STR Holdings: Q2 Results
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STR Holdings, Inc. (NYSE:STRI) today announced its financial results for the second quarter ended June 30, 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.
Second Quarter 2015 Summary:
Net sales of $8.5 million
Diluted GAAP loss per share from continuing operations of $(0.18); Diluted non-GAAP loss per share from continuing operations of $(0.18)
Adjusted EBITDA of $(2.5) million
Finished the quarter with $10.4 million in cash, $8.3 million in tax receivables, $5.3 million due from Zhenfa Energy Group Co., Ltd. ("Zhenfa") and no debt
Entered into a module-for-encapsulant swap transaction with Zhenfa and Zhejiang ReneSola Jiangsu Co., Ltd. ("ReneSola") to settle outstanding accounts receivable
Zhenfa Coordination Update
The Company continues to work with Zhenfa to explore synergies between both organizations and pursue other opportunities to improve the Company's financial performance.
Appointment of Corporate Officers
As previously disclosed, the Company announced the appointment of two Zhenfa executives to serve in new roles within the Company's senior management team. Qu Chao, currently a Director of STR's Board, has been appointed Vice President of Strategic Investment for STR Holdings, Inc. In this newly-created position, Mr. Qu, a specialist in downstream solar development and finance, will support STR's efforts to diversify within the renewable energy space. In addition, Kong Weijie has been appointed Vice President, Business Development and General Manager, China. In his role as General Manager, Mr. Kong will lead STR China's encapsulant operations. Serving in his capacity as Vice President of Business Development, Mr. Kong will focus on the development of new lines of business for STR Holdings, Inc., primarily seeking to harness synergies with the Zhenfa Group as a platform for expansion.
Assessment of Entry into Downstream Solar
The Company believes that over the past several years, profits in the industry have shifted from upstream manufacturers to downstream service providers and solar project owners. The Company, with Zhenfa's assistance, is currently assessing investments in U.S. solar projects in the more profitable downstream solar sector. Potential transactions could include construction financing of solar projects, acquisition and ownership of operating solar projects and developing solar projects.
Engagement of Investment Banker/ Due Diligence Provider
The Company has engaged the services of a U.S.-based investment bank with a speciality in renewable energy. The engagement mandate is to assist STR in finding a transformative transaction within the renewable energy sector, ideally within the downstream solar subsector. The engagement also provides for due diligence services related to potential investments in downstream solar projects, several of which have already been identified by the Company.
Robert S. Yorgensen, Chairman, President and CEO of STR Holdings, Inc., commented "We believe that the battle for success in the encapsulant business will be won in China, where we are currently focusing our related growth initiatives and working more closely than ever with our majority shareholder to leverage synergies and drive new sales. Pertinent examples include the initial swap agreement with Zhenfa and ReneSola, executed in the second quarter, and the recent appointment of two key Zhenfa executives to positions within STR Holdings." Mr. Yorgensen continued, "At the same time, we are also seeking to diversify the Company toward more lucrative sectors of the renewable energy industry, where earnings and valuation multiples have been more attractive."
Module-for-Encapsulant Swap Transaction
During the second quarter, the Company entered into a module-for-encapsulant swap transaction with Zhenfa and ReneSola to settle outstanding accounts receivable. As part of this three-party transaction, the Company has agreed to accept solar modules as settlement of approximately $7.5 million of outstanding receivables from ReneSola, and Zhenfa has agreed to purchase these modules from the Company for $7.5 million. As of June 30, 2015, the Company has received $2.2 million in cash from Zhenfa leaving a receivable of $5.3 million due from Zhenfa related to this transaction.
Net sales for the quarter ended June 30, 2015 were $8.5 million, an increase of 24% sequentially and a decrease of 24% from Q2 2014. The sequential increase was driven by approximately 21% higher volume and a 3% increase in average selling price ("ASP"). The sequential volume increase was primarily driven by new Chinese customer wins as well as growth in the European and India markets.
The year-over-year second quarter decrease was driven by approximately 13% lower volume and a 13% decline in ASP. The price decline was primarily caused by foreign exchange translation of the Euro compared to the U.S. Dollar. The average Euro exchange rate decreased by 20% in the second quarter of 2015 compared to the corresponding 2014 period. Ex-currency impact, our ASP declined by 1% driven by continued pricing pressure. The year-over-year volume decline was primarily driven by a reduction of net sales to our largest customer, which modified its OEM partner footprint in the latter part of 2014 and began exiting its OEM business in 2015. In addition, one of our European customers declared insolvency in the first quarter of 2015. This European customer has since resumed operations and has resumed ordering our encapsulant after a brief period of inactivity.
