Stock Update (NASDAQ:CSIQ): Canadian Solar Inc. Reports Second Quarter 2015 Results


Canadian Solar Inc. (NASDAQ:CSIQ), one of the world’s largest solar power companies, today announced its financial results for the second quarter ended June 30, 2015.

Second Quarter 2015 Highlights

  • Total solar module shipments were 850 MW, of which 809 MW were recognized in revenue, compared to 1.03 GW recognized in revenue in the first quarter of 2015, and second quarter shipment guidance in the range of 950 GW to 1,000 GW.
  • Net revenue was $636.7 million, compared to $860.9 million in the first quarter of 2015 and second quarter guidance in the range of $570 million to $620 million.
  • Net revenue from the total solutions business as a percentage of total net revenue was 30.6% compared to 35.9% in the first quarter of 2015.
  • Gross margin was 15.2%, compared to 17.8% in the first quarter of 2015 and second quarter guidance in the range of 13.0% to 15.0%.
  • Net income attributable to Canadian Solar was $17.9 million, or $0.31 per diluted share, compared to $61.3 million, or $1.04 per diluted share, in the first quarter of 2015.
  • Cash, cash equivalents and restricted cash balances at the end of the quarter totaled $1.04 billion, the same as at the end of the first quarter of 2015.
  • Net cash generated from operating activities was $29.1 million, compared to $124.9 million in the first quarter of 2015.
  • During the quarter, the Company closed the sale of one solar power plant in Canada and connected three solar power plants to the grid in Japan.

Second Quarter 2015 Results

Net revenue for the second quarter of 2015 was $636.7 million, down 26.0% from $860.9 million in the first quarter of 2015 and up 2.1% from $623.8 million in the second quarter of 2014.  Total solar module shipments in the second quarter of 2015 were 850MW, of which 809 MW were recognized in revenue, compared to 1.03 GW recognized in revenue in the first quarter of 2015 and 646 MW recognized in revenue in the second quarter of 2014.  Solar module shipments recognized in revenue in the second quarter of 2015 included 90 MW used in the Company’s total solutions business, compared to 124 MW in the first quarter of 2015 and 49 MW in the second quarter of 2014.

By geography, in the second quarter of 2015, sales to the Americas represented 47.6% of net revenue, sales to Asia and other markets represented 46.5% of net revenue, and sales to Europe represented 5.9% of net revenue, compared to 48.7%, 33.6% and 17.7%, respectively, in the first quarter of 2015 and 55.5%, 29.8% and 14.7%, respectively, in the second quarter of 2014.

Q2 2015 Q1 2015 Q2 2014
US$M % US$M % US$M %
The Americas 302.8 47.6 419.1 48.7 346.0 55.5
Asia and others 296.1 46.5 289.0 33.6 186.2 29.8
Europe 37.8 5.9 152.8 17.7 91.6 14.7
Total 636.7 100.0 860.9 100.0 623.8 100.0

Gross profit for the second quarter of 2015 was $96.5 million, compared to $153.0 million in the first quarter of 2015 and $118.2 million in the second quarter of 2014.  Gross margin in the second quarter of 2015 was 15.2%, compared to 17.8% in the first quarter of 2015 and 19.0% in the second quarter of 2014.  The sequential decrease in gross margin was primarily due to one-time cumulative catch-up countervailing and anti-dumping duties due to the new U.S. Department of Commerce ruling and both lower margin and lower contribution from the Company’s total solution business inCanada.

Total operating expenses were $64.1 million in the second quarter of 2015, down 13.7% from $74.2 million in the first quarter of 2015 and up 26.8% from $50.5 million in the second quarter of 2014.

Selling expenses were $32.2 million in the second quarter of 2015, down 21.1% from $40.8 million in the first quarter of 2015 and up 9.4% from $29.5 million in the second quarter of 2014. The sequential decrease was primarily due to lower shipment volume and lower unit shipping costs, as well as lower sales commission and marketing expenses. The year-over-year increase was primarily due to higher selling expenses to support higher shipment volume.

General and administrative expenses were $27.5 million in the second quarter of 2015, down 6.9% from $29.5 million in the first quarter of 2015 and up 51.5% from $18.2 million in the second quarter of 2014.  The sequential decrease was primarily due to the recognition of an insurance gain associated with the cell factory fire incident in early 2014, as well as a reduction in bad debt provision and various professional services expenses, partially offset by the consolidation of Recurrent Energy’s general and administrative expenses of $5.9 million for the second quarter. The year-over-year increase was primarily due to higher labor costs and an increase in various professional fees and expenses, as well as the consolidation of Recurrent Energy’s general and administrative expenses.

