STR Holdings: Q3 Results
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STR Holdings, Inc. (OTCQX:STRI) announced its financial results for the third quarter ended September 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.
Third Quarter 2015 Summary:
Net sales of $6.6 million
Diluted GAAP loss per share from continuing operations of $(0.32); Diluted non-GAAP loss per share from continuing operations of $(0.23)
Adjusted EBITDA of $(3.3) million
Finished the quarter with $9.6 million in cash, $8.3 million in tax receivables, $2.1 million in bank acceptance notes, $2.1 million due from Zhenfa Energy Group Co., Ltd. ("Zhenfa") and no debt
Zhenfa Coordination Update
The Company continues to work with Zhenfa to explore synergies and pursue other opportunities to improve the Company's financial performance.
Assessment of Entry into Downstream Solar
The Company, with Zhenfa's assistance pursuant to the terms of our Sales Service Agreement, is currently assessing investments in the more profitable downstream solar sector. Potential transactions could include, among other things, construction financing of solar projects, acquisition and ownership of operating solar projects and developing solar projects. The Company is in preliminary due diligence and discussions with Zhenfa in acquiring a multi-megawatt operating solar power plant located in Xuyi, Jiangsu, China. This solar power station is owned by Zhenfa.
China Business Development
During the third quarter of 2015, the Company benefited from Zhenfa's assistance in collection of overdue accounts receivable. The Company received $3.2 million of cash from Zhenfa as an installment payment relating to its previously executed $7.5 million module-for-encapsulant swap with Zhenfa and ReneSola. To date, the Company has received $5.4 million of cash from Zhenfa related to this transaction. Zhenfa also aided the Company in securing a $2.0 million bank acceptance note for settlement of long-overdue accounts receivable.
During the third quarter, the Company enhanced the process window of its encapsulants to improve ease of their use in prospective Chinese module manufacturers' production processes. During the fourth quarter of 2015, the Company has commenced large-scale production and shipments with new customers including Trina and Talesun. The Company is currently in the process of adding approximately two gigawatts ("GW") of production capacity to meet the needs of its new and existing customers, and expects it to become operational by the end of the first quarter of 2016. Of this new capacity, one GW is newly built equipment, while another GW is an upgrade of existing STR-owned surplus equipment. Zhenfa has offered to finance the upgrade as well as the newly-built production equipment and the related installation costs, including facilities modifications and ancillary equipment, such that the new capacity will be available for STR's use on a turnkey basis. The Company plans to negotiate an arms-length lease for the Zhenfa-purchased equipment, subject to approval by the STR Board of Directors. Since the lease would represent a related-party transaction, STR's Special Committee of Continuing Directors must approve the transaction. STR anticipates that by the end of the first quarter of 2016, its capacity in China will reach a total of approximately four GWs, with one GW at the Company's tolling partner, FeiYu.
Robert S. Yorgensen, Chairman, President and Chief Executive Officer, stated; "We have been successful recently in configuring our products for the Chinese module manufacturing market and as a result, have seen a significant increase in demand early in the fourth quarter. Our primary challenge has therefore shifted from a lack of sales volume to a shortage of capacity within China and we are actively addressing that challenge together with Zhenfa's assistance."
As previously announced, the Company has ceased manufacturing operations at its Malaysia facility during the third quarter of 2015. The Company significantly reduced its headcount at this facility and incurred $1.3 million of restructuring expense related to severance and termination benefits as well as a write down of its inventory. The Company is in the process of selling the production equipment, real estate and ancillary equipment at this location. In connection with the shutdown and sale of the Malaysia facility, the Company expects to generate approximately $2.4 million of associated annual pre-tax savings.
The Company also reduced headcount at its Connecticut facility and incurred $0.1 million of related severance expense during the third quarter of 2015. This cost-reduction action is expected to generate approximately $0.2 million of associated annual pre-tax savings.
Net sales for the quarter ended September 30, 2015 were $6.6 million, a decrease of 23% sequentially and a decrease of 31% from Q3, 2014. The sequential decrease was driven by approximately 20% lower volume and a 4% decrease in average selling price ("ASP"). The sequential volume decrease was primarily driven by the impact of the Company's largest customer reducing its OEM module production, as previously disclosed.
