Gross Margin Improved; Ongoing Market Diversification and Progress in Downstream Projects
China Sunergy Co., Ltd.(NASDAQ: CSUN) (" China Sunergy " or "the Company"), a specialized solar cell and module manufacturer, announced its financial results for the third quarter ended September 30, 2012 . Despite a challenging macro-environment, the quarterly results reflected sequentially narrower net losses[1], with many key operating metrics, including shipments, conversion costs and gross margin, in line with guidance. In the quarter, China Sunergy successfully diversified into more geographies, with greater revenue contribution from markets including Australia , France and Japan compared to the second quarter of 2012.
Third Quarter 2012 Financial Highlights
Total revenue was US$59.5 million , a decrease of 46.1% compared with the second quarter of 2012.
Shipments totaled 82.5MW (81.9MW of which were module shipments), falling by 45.1% over the second quarter of 2012. Shipment volume was consistent with the Company's guidance of between 80 and 85MW.
Average selling price (ASP) for the Company's solar modules was US$0.71 per watt, 4 cents or 5.3% lower than that of the second quarter 2012.
Conversion costs for cells and modules in the third quarter of 2012 were US$0.17 and US$0.23 per watt, respectively. This is slightly better than the Company's expectation, and the Company reiterates its cost reduction roadmap to achieve cell and module conversion costs of US$0.15 and US$0.21 per watt, respectively, at the end of 2012.
Gross profit, including inventory provision totaling US$1.3 million , was US$0.4 million , and gross margin was 0.7%. Achieving a positive gross profit and gross margin was attributable to decrease in wafer costs. Adjusted non-GAAP[2] gross profit, excluding the aforementioned inventory provision, was US$1.7 million , leading to adjusted non-GAAP[2] gross margin of 2.8% in the third quarter of 2012.
Net losses[1] were US$23.2 million , an improvement over net losses of US$30.3 million in the second quarter of 2012. Net margin was negative 39.0%. On an adjusted non-GAAP[2] basis, net losses were US$9.6 million , and non-GAAP[2] net margin was negative 16.2%.
Net loss per ADS[1] was US$1.74 on both a basic and a diluted basis, compared to a net loss per ADS of US$2.26 on both a basic and a diluted basis in the second quarter of 2012.Non-GAAP[2] net loss per ADS was US$ 0.72 on both a basic and a diluted basis in the third quarter of 2012.
Operating cash outflow in the third quarter was US$3.6 million , down from an outflow of US$55.9 million in the second quarter of 2012. For the three quarters ended September 30, 2012 , the Company generated operating cash inflow of US$25.5 million .
Cash Position: As of September 30, 2012 , the Company had cash and cash equivalents and restricted cash of US$439.1 million , up from US$416.5 million as of June 30, 2012 .
Operational, Technological and Business Highlights in Third Quarter
Expanded further in the Australian market: The Company signed a 7.8MW sales contract with Urban Group , the energy arm of a leading conglomerate, Urban Group Australia. Delivery of the solar modules was completed in August 2012 .
Secured 50MW sales to partner V2M in Eastern Europe : The Company agreed to supply 50MW of multi-crystalline PV modules to its Bulgarian partner V2M and its affiliates, for projects in Romania and Macedonia , in the third and fourth quarters of 2012.
Kicked off the first shipment to Dubai : The Company shipped 72kW of multi-crystalline solar modules in early September 2012 to Carillion Construction Ltd. , a multinational company dedicated to sustainable and green energy projects.
China Sunergy's modules passed TUV "PID" Test: The Company's solar modules passed the potential induced degradation test conducted by TUV Rheinland Group with superior results of a 0.1% degradation rate, versus the 5% benchmark. Such results again proved the quality and reliability of China Sunergy 's modules.
QSAR cell efficiency improvement: The average efficiency of the Company's QSAR cell has reached 19.0% in the third quarter of 2012, and the record high was 19.7% as of September 30, 2012 .
[1] Impairment indicators were identified in the third quarter of 2012 primarily as a result of the challenging conditions in the solar industry. The Company is in the process of its impairment testing for long-lived assets and finalizing the potential impairment charge. Therefore, these numbers are preliminary and could change once the impairment testing is completed.
[2] China Sunergy's non-GAAP financial measures for the third quarter of 2012 are its corresponding GAAP financial measures as adjusted by excluding costs related to non-cash charges, including an inventory provision totaling US$1.3 million and a bad debt provision totaling US$12.3 million. Please refer to "Reconciliations of non-GAAP financial measures to the nearest comparable GAAP measures" at the end of this press release.
Mr. Stephen Cai, CEO of China Sunergy , commented: "In spite of a challenging market environment, our financial performance of this quarter remained in line with expectations, and the Company has performed solidly in managing costs and cash flow. We believe that the quarter marked a turning point for China Sunergy , as we continued diversifying our end markets, forming new partnerships with strong customers, and gradually transforming ourselves from a pure manufacturer to a downstream solar solutions provider. China Sunergy will continue to make strategic investments to develop European and US markets despite ongoing trade disputes. We will also work diligently at business fundamentals and continue to optimize our cost structure and pursue technological advances. We are confident that we have the right business strategies in place to weather the current industry turmoil and benefit from future market recovery."
Third Quarter 2012 Financial Review
Total Revenue and Shipments
For the third quarter of 2012, total revenue was US$59.5 million ( US$58.5 million of which was from modules), representing a sequential decline of 46.1% over the second quarter of 2012, resulting from drops in both shipments and ASP in the quarter.
Shipments for the third quarter of 2012 were 82.5MW, including 81.9MW of solar modules, in line with the Company's guidance.