Research and development expenses were $4.3 million in the second quarter of 2015, compared to $3.9 million in the first quarter of 2015 and $2.9 million in the second quarter of 2014.

Income from operations was $32.5 million in the second quarter of 2015, compared to $78.7 million in the first quarter of 2015, and $67.7 million in the second quarter of 2014.  Operating margin was 5.1% in the second quarter of 2015, compared to 9.1% in the first quarter of 2015 and 10.9% in the second quarter of 2014.

Non-cash, depreciation and amortization charges were approximately $22.7 million in the second quarter of 2015, compared to $22.0 million in the first quarter of 2015, and $19.8 million in the second quarter of 2014. Non-cash, equity compensation expense was $2.0 million in the second quarter of 2015, compared to $1.2 million in the first quarter of 2015, and $1.3 million in the second quarter of 2014.

Interest expense was $12.9 million in the second quarter of 2015, compared to $11.2 million in the first quarter of 2015 and $12.8 million in the second quarter of 2014. The sequential increase was primarily due to higher bank borrowings.

Interest income in the second quarter of 2015 was $4.1 million, compared to $4.3 million in the first quarter of 2015 and $3.6 million in the second quarter of 2014.

The Company recorded a gain on change in fair value of derivatives of $1.6 million in the second quarter of 2015, compared to a gain of $7.9 million in the first quarter of 2015 and a loss of $3.2 million in the second quarter of 2014.  Foreign exchange loss in the second quarter of 2015 was $4.4 millioncompared to foreign exchange loss of $1.0 million in the first quarter of 2015 and foreign exchange gain of $7.6 million in the second quarter of 2014.

Income tax expense in the second quarter of 2015 was $2.7 million, compared to income tax expense of $19.7 million in the first quarter of 2015 and income tax expense of $8.3 million in the second quarter of 2014.

Net income attributable to Canadian Solar in the second quarter of 2015 was $17.9 million, or $0.31 per diluted share, compared to net income of $61.3 million, or $1.04 per diluted share, in the first quarter of 2015, and net income of $55.8 million, or $0.95 per diluted share, in the second quarter of 2014.

Financial Condition

The Company had $1.04 billion of cash, cash equivalents and restricted cash as of June 30, 2015, compared to $1.04 billion as of March 31, 2015.

Accounts receivable, net of allowance for doubtful accounts, at the end of the second quarter of 2015 were $303.8 million, compared to $327.8 millionat the end of the first quarter of 2015.  Accounts receivable turnover was 58 days in the second quarter of 2015, compared to 45 days in the first quarter of 2015.

Inventories at the end of the second quarter of 2015 were $521.1 million, compared to $400.1 million at the end of the first quarter of 2015.  The increase reflects the Company’s building of inventory in order to meet expected demand in the second half of 2015.  Inventory turnover was 82 days in the second quarter of 2015, compared to 57 days in the first quarter of 2015.

Accounts and notes payable at the end of the second quarter of 2015 were $973.3 million, compared to $900.4 million at the end of the first quarter of 2015.

Short-term borrowings at the end of the second quarter of 2015 were $940.1 million, compared to $885.6 million at the end of the first quarter of 2015.  Long-term debt at the end of the second quarter of 2015 was $353.2 million, compared to $125.9 million at the end of the first quarter of 2015.  Senior convertible notes totaled $150.0 million at the end of the second quarter of 2015, unchanged from the end of the first quarter of 2015.  Short-term borrowings and long-term debt directly related to utility-scale solar power projects totaled $181.0 million at the end of the second quarter of 2015.

A preliminary allocation of the purchase price of Recurrent, to the assets acquired and liabilities assumed has been made based on available information and management’s best estimates. The Company is still finalizing the valuation of the assets acquired and liabilities assumed. The final allocation of the purchase price may differ from this preliminary allocation.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked:  “Revenue for the second quarter was above the high-end of our guidance reflecting stable pricing and continued strong demand in our key markets worldwide.  With our late-stage, utility-scale solar project pipeline totaling 2.4 GW, we continue to gain momentum, attracting leading financial partners to support our development efforts in Canada, the U.S., the U.K.and Japan.    We are pleased with the continued profitable growth of our solar module businesses.  We continue to have a distinct competitive advantage as an integrated solar power company and are in an excellent position to extend our Tier I global brand, as we work to deliver value for our shareholders.”

