STR Holdings: Q4 & full year 2010 results

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STR Holdings, Inc. announced financial and operating performance for the fourth quarter and year ended December 31, 2010.

Fourth Quarter 2010 Financial Highlights:

    * Consolidated net sales increased 22.1% to $97.6 million, from $79.9 million in 2009. Solar segment net sales increased 37.3% to $69.1 million, from $50.3 million in 2009;
    * Solar gross margin as percentage of net sales improved 13 basis points sequentially as manufacturing efficiencies offset raw material inflation;
    * Diluted EPS of $0.31 vs. $0.23 a year ago; non-GAAP diluted EPS of $0.39 vs. $0.42 a year ago. The prior year diluted EPS and non-GAAP diluted EPS included a $0.07 benefit from special items that affects comparability;
    * Free cash flow of $9.0 million generated during the quarter.

Full-Year 2010 Financial Highlights:

    * Consolidated net sales increased 40.3% to $371.8 million, from $264.9 million in 2009. Solar segment net sales increased 73.4% to $259.2 million from $149.5 million in 2009;
    * Solar gross profit as a percentage of net sales increased 243 basis points to 41.4% compared to 39.0% in 2009;
    * Operating income increased 78.2% to $85.7 million, from $48.1 million in 2009 and as a percentage of net sales improved 489 basis points to 23.0%;
    * Net income increased 114.5% to $49.3 million or $1.17 per diluted share from $23.0 million or $0.61 per diluted share in 2009;
    * Non-GAAP net income increased 67.6% to $64.1 million or $1.52 per diluted share from $38.3 million or $1.02 per diluted share in 2009.

Solar Segment

“We are delighted to report yet another strong quarter for our Solar segment to finish off a remarkable 2010,” said Dennis L. Jilot, Chairman, President and Chief Executive Officer. “Our continued growth in the fourth quarter was primarily driven by sales to customers in Asia. Growing 176% from the fourth quarter of 2009, this region now accounts for 43% of our Solar revenue compared to 22% a year ago. We have recently made our first shipment to another world class Chinese solar manufacturer in 2011 and are currently working through contract negotiations. Additionally, we have increased existing share in 2011 with our current tier 1 Chinese customers as well as with another large Asian module manufacturer.”

Solar net sales for the quarter ended December 31, 2010 increased 37.3% to $69.1 million from $50.3 million in 2009. On a quarterly sequential basis, net sales rose 1.2% from what was a very strong third quarter primarily due to foreign exchange, while ASPs were essentially unchanged.

Solar segment gross profit for the fourth quarter of 2010 increased 26.6% to $27.9 million, compared with $22.0 million a year ago. On a quarterly sequential basis, Solar segment gross margin as a percentage of net sales increased by 13 basis points from the third quarter of 2010. This increase was the result of improved manufacturing performance achieved at the Malaysia plant, as well as continued productivity gains at all facilities, which helped to further offset increased raw material cost.

“We maintained our Solar gross margins sequentially in the fourth quarter by maintaining price and through our continued emphasis on improving our manufacturing processes,” said Robert S. Yorgensen, President of STR Solar. “Looking forward, we’ll continue to work very hard to control our internal costs, improve our manufacturing efficiency and optimize our supply chain. Additionally, in order to partially offset increasing commodity prices, we have implemented a resin surcharge policy effective April 1st.”

In January 2011, two courts of law found in favor of STR in its trade secret litigation with JPS Elastomerics (JPS). The Massachusetts Federal Court dismissed the complaint filed by JPS in the third quarter of 2010 against STR for anti-trust and unfair competition. Additionally, the Massachusetts State Superior Court came to a final ruling on the original dispute between the Company and JPS, which has been pending since 2007. On January 24, 2011, the State Court awarded the Company the right to recover from JPS a total of $8.2 million dollars, plus interest. This amount includes monetary and punitive damages awards and reimbursement of attorney fees and costs. An injunction was also imposed on JPS prohibiting its manufacture of low-shrink EVA encapsulants for five years as well as a permanent injunction barring JPS from using STR trade secrets. JPS has appealed each of these decisions. Therefore, the Company has neither included this in its 2011 guidance nor will it record any award until collection on the judgment in ensured.

In December, STR Solar closed on its purchase of a 275,000 square foot facility in East Windsor, Connecticut. This facility will consolidate all Connecticut operations and provide floor space for up to 5.5 GW of capacity to support anticipated growth in the North American market. It will also house a state-of-the-art Research and Development facility, which will be leveraged to improve STR’s technological expertise and industry leadership. Additionally, the previously announced facility expansion in Malaysia, which will double existing floor space, is nearly complete and the capacity increase is on-schedule to commence production by the end of the third quarter of 2011. This plant is being expanded to address strong demand, and to support the anticipated growth in the Asian market. Further, the Company plans to install an additional 1.2 GW of new production equipment by the end of the fourth quarter of 2011. These capacity projects, when completed, will bring STR’s global capacity to approximately 11 GW by the end of 2011.