Although Italy and Germany remained important markets for the Company, accounting for 16.8% and 15.3% of total revenue, respectively, in the third quarter of 2012, the Australian market grew strongly, contributing 26.0% of total revenue. This demonstrated China Sunergy 's success in strategically diversifying into more geographies. Other markets with notable revenue contribution increases included France , Portugal and Japan .
Gross Profit and Gross Margin
Gross profit, which included an inventory provision totaling US$1.3 million , was US$0.4 million in the third quarter of 2012, improving from the gross loss of US$0.3 million in the second quarter of 2012. Gross margin was 0.7% for the third quarter of 2012, compared to negative gross margin of 0.3% for the second quarter of 2012. Lower wafer cost was the major driver for sequentially better gross margin in the third quarter of 2012. Adjusted non-GAAP gross profit, which excluded the aforementioned inventory provision, was US$1.7 million , leading to adjusted non-GAAP gross margin of 2.8% in the third quarter of 2012.
ASP
Module ASP for the third quarter of 2012 was US$0.71 per watt, which was 4 cents (5.3%) lower than that of the last quarter. The lowered ASP was driven by market forces, primarily caused by an imbalance of supply and demand throughout the global solar value chain, and, to a lesser extent, continuously falling raw material prices.
Costs
In the third quarter of 2012, wafer costs were US$0.27 per watt, representing a sequential 1 cent decrease over the second quarter of 2012. The prices of polysilicon and wafers are expected to continue declining mildly for the rest of the year. Conversion costs of cells and modules manufactured in the third quarter of 2012 were US$0.17 and US$0.23 per watt, respectively, which were better than management's earlier expectations. Management reaffirmed the Company's cost reduction roadmap to achieve cells and module conversion costs of US$0.15 and US$0.21 per watt, respectively, at the end of 2012.
Operating Expense, Operating Profit/Loss and Net Income/Loss
The Company has identified impairment indicators related to its long-lived assets mainly as a result of challenging conditions in the solar industry. The Company expects the assessment process to take one to two months, and will report the outcome and any impairment when it is completed. If an impairment charge is made, it will be non-cash accounting charge, which will negatively affect certain of the Company's financial statement items, including operating expenses, operating profit/loss and net income/loss. Such potential impairment charge has not been reflected in the discussion of preliminary results below.
Operating expenses surged to US$28.4 million in the third quarter of 2012, from US$17.0 million in the second quarter of 2012. The significant increase in operating expenses was due primarily to rising SG&A expenses, from US$14.7 million in the second quarter of 2012 to US$26.2 million in the third quarter of 2012, which mainly included a bad debt provision of US$12.3 million recorded in the third quarter of 2012, compared to the US$3.1 million bad debt provision recorded in the second quarter. The increase in bad debt provision was mainly due to specific accrual against several customers. Adjusted non-GAAP operating expenses, which excluded the bad debt provision, were US$16.1 million , in the third quarter of 2012.
Losses from operations were US$28.1 million , and net losses were US$23.2 million for the third quarter of 2012. Main factors accounting for the gap between losses from operations and net losses included a US$7.8 million foreign exchange gain from currency translation, US$2.1 million of interest income, US$7.3 million of interest expense, and a US$2.0 million income tax gain. On an adjusted non-GAAP basis, losses from operations were US$14.5 million , and net losses were US$9.6million for the third quarter of 2012.
Inventory
Inventories at the end of the third quarter of 2012 reached US$56.1 million , a slight increase from US$53.3 million at the end of the second quarter of 2012. The increase in third quarter inventories was primarily in preparation of an increased spot market demand the Company expected in October 2012 . The Company carefully monitors its inventory balance and strives to maintain inventory at a reasonable level.
Cash and Cash Flow
As of September 30, 2012 , the Company had cash and cash equivalents of US$190.7 million , and restricted cash of US$248.4 million . Operating cash outflow was US$3.6 million for the third quarter of 2012, representing a significant improvement from cash outflow of US$55.9 million in the second quarter of 2012, as a result of stringent working capital control, resulting in better accounts receivable and other receivable positions on the balance sheet as of September 30, 2012 .
Capital Expenditures
Capital expenditures were US$7.6 million for the third quarter of 2012 and were primarily for continued expansion of R&D Center, which is expected to be completed by the first quarter of 2013.
Additional Company Updates Subsequent to Q3 2012
Signed sales contract with INFiNi in Japan : the Company signed a sales contract for 1.65MW of solar modules with INFiNi Group , a well-known conglomerate headquartered in Osaka, Japan . China Sunergy 's solar modules are to be installed in Okayama First Solar Plant in Japan , the first ground-mounted solar project of INFiNi. All shipments were completed in October 2012 as scheduled.
Invested in China Sunergy's first solar parks in UK : the Company has completed the transactions to procure its first two solar park projects, with a size of about 5 MW each, in the southwest Cornwall region of the U.K. . China Sunergy will arrange for the construction of the projects, and then own and operate these two solar parks.
China Sunergy 's collaboration with Netherlands ' Leading PV Integrator OSPS: the Company signed a supply contract with Oskomera Solar Power Solutions B.V in the Netherlands to deliver up to 7MW of high efficiency monocrystalline solar modules to OSPS for roof-top projects covering 2,500 Dutch households.
Fourth Quarter Guidance
The Company believes that weak market demand and industry oversupply will continue to adversely affect its business for the rest of the year, and it expects that challenging conditions in the global solar market will persist through the first half of 2013.
To the best of its knowledge at this time, the Company estimates that fourth quarter shipments will be in the range of 90MW to 100MW. The Company expects its gross margin to remain in low single digits and forecasts a net loss in the fourth quarter of 2012. Such guidance is based on the average Euro-US dollar exchange rate in September. For the full year 2012, the Company reaffirms its estimated yearly total shipments at approximately 400MW to 420MW.