Gross loss for the second quarter of 2015 was $(0.1) million, or (1)% of net sales, compared to $(0.1) million, or (2)% of net sales from the first quarter of 2015 and gross loss of $(1.2) million, or (11)% of net sales from the second quarter of 2014. The sequential improvement in gross loss was driven by higher sales, lower restructuring costs and benefits from cost-reduction actions. These positive impacts were offset by higher resin costs. On a year-over-year basis, the improved gross loss was the result of lower raw material costs and other cost-reductions that more than offset lower net sales and a $0.4 million restructuring benefit in 2014 that did not recur.
Selling, general and administrative expenses for the second quarter of 2015 were $2.8 million compared to $2.6 million in the first quarter of 2015 and $2.4 million in the second quarter of 2014. The sequential increase was driven by $0.2 million of increased professional fees and a $0.1 million non-recurring settlement of a state sales tax audit. The year-over-year increase of $0.4 million was driven by $0.3 million of annual incentive compensation expense and the non-reoccurrence of a $0.4 million restructuring benefit recorded in 2014. These were partially offset by continued cost-reduction measures, primarily associated with the closure of our East Windsor, Connecticut facility in 2014.
Adjusted EBITDA for the second quarter of 2015 was $(2.5) million compared to $(1.8) million from the first quarter of 2015. Unfavorable foreign currency transactional loss drove $0.6 million of this decline. Ex-currency, our sequential decline was due to expenses related to the settlement of the aforementioned state sales tax audit. This compares to Adjusted EBITDA from continuing operations of $(4.0) million for the second quarter of 2014. The year-over-year improvement was due to reduced gross loss and improved bad debt, partially offset by increased R&D and unfavorable foreign currency impact.
Net loss from continuing operations for the second quarter of 2015 was $(3.3) million, or $(0.18) per diluted share. This compares to a net loss from continuing operations of $(2.6) million, or $(0.14) per diluted share, for the first quarter of 2015 and net loss from continuing operations of $(1.6) million, or $(0.19) per diluted share, for the second quarter of 2014. The sequentially higher net loss of $0.7 million was primarily due to negative foreign exchange impact. On a year-over-year basis, net loss from continuing operations increased by $1.7 million compared to the corresponding 2014 period driven by a $0.2 million unfavorable impact from foreign currency as well as the net impact for the following special items recorded in 2014 that did not recur in 2015: $4.1 million non-cash product performance accrual reversal; $0.8 million in restructuring accrual reversals and the $1.3 million loss on reclassification in 2014. These negative impacts more than offset reduced gross loss, improved bad debt and lower income tax expense achieved in the second quarter of 2015.
Non-GAAP net loss from continuing operations for the second 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 $(3.2) million, or $(0.18) per diluted share. This compares to non-GAAP net loss from continuing operations of $(2.4) million, or $(0.13) per diluted share, for the first quarter of 2015 and non-GAAP net loss from continuing operations of $(3.9) million, or $(0.44) per diluted share, for the second quarter of 2014.
Encapsulant Business Restructuring
The Company ceased operations at its Malaysian encapsulant production facility, effective August 2, 2015, following a decision by the Company's largest customer to exit its OEM module production in Malaysia. The Company expects to continue to fulfill orders to this customer from its Spain and China facilities. Other factors contributing to the decision to close the plant included underutilization, increasing costs in Malaysia resulting from the recent introduction of a Goods & Services Tax (GST), and the newly launched investigation by the European Commission that may result in anti-dumping and countervailing duties on solar cells and modules consigned from China and assembled in Malaysia and Taiwan.
The Company has engaged agents to sell its Malaysian real estate, recently appraised at approximately $8.0 million, as well as the associated production and ancillary equipment. The Company expects to incur approximately $1.0 million to $1.5 million of associated non-recurring severance and other exit costs during the second half of 2015, partially offset by the sale of production and ancillary equipment, and further expects to generate approximately $2.4 million of associated annual pre-tax savings on a going forward basis. The Company plans to transfer the majority of its Malaysian raw material inventory to the Company's existing Spain and China manufacturing facilities.
Balance Sheet and Liquidity
The Company finished the quarter with $10.4 million of cash and no debt. As of June 30, 2015, the Company also had $8.3 million of income tax receivables and $5.3 million due from Zhenfa as the remaining balance on the ReneSola swap agreement.
The Company generated negative operating cash flow of $2.0 million during the second quarter of 2015. The Company collected $2.2 million from Zhenfa (on the ReneSola swap agreement) and expects the remaining balance to be collected by the end of the year. This positive impact was more than offset by negative Adjusted EBITDA generation and higher working capital.
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.