Zhenfa entered into a Sales Service Agreement. Under this agreement, Zhenfa will allow STR to use certain of its existing production facilities, free of charge for five years followed by rent at 50% of the then-current market rate, to expand STR's encapsulant production capacity in China. Pursuant to this agreement, the Company has selected a 110,000 square foot facility in Wuxi, Jiangsu Province. The Company has chosen this building due to its suitability for conversion to an encapsulant factory and its convenient location, which is central to many major Chinese module manufacturers and is close to both Zhenfa's corporate offices and STR's existing facility in Shajiabang. The Wuxi building can accommodate up to nine gigawatts of encapsulant production capacity.
Zhenfa has advised the Company that it will finance building improvements, ancillary equipment, one gigawatt of new production equipment and the upgrade of an additional gigawatt of STR's existing production equipment, all according to STR's specifications. The Company expects the Wuxi facility to be available for production by the end of 2015.
STR and Zhenfa are currently negotiating an arm's length lease agreement wherein STR will reimburse Zhenfa over time for its investment in the Wuxi facility. Investments made to date are solely at Zhenfa's risk.
The Company is under no obligation to lease this facility, and any such transaction would be subject to review by the Company's executive management team and the approval of the Company's Special Committee of Continuing Directors.
In May, the Company also entered into a module-for-encapsulant swap transaction with Zhenfa and Zhejiang ReneSola Jiangsu Co., Ltd. ("ReneSola") to settle outstanding accounts. As part of this three-party transaction, the Company has agreed to accept solar modules as settlement of approximately $7.4 million of outstanding receivables from ReneSola, and Zhenfa has agreed to purchase these modules from the Company for $7.4 million.
"We are very pleased to report tangible benefits flowing from cooperative efforts with our primary stockholder," stated Robert S. Yorgensen, STR's Chairman, President and Chief Executive Officer. "We believe our innovative module-for-EVA swap demonstrates a competitive advantage that can not only be used to collect aged receivables but can also drive future sales volume. The value proposition of this approach is to provide module manufacturers with high-quality, bankable encapsulants, while also increasing their module sales and enabling payment with module inventory rather than cash, thereby improving liquidity. In addition, Zhenfa's willingness to invest in production capacity to supplement STR's current Shajiabang facility and that of our tolling partner is further evidence of Zhenfa's commitment and ability to assist STR in growing our encapsulant business in China."
Net sales for the quarter ended March 31, 2015 were $6.9 million, a decrease of 26% sequentially and a decrease of 26% from Q1 2014. The sequential decrease was driven by approximately 19% lower volume and a 9% decline in average selling price ("ASP"). The sequential ASP decline was primarily caused by foreign exchange translation of the Euro compared to the U.S. Dollar, which is the Company's reporting currency. The average Euro exchange rate decreased by 9% in the first quarter of 2015 compared to the fourth quarter of 2014. Ex-currency impact, our ASP declined by 3% during this period. The sequential volume decline was driven by a first quarter 2015 interruption in sales to a Chinese customer that had ramped sharply in the fourth quarter of 2014. The Company expects to resume shipments to this customer in the second quarter of 2015. In addition, one of our European customers declared self-administered insolvency in the first quarter of 2015. This European customer has since resumed operations and ordering our encapsulants after a brief period of inactivity.
On a year-over-year basis, our net sales declined $2.4 million or 26%. The year-over-year decrease was driven by approximately 10% lower volume and a 19% decline in average selling price ("ASP"). The price decline was caused by foreign exchange translation of the Euro compared to the U.S. Dollar. The average Euro exchange rate decreased by 17% in the first quarter of 2015 compared to the corresponding 2014 period. Ex-currency impact, our ASP declined by 9% driven by continued pricing pressure. The volume decline was driven by a reduction of net sales to our largest customer, which modified its OEM partner footprint in the latter part of 2014, and by one of our European customers declaring insolvency in the first quarter of 2015 as discussed above.
