Canadian Solar Reports Third Quarter 2012 Financial Results

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

Third Quarter 2012 Highlights

Solar module shipments were 384 MW, compared to 412 MW in the second quarter of 2012.

Net revenue was $326.0 million, compared to $348.2 million in the second quarter of 2012.

Revenue derived from the Company's total solution business was 21.5% of total revenue, compared to 5.5% in the second quarter of 2012.

Gross margin was 2.2%, compared to 12.4% in the second quarter of 2012.

Diluted loss per share was $1.01, compared to $0.59 in the second quarter of 2012.

Cash, cash equivalents and restricted cash balances at the end of the quarter were $690.8 million, compared to $692.1 million at the end of the second quarter 2012.

Third Quarter 2012 Results

Net revenue for the third quarter of 2012 was $326.0 million, down 6.4% from $348.2 million in the second quarter of 2012 and down 34.8% from $499.6 million in the third quarter of 2011.  Total solar module shipments in the third quarter of 2012 were 384 MW, compared to 412 MW in the second quarter of 2012 and 355 MW in the third quarter of 2011.  Total solar module shipments in the third quarter of 2012 included 21.1 MW used in the Company's total solution business, up from 8.7MW in the second quarter of 2012, and up from 19.3 MW in the third quarter of 2011.

By geography, in the third quarter of 2012, sales to European markets represented 47.9% of net revenue, sales to North America represented 24.9% of net revenue, and sales to Asia and all other markets represented 27.2% of net revenue, compared to 69.4%, 15.7% and 14.9%, respectively, in the second quarter of 2012 and 61.7%, 16.1% and 22.2%, respectively, in the third quarter of 2011.

Gross profit in the third quarter of 2012 was $7.3 million, compared to $43.2 million in the second quarter of 2012 and $11.9 million in the third quarter of 2011.  The sequential quarterly decline in gross profit was primarily due to lower shipment volume and continued downward pressure on average selling prices, partially offset by lower manufacturing costs. In the second quarter of 2012 the Company's gross profit was impacted by an adjustment of $14 million primarily as result of the recognition of the benefit from the Company's purchase of warranty insurance.   The year-over-year decline in gross profit was primarily due to the decline in average selling prices, partially offset by lower manufacturing costs and higher shipment volume.  In the third quarter of 2012, the Company recorded an additional charge of $2.1 million, representing 0.65% of revenue, to reflect the higher countervailing duty on the Company's products imposed by the US Department of Commerce in its final trade investigation determination. Gross margin in the third quarter of 2012 was 2.2%, compared to 12.4% in the second quarter of 2012 and 2.4% in the third quarter of 2011. 

Total operating expenses were $41.8 million in the third quarter of 2012, compared to $46.2 million in the second quarter of 2012 and $42.6 million in the third quarter of 2011.

Selling expenses were $21.4 million in the third quarter of 2012, down 12.4% from $24.4 million in the second quarter of 2012 and up 14.4% from $18.7 million in the third quarter of 2011.  The sequential quarterly decline in selling expenses was due to lower freight unit costs and lower shipment volume.  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, as well as increases in sales force headcount and related salary expenses.

General and administrative expenses were $17.0 million in the third quarter of 2012, down 7.4% from $18.4 million in the second quarter of 2012 and up 6.1% from $16.0 million in the third quarter of 2011.  The sequential quarterly decline in general and administrative expenses was due to a $1.3 million reversal of a bad debt expense and lower bank charges, partially off-set by higher salary expenses following the annual salary adjustment.  The year-over-year increase in general and administrative expenses was due to higher consulting fees, increases in headcount as well as the yearly salary adjustment.

Research and development expenses were $3.4 million in the third quarter of 2012, down 2.3% from $3.5 million in the second quarter of 2012 and down 57.1% from $7.9 million in the third quarter of 2011.  The year-over-year decline in research and development expenses was due to a reduced level of product development activities following the completion of several key projects at the end of 2011.