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “Gross margin for the second quarter of 2015 was 15.2%, which was in-line with our guidance, even with the sequential decline in revenue.  We expect to see a slight uptick as we move into the second half of the year, as we anticipate an increased contribution from year-end demand rush.  We are in the advantageous position of having the balance sheet and bankability of our Tier 1 brand to allow us to build and stage adequate inventory to capture the higher demand.   We continue to make good progress towards our business model transformation into a build, own and operate model, and remain on track in our plan to launch a YieldCo. We recognize that the market has recently experienced volatility around YieldCo valuations and we have alternative plans to monetize our utility-scale solar power plant assets, if necessary. Overall, we believe our business fundamentals, growth prospects and financial position are stronger than they have been for a long time.”

Utility Scale Project Pipeline Update

As of the end of the second quarter of 2015, Canadian Solar’s late-stage, utility-scale solar project pipeline totaled approximately 2.4 GW. These projects include owned and joint-venture projects, as well as projects where the Company provides engineering, procurement and construction (“EPC”) services. However, the Company cautions that some of the projects under development may fail to secure all of the necessary permits and grid-connection approvals and as a result may not reach completion.

In Canada, in the second quarter of 2015, the Company closed the sale of the LunarLight solar power plant totaling 10 MW AC and valued at over C$65 million (USD$53 million). The Company also reached substantial completion on its 100 MW AC (134 MWp) Samsung phase I, Grand Renewable Solar project, the largest solar power plant in Canada. The status of the Company’s late-stage, utility-scale solar projects in Ontario, Canada as of June 30, 2015 is summarized below:

Canadian Solar developed MWp Status Expected COD
Alfred 14.1 In Construction 2015 Q4
Illumination LP 14.0 In Construction 2015 Q4
Beam Light LP 14.0 In Construction 2015 Q4
Earth Light LP 14.1 In Construction 2015 Q4
Aria LP 14.8 In Construction 2015 Q4
Total CSIQ Developed (SALE in 2015) 71.0
3rd Party Developed (EPC) MWp Status
Samsung Phase I 133.6 In Operation 2015 Q2
Samsung Phase II 141.0 In Construction 2015 Q3
Total EPC Projects 274.6
EPC MW Recognized into Revenue in Prior Quarters 229.3
Total Poject Backlog 116.3

In the United States, the Company’s late-stage, utility-scale solar project pipeline totals approximately 1.2 GWp. Permitting is completed, and power purchase agreements are in place for all seven projects and the Company is making progress on its debt and tax equity financing with announcements expected in the weeks ahead.  The Company’s late stage project pipeline in the U.S. is listed in the table below:

Project MWp Location Status Expected COD
Astoria 1 131.0 CA In Construction 2016
Astoria 2 100.0 CA In Construction 2016
Project A 81.0 CA NTP in 2015 2016
Mustang 134.0 CA In Construction 2016
Tranquility 288.0 CA In Construction 2016
Project B 200.0 TX NTP in 2015 2016
Project C 272.0 CA NTP in 2015 2016
Total 1,206.0

In Japan, in the second quarter of 2015, the Company completed construction and grid connection of three of its solar photovoltaic (PV) power plants, with a total production capacity of approximately 5.2 MWp. As of the end of the second quarter of 2015, the Company’s pipeline of projects under development in Japan is approximately 617 MWp, of which approximately 336 MWp have full grid connection approval (Keitou Renkei Shoudakusho) and approximately 96.8 MWp are either in construction or near ready to start construction.  As a result of previously disclosed market-wide delays in permitting, the Company now expects to complete construction and grid connection of approximately 19.6 MWp of projects in Japan during 2015, including the 5.2 MWp that were connected in the second quarter of 2015. Additionally, the Company continues to evaluate several opportunities to expand its project pipeline in the Japanese market with at least 112 MWp of acquisitions currently under negotiation. The Company is now planning construction and grid-connection scheduling of its projects to meet the needs of its build, own and operate strategy and is concentrating on the timing of cash outlays and drop downs instead of quarterly earnings targets.

In China, as previously disclosed, the Company has approximately 338 MWp of projects under development. The Company plans to connect approximately 320 MWp to the grid in China in 2015.

In the United Kingdom, Canadian Solar’s late-stage project pipeline totals 55.6 MWp, all of which are expected to be connected to the grid during 2015.

In Brazil, the Company has won the right to develop three solar power plants totaling 114 MWp in Vazante, in the state of Minas Gerais.  Canadian Solarexpects these solar power plants to be connected to the grid in 2016.  Once connected, the electricity generated will be purchased by a Brazilian government entity under a 20-year power purchase agreement.