The year-over-year third quarter decrease was driven by approximately 21% lower volume and a 12% 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 16% in the third quarter of 2015 compared to the corresponding 2014 period. Ex-currency impact, the Company's ASP declined by a modest 1%. The year-over-year volume decline was primarily driven by the reduction of net sales with its largest customer, as described above. Excluding net sales to this customer, volume increased by approximately 22% with the Company's remaining customer base, primarily driven by a 31% volume increase in China, as well as growth in India.
Gross loss for the third quarter of 2015 was $(1.5) million, or (23)% of net sales, compared to $(0.1) million, or (1)% of net sales from the second quarter of 2015 and gross loss of $(1.0) million, or (11)% of net sales from the third quarter of 2014. The sequential and year-over-year increases in gross loss were driven by $0.8 million of restructuring charges relating to the Company's Malaysia facility closure. Ex-restructuring, the $0.6 million sequential increase in gross loss was due to $0.2 million of inventory charges and reduced absorption due to reduced net sales and winding down its Malaysia facility, which more than offset lower material costs and benefits from prior-cost reduction actions. When removing the impact of restructuring, the Company improved its gross loss by $0.3 million during the third quarter of 2015 on a year-over-year basis due to lower raw material costs and benefits from cost-reduction actions which more than offset lower net sales.
Selling, general and administrative expenses ("SG&A") for the third quarter of 2015 were $3.2 million compared to $2.8 million in the second quarter of 2015 and $2.5 million in the third quarter of 2014. The sequential and year-over-year increases were primarily driven by $0.7 million of restructuring costs. The year-over-year increase was also attributable to $0.5 million of higher professional fees.
Adjusted EBITDA for the third quarter of 2015 was $(3.3) million compared to $(2.5) million from the second quarter of 2015. The sequential decline was due to previously described increases in gross loss and SG&A, as well as a $0.1 million unfavorable foreign exchange impact. This compares to Adjusted EBITDA from continuing operations of $(2.9) million for the third quarter of 2014. Unfavorable foreign currency transactional loss drove $0.5 million of this decline.
Net loss from continuing operations for the third quarter of 2015 was $(5.8) million, or $(0.32) per diluted share. This compares to a net loss from continuing operations of $(3.3) million, or $(0.18) per diluted share, for the second quarter of 2015 and net loss from continuing operations of $(3.2) million, or $(0.37) per diluted share, for the third quarter of 2014. The sequential and year-over-year higher net losses were primarily due to lower adjusted EBITDA, a $0.7 million loss on reclassification relating to the Company's Malaysian fixed assets being accounted for as held for sale, negative foreign exchange impact and higher restructuring charges.
Non-GAAP net loss from continuing operations for the third 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 $(4.2) million, or $(0.23) per diluted share. This compares to non-GAAP net loss from continuing operations of $(3.2) million, or $(0.18) per diluted share, for the second quarter of 2015 and non-GAAP net loss from continuing operations of $(3.0) million, or $(0.34) per diluted share, for the third quarter of 2014.
Balance Sheet and Liquidity
The Company finished the quarter with $9.6 million of cash and no debt. As of September 30, 2015, the Company also had $8.3 million of income tax receivables, $2.1 million of bank acceptance notes and $2.1 million due from Zhenfa.
The Company generated negative operating cash flow of $0.8 million during the third quarter of 2015. The Company collected $3.2 million from Zhenfa as partial payment on the ReneSola module-for-encapsulant swap agreement. This positive impact was more than offset by negative Adjusted EBITDA generation and higher working capital.
In October 2015, the Company's wholly owned Spanish subsidiary, Specialized Technology Resources España S.A., entered into a factoring agreement to sell, with recourse, certain European, U.S., and other foreign company-based receivables to Eurofactor Hispania S.A.U. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is €1.0 million, which is subject to adjustment based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. The annual discount rate is 2% plus EURIBOR for Euro denominated receivables, and 2% plus LIBOR for all other currencies. The term of the agreement is for one year, which will be automatically extended unless terminated by either party with 90 days prior written notice. The Company entered into the factoring agreement with the aim to improve its cash conversion cycle at its Spanish facility and to enhance STR's global liquidity.
Third Quarter Conference Call and Presentation
Due to continued cost-reduction efforts, the Company will not host a quarterly conference call.
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