Operating margin was negative 10.6% in the third quarter of 2012, compared to negative 0.9% in the second quarter of 2012 and negative 6.1% in the third quarter of 2011.  The sequential quarterly and year-over-year decline in operating margin was due to lower gross profit, partially offset by lower operating expenses.

Interest expense in the third quarter of 2012 was $15.2 million, compared to $15.1 million in the second quarter of 2012 and $10.8 million in the third quarter of 2011.  The sequential quarterly and year-over-year increase in interest expense was primarily due to higher bank borrowings in the third quarter of 2012.  Interest income in the third quarter of 2012 was $3.6 million, compared to $3.4 million in the second quarter of 2012 and $3.0 million in the third quarter of 2011. The sequential quarterly 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 $5.3 million in the third quarter of 2012, compared to a loss of $1.1 million in the second quarter of 2012 and a gain of $14.5 million in the third quarter of 2011.  Net foreign exchange gain in the third quarter of 2012 was $7.0 million compared to a net foreign exchange loss of $7.2 million in the second quarter of 2012 and a net foreign exchange loss of $23.9 million in the third quarter of 2011.

Income tax benefit in the third quarter of 2012 was $1.8 million, compared to income tax expense of $2.1 million in the second quarter of 2012 and income tax benefit of $3.4 million in the third quarter of 2011. In the third quarter of 2012 the Company considered that some portion of the deferred tax assets relating to the current year operating losses in its Chinese manufacturing operations would not be realized based on its current forecast. Therefore, it recorded approximately $4.4 million income tax charge as a result of including the valuation allowance loss in the annual estimated tax expenses.

Net loss attributable to Canadian Solar in the third quarter of 2012 was $43.7 million, or $1.01 per share, compared to net loss of $25.5 million, or $0.59 per share, in the second quarter 2012,and net loss of $43.9 million, or $1.02 per share, in the third quarter of 2011.

Financial Condition

As of September 30, 2012, the Company had $690.8 million of cash, cash equivalents and restricted cash, compared to $692.1 million as of June 30, 2012.  Operating cash flow was approximately negative $57.6 million in the third quarter of 2012, reflecting the impact of approximately $68.6 million in cash outflows for the Company's previously disclosed acquisition of 16 projects from the former SkyPower Limited in Ontario, Canada.  Excluding the impact of this acquisition, adjusted operating cash flow, a non-GAAP measure, was positive $11.0 million in the third quarter of 2012 compared to $0.8 million in the second quarter of 2012.  A table providing a reconciliation of non-GAAP to the nearest GAAP measure is set out at the end of this press release.

Accounts receivable balance, net of allowance for doubtful accounts, at the end of the third quarter of 2012 was $257.8 million compared to $262.2 million at the end of the second quarter of 2012.  Accounts receivable turnover was 79 days in the third quarter of 2012 compared to 69 days in the second quarter of 2012.

Inventories at the end of the third quarter of 2012 were $317.8 million, compared to $343.8 million at the end of the second quarter of 2012.  Inventory turnover was 102 days in the third quarter of 2012 compared to 107 days in the second quarter of 2012.

Accounts and notes payable at the end of the third quarter of 2012 were $462.8 million, compared to $436.8 million at the end of the second quarter of 2012.  Accounts payable turnover in the third quarter of 2012 was 128 days compared to 122 days in the second quarter of 2012.

Short-term borrowings at the end of the third quarter of 2012 totaled $890.6 million, compared to $927.7 million at the end of the second quarter of 2012.  Long-term debt at the end of the third quarter 2012 was $224.2 million, compared to $136.3 million at the end of the second quarter of 2012.  The increase in long-term debt was primarily due to the drawdown of the long-term credit facilities to finance the Company's acquisition of 16 projects from the former SkyPower Limited in Ontario, Canada. The Company's unused borrowing lines of credit totaled $761 million at the end of the third quarter of 2012.