Quality Assurance Segment

For the fourth quarter of 2010, Quality Assurance (QA) net sales of $28.5 million were in line with previously announced expectations and lower by $1.1 million compared with $29.6 million a year ago. The decline in sales is the result of global economic softness and previously announced business losses from certain clients early in 2010. Sequentially, QA net sales were 3.3% lower than the third quarter of 2010 mainly due to seasonality in the consumer retail buying cycle.

Consolidated Financial Results

Consolidated net sales for the quarter ended December 31, 2010 rose 22.1% to $97.6 million, compared with $79.9 million in the fourth quarter of 2009. For the full-year 2010, net sales rose 40.3% to $371.8 million, compared with $264.9 million in 2009.

Fourth quarter 2010 consolidated gross profit rose 15.0% to $37.0 million, compared with $32.1 million in the fourth quarter of 2009. Year to date, 2010 consolidated gross profit rose 47.1% to $144.1 million, compared with $98.0 million in 2009. As a percentage of net sales, year-to-date 2010 gross profit increased 177 basis points from 2009.

SG&A expense for the fourth quarter ended December 31, 2010 was $14.6 million, down from $18.8 million last year, primarily as a result of a $4.2 million reduction in non-cash, stock-based compensation. Year to date, SG&A was $58.0 million, up from $48.8 million a year ago. This increase is primarily attributable to increased staffing and infrastructure costs to support the Company’s growth, increased research and development expense and higher legal costs associated with the JPS matter. As a percentage of net sales, year-to-date 2010 SG&A improved 280 basis points from 2009 to 15.6%.

Operating income for the fourth quarter of 2010 increased 70.7% to $22.9 million compared to $13.4 million in 2009. Year to date, operating income grew 78.2% to $85.7 million from $48.1 million in 2009 on 40.3% sales growth.

Net income for the fourth quarter of 2010 rose 49.0% to $13.2 million, or $0.31 on a diluted EPS basis. This compared with net income of $8.9 million, or $0.23 per diluted share, for the fourth quarter of 2009. Year to date, net income totaled $49.3 million, or $1.17 per diluted share, up 114.5% from $23.0 million, or $0.61 on a diluted EPS basis, for the same period in 2009.

Non-GAAP net income, which excludes the tax effected impact of intangible asset amortization expense, non-cash stock-based compensation, amortization of deferred financing costs and secondary offering expense, for the fourth quarter of 2010 amounted to $16.4 million, or $0.39 per diluted share. This compared with non-GAAP net income of $16.5 million, or $0.42 per diluted share, for the fourth quarter of 2009. Year to date, 2010 non-GAAP net income increased 67.6% to $64.1 million, or $1.52 per diluted share. This compared with non-GAAP net income of $38.3 million, or $1.02 per diluted share, during the 12 months ended 2009.

The 2009 net income and non-GAAP net income as well as diluted EPS and non-GAAP diluted EPS were positively affected by discrete tax items in the fourth quarter that provided a four cent benefit to both diluted EPS metrics. Also, the fourth quarter of 2009 had a lower share count compared with the current quarter due our initial public offering occurring in late 2009. The lower share count resulted in a three cent benefit to both fourth quarter diluted EPS metrics.

Consolidated Balance Sheet Results

During the fourth quarter of 2010, the Company generated $18.4 million of operating cash flow, and finished the year with cash of $106.6 million. Free cash flow, which is defined as operating cash flow less capital expenditures, increased nearly $2.2 million from the fourth quarter of 2009.

“In 2010, we continued our track record of strong free cash flow generation,” said Barry A. Morris, STR’s Executive Vice President and Chief Financial Officer, “We were also able to use our healthy balance sheet to proactively increase our raw material inventory to support our continued growth, help mitigate short-term inflation and reduce supply risk. As we enter 2011, our balance sheet is strong and we have the ability to fund our capacity projects as well as pursue other areas of growth.”

Business Outlook

Due to the Company’s expected increase in volume in Asia during the first quarter of 2011, some orders will be temporarily filled from the U.S. and Spain until the Company’s previously announced capacity expansion in Malaysia is operational. This will create a timing issue with regard to revenue recognition as $4.2 million of expected shipments in the first quarter of 2011 will not be recognized during the quarter.

About STR Holdings, Inc.

STR Holdings, Inc. is a leading global provider of high quality, superior performance solar encapsulants to the photovoltaic module industry. It is also one of the world’s leading providers of consumer product quality assurance testing, audit, inspection and responsible sourcing services, which helps ensure that suppliers and retailers have the highest level of confidence in the quality and safety of their products and in the social standards of the supply chain producing them. Further information about STR Holdings, Inc. can be obtained via the Company’s website at www.strholdings.com.

Contact:
STR Holdings, Inc.
Joseph C. Radziewicz, 860-758-7325
Controller and Principal Accounting Officer
joseph.radziewicz@strus.com
or
ICR, Inc.
Gary Dvorchak, 310-954-1123
CFA
Senior Vice President
Investor Relations Consultant
Gary.Dvorchak@icrinc.com
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