STR Holdings: Q3 Results
EAST WINDSOR, Conn. - STR Holdings, Inc. (NYSE:STRI) announced its financial results for the third quarter ended September 30, 2014.
Third Quarter 2014 Summary:
Net sales of $9.5 million
Diluted GAAP loss per share from continuing operations of $(0.12)
Diluted non-GAAP loss per share from continuing operations of $(0.11)
Adjusted EBITDA of $(2.9) million
Finished the quarter with $22.8 million in cash and no debt
Net sales for the quarter ended September 30, 2014 were $9.5 million, a decrease of 15% sequentially and an increase of 53% from Q3 2013. The sequential decrease was driven by approximately 11% lower volume and a 5% decline in average selling price ("ASP"). The sequential volume decrease was primarily due to delayed orders by one of the Company's large customers following a shift in their production site, and softer European orders. On a year-over-year basis, volume increased by approximately 89% and ASP declined by approximately 19%. The volume increase was driven by growth with new Chinese customers and improved demand from the Company's European customer base.
Gross loss for the third quarter of 2014 was $(1.0) million, or (11)% of net sales, compared to $(1.2) million, or (11)% of net sales, from the second quarter of 2014 and gross loss of $(0.8) million, or (13)% of net sales from the third quarter of 2013. The sequential improvement in gross loss was driven by $0.2 million of reduced inventory reserves and benefits of cost-reductions that more than offset the 5% ASP decline and the non-recurrence of a $0.4 million one-time benefit from reversing restructuring accruals in the second quarter of 2014. The Company's negative gross margin continues to be the result of under-absorption and volume-related inefficiencies in its production. The Company has also incurred pre-production costs at its Suzhou manufacturing plant, which became operational in November 2014.
Selling, general and administrative expenses for the third quarter of 2014 were $2.5 million compared to $2.4 million in the second quarter of 2014 and $4.6 million in the third quarter of 2013. On a sequential basis, SG&A increased $0.1 million. The increase was driven by $0.4 million of a restructuring reversal recorded in the second quarter relating to our decision to keep our Malaysian plant open, $0.2 million of increased non-cash, stock-based compensation expense and $0.1 million related to the move of the corporate and research and development functions to the Company's Enfield, CT facility. These costs were mostly offset by $0.6 million of reduced professional fees. The year-over-year decrease was primarily driven by $0.6 million in reduced labor and benefits due to headcount reductions taken during 2013, $1.0 million of lower professional fees, $0.5 million of reduced restructuring charges due to 2013 headcount reductions and $0.2 million of decreased non-cash, stock-based compensation expense, partially offset by $0.2 million in expense related to the Company's move to its Enfield, CT facility.
Net loss from continuing operations for the third quarter of 2014 was $(3.2) million, or $(0.12) per diluted share. This compares to a net loss from continuing operations of $(1.6) million, or $(0.06) per diluted share, for the second quarter of 2014 and net loss from continuing operations of $(5.9) million, or $(0.14) per diluted share, for the third quarter of 2013. The sequentially higher net loss was due to the absence of the second quarter 2014 reversal of a $4.1 million non-cash, product performance accrual, as well as a $1.3 million loss on the reclassification of our Connecticut facility. The year-over-year improvement was due to the $4.1 million non-cash, product performance accrual reversal, $1.0 million in reduced professional fees, $0.5 million of lower restructuring, $0.4 million of decreased labor and benefits and other cost-reductions that more than offset the $1.3 million loss on reclassification, increased bad debt expense of $0.4 million and $0.5 million of higher raw material costs.
Adjusted EBITDA for the third quarter of 2014 was $(2.9) million compared to $(4.0) million from the second quarter of 2014. This sequential improvement was primarily driven by lower professional fees associated with the assessment of strategic alternatives and other cost-reductions that more than offset lower net sales. This compares to Adjusted EBITDA from continuing operations of $(4.6) million for the third quarter of 2013. The year-over-year improvement was driven by higher sales volume and benefits from cost-reduction actions that more than offset a 19% ASP decline and higher raw material costs.
