Canadian Solar Reports Second Quarter 2012 Financial Results

Canadian Solar Inc. ("Canadian Solar" or the "Company") (NASDAQ: CSIQ), one of the world's largest solar companies, has announced its financial results for the quarter ended June 30, 2012.

Second Quarter 2012 Highlights

Solar module shipments were 412 MW, compared to 343 MW in the first quarter of 2012.

Net revenue was $348.2 million, compared to $325.8 million in the first quarter of 2012.

Gross margin was 12.4%, compared to 7.7% in the first quarter of 2012.

Diluted loss per share was $0.59, compared to $0.49 in the first quarter of 2012.

Cash, cash equivalents and restricted cash balances at the end of the quarter were $692.1 million, compared to $625.2 million at the end of the first quarter 2012.

Second Quarter 2012 Results

Net revenue for the second quarter of 2012 was $348.2 million, up 6.9% from $325.8 million in the first quarter of 2012 and down 27.7% from $481.8 million in the second quarter of 2011.  Total solar module shipments for the second quarter of 2012 were 412 MW, compared to 343 MW for the first quarter 2012 and 287 MW for the second quarter of 2011.  Total solar module shipments for the second quarter of 2012 included 8.7 MW used in the Company's total solutions business.

By geography, in the second quarter of 2012, sales to European markets represented 69.4% of net revenue, sales to North America represented 15.7% of net revenue, and sales to Asia and all other markets represented 14.9% of net revenue, compared to 42.6%, 45.1% and 12.3%, respectively, in the first quarter of 2012 and 76.6%, 15.2% and 8.2%, respectively, in the second quarter of 2011. 

Gross profit in the second quarter of 2012 was $43.2 million, compared to $25.1 million in the first quarter of 2012 and $63.7 million in the second quarter of 2011.  The sequential increase in gross profit was primarily due to the increase in revenue as a result of higher shipment volume, as well as an adjustment of $14 million primarily resulting from the recognition of the benefit from the Company's purchased warranty insurance.  The year-over-year decline in gross profit was primarily due to the decline in average selling prices over the past several quarters, partially offset by lower manufacturing costs, higher shipment volume, and the positive effect of the warranty insurance adjustment.  Gross margin in the second quarter of 2012 was 12.4% compared to 7.7% in the first quarter of 2012 due to the positive impact of the warranty insurance adjustment, which totaled approximately 4% of revenue.  Gross margin was 13.2% in the second quarter of 2011. 

Total operating expenses were $46.2 million in the second quarter of 2012, compared to $38.5 million in the first quarter of 2012 and $38.7 million in the second quarter of 2011. 

Selling expenses were $24.4 million in the second quarter of 2012, up 20.2% from $20.3 million in the first quarter of 2012 and up 43.5% from $17.0 million in the second quarter of 2011.  The sequential increase in selling expenses was due to higher freight as a result of increased shipment volume, as well as higher shipping price per unit.  The year-over-year increase in selling expenses was due to increases in freight and other export-related expenses as a result of  higher shipment volume.

General and administrative expenses were $18.4 million in the second quarter of 2012, up 21.1% from $15.2 million in the first quarter of 2012 and 9.5% from $16.8 million in the second quarter of 2011.  The sequential and year-over-year increase in general and administrative expenses was primarily due to an increase in legal expenses.

Research and development expenses were $3.5 million in the second quarter of 2012, up 14,1% from $3.0 million in the first quarter of 2012 and down 29.3% from $4.9 million in the second quarter of 2011.  The sequential increase in research and development expenses reflects the Company's ongoing commitment to developing innovations that can increase PV module efficiency, lower system ownership costs and further strengthen Canadian Solar's competitive position.  The year-over-year decline in research and development expenses is due to a reduced level of product development activity following the completion of several projects, including the launch of ELPS high efficiency modules at the end of 2011. 

Operating margin was negative 0.9% in the second quarter of 2012, compared to negative 4.1% in the first quarter of 2012 and positive 5.2% in the second quarter of 2011.  The sequential improvement in operating margin was due to higher gross profit partially offset by higher operating expenses.  The year-over-year decline in operating margin was due to lower gross profit and higher operating expenses.

Interest expense in the second quarter of 2012 was $15.1 million, compared to $13.1 million in the first quarter of 2012 and $11.4 million in the second quarter of 2011.  The sequential and year-over-year increase in interest expense was primarily due to higher borrowing costs and higher bank borrowings in the second quarter of 2012.  Interest income in the second quarter of 2012 was $3.4 million, compared to $2.7 million in the first quarter of 2012 and $2.2 million in the second quarter of 2011. The sequential and year-over-year increase in interest income was due to higher restricted cash balances.

The Company recorded a loss on change in fair value of derivatives of $1.1 million in the second quarter of 2012, compared to a loss of $0.2 million in the first quarter of 2012 and a loss of $5.5 million in the second quarter of 2011.  Net foreign exchange loss in the second quarter of 2012 was $7.2 million, compared to a net foreign exchange gain of $0.3 million in the first quarter of 2012 and a loss of $1.2 million in the second quarter of 2011.