Gross loss for the first quarter of 2015 was $(0.1) million, or (2)% of net sales, which included $0.1 of restructuring costs, compared to $(2.3) million, or (25)% of net sales, from the fourth quarter of 2014 and gross loss of $(0.7) million, or (7)% of net sales from the first quarter of 2014. When removing the impact of $1.4 million of special items in the fourth quarter of 2014 as previously disclosed, gross loss improved by $0.8 million. The sequential improvement in gross loss was driven by lower resin pricing due to the recent decline in the price of oil, improved yield and increased raw material efficiency, including improved sales mix of our paperless encapsulants. These positive impacts were partially offset by sequentially lower net sales.
Selling, general and administrative expenses for the first quarter of 2015 were $2.6 million compared to $5.0 million in the fourth quarter of 2014 and $3.0 million in the first quarter of 2014. The sequential decrease was driven by $2.9 million of special items in the fourth quarter of 2014 that did not recur in the first quarter of 2015. When removing the impact of these special items (as previously disclosed), SG&A increased $0.5 million due to $0.3 million of higher annual incentive compensation expense and $0.3 million of higher professional fees, partially offset by benefits from prior cost-reduction actions. The year-over-year decrease of $0.4 million was primarily driven by $0.5 million of lower stock-based compensation expense due to cancelling all previously granted options in the fourth quarter of 2014 and $0.2 million of cost-reduction benefits from selling our East Windsor, Connecticut facility in 2014. These positive impacts were partially offset by $0.2 million of higher annual incentive compensation expense and $0.1 million of increased professional fees.
Adjusted EBITDA for the first quarter of 2015 was $(1.8) million compared to $(5.7) million from the fourth quarter of 2014. When removing the impact of the $3.3 million of Q4 2014 special items (as previously disclosed), adjusted EBITDA improved by $0.6 million. Favorable foreign currency transactional gains drove $0.2 million of this improvement. Ex-currency, our sequential improvement was due to our improvement in gross loss as discussed above, which more than offset higher SG&A (ex-special items) and lower net sales. This compares to Adjusted EBITDA from continuing operations of $(2.9) million for the first quarter of 2014. The improvement in 2015 is driven by favorable foreign exchange impact, improved gross loss and lower SG&A that more than offset lower net sales.
Net loss from continuing operations for the first quarter of 2015 was $(2.6) million, or $(0.14) per diluted share. This compares to a net loss from continuing operations of $(13.2) million, or $(1.36) per diluted share, for the fourth quarter of 2014 and net loss from continuing operations of $(4.6) million, or $(0.35) per diluted share, for the first quarter of 2014. The sequentially lower net loss of $10.6 million was due to the special items described above not recurring in 2015, improved adjusted EBITDA and $6.3 million of lower income tax expense. The Q4 2014 higher income tax expense was driven by recording non-cash valuation allowances on the Company's deferred tax assets as of December 31, 2014. On a year-over-year basis, net loss from continuing operations decreased by $2.0 million compared to the corresponding 2014 period driven by reduced gross loss and SG&A and favorable impact from foreign currency.
Non-GAAP net loss from continuing operations for the first quarter of 2015, which excludes certain tax-effected adjustments (as disclosed following the non-GAAP reconciliation table at the end of this press release), was $(2.4) million, or $(0.13) per diluted share. This compares to non-GAAP net loss from continuing operations of $(12.8) million, or $(1.32) per diluted share, for the fourth quarter of 2014 and non-GAAP net loss from continuing operations of $(3.2) million, or $(0.24) per diluted share, for the first quarter of 2014.
The Company has substantially completed the renovation of its Enfield, Connecticut facility including its research and development laboratory. In addition, the Company's newly opened Suzhou facility has achieved ISO 9001 certification.
The Company continues to retrofit its existing production equipment to produce low-shrink paperless encapsulants and has attained a product mix of approximately 65% paperless in the first quarter of 2015. 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 $13.3 million of cash and no debt. As of March 31, 2015, the Company also had $8.3 million of income tax receivables.
The Company generated negative operating cash flow of $1.7 million during the first quarter of 2015. With Zhenfa's assistance, the Company is currently exploring working capital financing to support expected sales volume growth.
"During the first quarter we were able to improve our adjusted EBITDA burn," stated Joseph C. Radziewicz, STR's Vice President and Chief Financial Officer. "Ex-restructuring, we were also close to achieving break-even gross profit. We are implementing additional cost-reduction actions in the second quarter that we believe will further improve our financial results going forward."
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.