As of September 30, 2012, the Company had $402.6 million in total stockholders' equity, compared to $441.4 million as of June 30, 2012.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "Our results for the third quarter were broadly in line with our guidance, despite continued competitive pricing pressure and demand weakness.  During the quarter, we continued to strengthen our position as one of the four largest suppliers of photovoltaic modules in the world.  But more importantly, we did so while maintaining positive operating cash flow, net of our landmark acquisition of highly accretive solar power projects in Canada.  In the past several weeks, we announced a series of solar power plant development agreements, including the sale of our first solar power project in Canada to Stonepeak Infrastructure Partners, and a significant EPC agreement with Penn Energy Renewables Ltd., which we have since then expanded.  After the end of the third quarter, we completed construction of two TransCanada Corporation projects, which are now connected to the grid, and we received REA approval for six out of the remaining seven TransCanada projects, which are now in the initial phase of construction. Clearly, we continue to make impressive headway on the build-out of our project pipeline and the development of our total solutions business.  This is a major differentiator and diversification strategy for Canadian Solar, which we believe will be a key driver of our success and sustainability over the long term."

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar commented: "Our gross margin was impacted by our lower shipment volume and industry-wide pricing pressure.  Better than expected volume in Europe and strength in emerging markets were offset by ongoing weakness in the U.S.  We continue to actively focus on strict cost and inventory controls.  We reduced inventory by approximately $26 million during the third quarter and expect a further improvement in the fourth quarter.  Importantly, because we have managed our inventory and our balance sheet prudently, we are not under the pressure to sell inventory regardless of profitability that we believe some of our competitors are facing.  Our long-term debt increased in the quarter by approximately $88 million.  This is directly related to the growth of our projects business and the drawdown of our long-term credit facility in support of our previously announced acquisition, and the ongoing construction, of our Ontario solar power plant projects.  We remain in good standing with our bank syndicates and we are actively managing these important relationships.  We do not currently plan to expand manufacturing capacity as we can meet expected demand from our existing plants."

Utility Scale Project Pipeline Update

As previously announced, Canadian Solar completed the sale to Stonepeak Infrastructure Partners of a utility-scale solar power plant for approximately C$48.0 million (US$48.4 million) in the third quarter of 2012.  Shortly after the end of the third quarter, the Company also finished construction of two projects: Brockville 1 and William Rutley totaling 20MW (AC), which were sold to TransCanada Corporation.  Final payment and revenue recognition for these two projects will be determined by testing, which is currently underway.  The Company currently expects payment and revenue recognition for these two projects in the first quarter of 2013.  In addition, six of the seven remaining solar power projects sold to TransCanada Corporation totaling 56MW (AC) have received Ontario Renewable Energy Approval (REA) and construction is expected to be completed between the second quarter and the third quarter of 2013, with payment and revenue recognition expected in the following quarter after acceptance testing is completed. The Company now expects to recognize revenue of over $400 million for eight of the nine projects sold to TransCanada Corporation during 2013.

Additionally, the Company has also filed REA applications for all sixteen of the projects it acquired from the former SkyPower Limited and expects to receive notice to proceed (NTP) with, and start construction on, these projects during the period from first quarter to third quarter of 2013. The Company expects to generate over $800 million in revenue from these sixteen projects in the next 12 to 24 months.

During the third quarter, the Company entered into a turnkey engineering, procurement and construction (EPC) contract and operations and maintenance agreement with Penn Energy Renewables Ltd. for the construction and operation of two new solar energy farms totaling 18.7 MW (AC) in Ontario, Canada. This agreement has since been expanded to three solar energy farms totaling 28.7MW (AC), with expected completion by the third quarter of 2013. The Company expects to recognize revenue for these contracts on a percentage of completion basis.

In the U.S. market, the Company made good progress expanding its utility-scale project pipeline to approximately 243MW (DC) at the end of the third quarter of 2012. Currently, the Company expects up to 5MW (DC) to be built and recognized in the fourth quarter of 2012, including the recently announced 2.5 MW solar power plant in Laurinburg, NC.  In 2013, the Company expects its U.S. projects business to increase rapidly, with construction of up to 130MW expected during the year.