Income tax expense in the second quarter of 2012 was $2.1 million, compared to income tax benefit of $2.5 million in the first quarter of 2012 and income tax expense of $1.9 million in the second quarter of 2011. 

Net loss attributable to Canadian Solar in the second quarter of 2012 was $25.5 million, or $0.59 per diluted share, compared to net loss of $21.3 million, or $0.49 per diluted share, in the first quarter 2012,and net income of $7.1 million, or $0.16 per diluted share, in the second quarter of 2011.

Financial Condition

As of June 30, 2012, the Company had $692.1 million of cash, cash equivalents and restricted cash, compared to $625.2 million as of March 31, 2012. Operating cash flow was approximately negative $69.6 million in the second quarter of 2012, reflecting the impact of approximately $70.4 million cash outflow for the acquisition of the 16 projects in Ontario, Canada. Operating cash flow was approximately positive $12.1 million in the first quarter of 2012. Excluding the impact of the above mentioned acquisition, adjusted operating cash flow, a Non-GAAP measure, was positive $0.8 million in the second quarter of 2012. A table that provides a reconciliation of GAAP to non-GAAP measures is available elsewhere on this press release.

Accounts receivable balance, net of allowance for doubtful accounts, at the end of the second quarter of 2012 was $262.2 million compared to $250.6 million at the end of the first quarter of 2012.  Accounts receivable turnover was 69 days in the second quarter of 2012 compared 78 days in the first quarter of 2012.

Inventories at the end of the second quarter of 2012 were $343.8 million, compared to $389.9 million at the end of the first quarter of 2012.  Inventory turnover was 107 days in the second quarter of 2012 compared to 110 days in the first quarter of 2012.

Accounts and notes payable at the end of the second quarter of 2012 were $436.8 million, compared to $390.5 million at the end of the first quarter of 2012.  Accounts payable turnover in the second quarter of 2012 was 122 days compared to 104 days in the first quarter of 2012.

Short-term borrowings at the end of the second quarter of 2012 totaled $927.7 million, compared to $861.9 million at the end of the first quarter of 2012.  Long-term debt at the end of the second quarter 2012 was $136.3 million, compared to $88.3 million at the end of the first quarter of 2012.  The increase in long-term debt is primarily due to drawdown of a syndicate loan of $53.8 million with maturities ranging from 25 to 60 months during the quarter.

As of June 30, 2012, the Company had $441.4 million in total stockholders' equity, compared to $455.5 million as of March 31, 2012.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "Shipments remained strong in the second quarter of 2012.  Strength in Europe, most notably Germany, offset weakness in the U.S. market.  Despite healthy volume, average selling price continued to decline as the Euro weakened and Germany transitioned to a new, lower feed-in-tariff regime.  We were again very active in the quarter as our organization is moving aggressively to capture new opportunities in key solar markets worldwide.  We continue to see attractive opportunities for growth in China, Japan and India, as well as other emerging markets in Asia, Africa and Latin America.  Importantly, we remain fully focused on the development of our total solutions business. During the quarter, we completed construction of an 11.5 MW power plant in Stone Mills, Ontario.  We expect to recognize the revenue from this project in the third quarter.  As we have discussed previously, by focusing on these manageable projects, we expect to reduce financing and execution risks, and enjoy a greater level of predictability in our business.  Starting in 2011, we entered into transactions to acquire, or joint venture, approximately 140 MW of utility-scale solar development projects in the U.S.  These transactions will give us an expanded presence in the U.S., which we believe will be an attractive growth market despite near-term headwinds.  We also completed the acquisition of 16 solar projects from SkyPower and launched a 50:50 joint venture with SkyPower Limited, called CSI SkyPower, which we expect will allow us to more rapidly expand our total solutions business in Africa, the Middle East and South America.  We believe these target markets have great potential for rapid growth due to the strong desire of such regions to expand solar energy generation assets and infrastructure." 

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, commented: "We are encouraged by our higher shipment volume, margin improvement, and balance sheet stability.  We continue to focus on the cost initiatives that will drive organization-wide improvements and help us remain highly competitive.  We are also closely managing our inventory with a reduction in our quarter ending inventory balance of approximately $40 million from the first to the second quarter 2012.  However, we ended the quarter with higher than planned inventory as a result of recognized shipments being slightly lower than what we had expected.  Our net debt increased by approximately $81 million, mostly due to the payment of the first installment of the purchase price for the SkyPower Limited acquisition and the commencement of draw-downs under the construction facility for our projects in Canada.  We will continue to diligently manage our short and long-term debt as we support our rapidly expanding total solutions business, which we expect to have higher average gross margins than our standard module business.  We are comfortable with our current financial ratios and with the support of major financial institutions to finance ongoing downstream expansion.  Our prudent financial management in the past has positioned us to be able to capitalize on project opportunities today."