Non-GAAP net loss from continuing operations for the third 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 $(3.0) million, or $(0.11) per diluted share. This compares to non-GAAP net loss from continuing operations of $(3.9) million, or $(0.15) per diluted share, for the second quarter of 2014 and non-GAAP net loss from continuing operations of $(5.1) million, or $(0.12) per diluted share, for the third quarter of 2013.
The Company continues to retrofit its existing production equipment to produce low-shrink paperless encapsulants. The Company successfully retrofitted two additional production lines during the third quarter and achieved a third quarter product mix of approximately 42% paperless. The Company expects to have two additional paperless production lines operational during the fourth quarter of 2014, and three additional lines in the first half of 2015.
In November, the Company's Suzhou, Jiangsu, China plant became fully operational. We are very pleased to report that we have now passed two very substantial audits of this factory, which were conducted by tier-one module manufacturers, one of which represents a new large customer opportunity for STR, clearing the way for commercial production-scale business in 2015.
In October, the Company closed on the sale of its East Windsor, CT facility for $4.75 million in cash. As a result of the sale, the Company expects to record an additional income tax receivable of approximately $4.4 million in the fourth quarter of 2014. The Company intends to relocate its corporate and research and development functions to its owned facility located in Enfield, Connecticut. The Company anticipates one-time relocation costs of approximately $1.0 million and ongoing operational savings of approximately $0.4 million per year.
Zhenfa Transaction Update
On August 11, 2014, the Company announced its strategic relationship with Zhenfa Energy Group Co., Ltd. ("Zhenfa"), based in Chongqing, China, a leading developer of solar power stations. The contemplated transactions (collectively, the "Transaction") with Zhenfa and certain affiliated entities, which are subject to approval by STR stockholders and satisfaction of other customary closing conditions, include (i) the sale of shares of common stock representing a 51% interest in STR (based on current shares outstanding) for an aggregate purchase price of approximately $21.7 million, (ii) the payment by the Company of a special dividend in the aggregate amount of approximately $22.6 million to STR stockholders of record (excluding Zhenfa), and (iii) the execution of a Sales Service Agreement pursuant to which Zhenfa will, among other things, help drive sales of STR encapsulant to China-based solar module manufacturers.
To provide equal treatment to all STR stockholders, the Transaction has been structured to be economically equivalent to Zhenfa acquiring 51% of STR's outstanding shares of common stock at $1.60 per share, which represents a 23% premium to the average closing stock price of $1.30 per share for the ten-day period ended August 8, 2014. All stockholders other than Zhenfa will receive a special dividend of $0.85 per share, which will be substantially funded by Zhenfa's purchase of newly issued shares of STR, and will continue to own an economic interest in the Company equivalent to 49% of their pre-Transaction ownership interest.
As previously disclosed in STR's proxy statement filed with the Securities and Exchange Commission (the "SEC") on October 8, 2014, Zhenfa has informed the Company that it received all of the then required Chinese governmental approvals necessary to consummate the Transaction. In addition, the Company was notified by the Committee on Foreign Investment in the United States ("CFIUS") that there are no unresolved national security concerns relating to the proposed transaction with Zhenfa and its affiliates and that its review and investigation had concluded. The Company has scheduled a Special Meeting of stockholders to vote on, among other things, the sale of shares of common stock to Zhenfa, on November 14, 2014 at 10:00 a.m., local time, at the Hartford/Windsor Marriott Airport Hotel, located at 28 Day Hill Road, Windsor, Connecticut 06095.
Subject to the receipt of the prior approval of STR's stockholders, as well as the satisfaction of certain other closing conditions, the Transaction is expected to close during the fourth quarter of this year.
Balance Sheet and Liquidity
The Company finished the quarter with $22.8 million of cash and no debt. As of September 30, 2014, the Company also had $8.2 million of income tax receivables.
The Company had negative operating cash flow of $5.2 million during the third quarter of 2014. The use of cash was driven by negative EBITDA and increased working capital investment. The higher working capital was due to increased receivables driven by longer collection times in China and higher inventory required to support the Company's sales growth initiatives, including ramping its Suzhou plant.
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.