In addition to its late-stage, utility-scale project development pipeline discussed above, the Company now has a fleet of solar power plants in operation totaling approximately 163.9MWp, of which 100.0 MWp are in China, 40.2MWp are in the U.K., 6.3 MWp are in Japan, and 17.4 MWp, which are owned through Recurrent Energy, are located in the U.S. and Spain.

Business Outlook

The Company’s business outlook is based on management’s current views and estimates with respect to operating and market conditions, its current order book, and the global and local financing environment, and is also subject to uncertainty relating to customer final demand and solar project construction schedule.  Management’s views and estimates are subject to change without notice.

For the third quarter of 2015, the Company expects total module shipments to be in the range of approximately 970MW to 1,020MW, including approximately 70MW of shipments to the Company’s utility-scale solar projects that will not be recognized in third quarter 2015 revenue. Total revenue for the third quarter of 2015 is expected to be in the range of $570 million to $620 million, with gross margin expected to be between 12% and 14%. The gross margin guidance for the third quarter of 2015 is expected to be negatively impacted by the U.S. import duty on modules because module shipments to the U.S. are expected to increase significantly.

For the full year 2015, the Company maintains its expectation of total module shipments to be in the range of approximately 4.0 GW to 4.3 GW, including 3,300 MW to 3,500 MW of third-party module sales, 235 MW to 275 WW of project and EPC sales, and 460 MW to 490 MW of shipments to projects which will be held on the balance sheet pending the potential launch of a YieldCo. Total revenue for the full year 2015 is expected to be in the range of $2.8 billion to $3.0 billion.  Absent the planned change in the Company’s energy business model from a build-to-sell to a build, own and operate model, revenue for 2015 would be approximately $1.0 billion to $1.1 billion higher.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar commented, “We maintain our view that demand will remain strong, with supply constraints likely later in the year.  As a Tier 1 solar module supplier, we expect to benefit from this trend even as we pursue only the most attractive, lower risk opportunities. We are also on track in developing our global downstream energy business. We continue to plan the launch of our renewable energy Yield Co with high quality assets in OECD countries. Meanwhile, the quality of our project portfolio also allows us to make a decent developer’s margin even if we decide to sell these projects to third-party customers. Our strong track record gives us a competitive advantage and has enabled us to secure project level financing on favorable terms.    While we continue to be positive on the growth in the U.S. in both module sales and downstream energy business, we are also pleased with our progress in Asia, where demand continues to grow as the market further matures.  Our pipeline of projects already under development in China and Japan stands at 338 MWp and 617 MWp, respectively.  These are just a few of the growth markets we are addressing.”

Recent Developments

On July 30, 2015, Canadian Solar announced that it supplied 1.25 MW AC of 28 kW three-phase inverters to Renewable Solar Energy in central California. These inverters will be used in their three ground mount PV projects in Netto Farms, Tos Farms, and Summer Hill Dairy. Canadian Solar is also the supplier of 1.5 MW DC of Canadian Solar’s CS6X-305P solar panels. Offering inverters and PV panels together as part of a total system solution allowsCanadian Solar to further enhance its customer support services.

On July 28, 2015, Canadian Solar announced that it signed a JPY3.5 billion (US$28.35 million) credit facility agreement with Rabobank Hong Kong. The credit facility has a two-year maturity and will be used to finance the construction of an initial portfolio of up to 20 MWp of Canadian Solar’s solar power plants in Japan.

On July 27, 2015, Canadian Solar announced that its wholly owned subsidiary, Canadian Solar Solutions Inc., reached substantial completion on its 100 MW AC (133 MW DC) utility-scale Grand Renewable Solar Project. This project, located in the county of Haldimand, Ontario consists of approximately 445,000 CS6X MaxPower high-performance Ontario-made modules, and is the largest operational solar farm in Canada. Canadian Solar provided EPC services for the project, which is jointly owned by Samsung Renewable Energy Inc., Connor, Clark & Lunn Infrastructure, and the Six Nations of the Grand River.

On July 21, 2015, Canadian Solar announced that The Manufacturers Life Insurance Company agreed to provide approximately C$52.8 Million (US$40.8 Million) in construction and term financing to Canadian Solar for the Aria solar plant located in Springwater, Ontario, Canada. The Aria project will be acquired by Concord Green Energy Inc. after commercial operation commences.

On July 20, 2015, Canadian Solar announced that it completed construction and grid connection of three solar PV power plants in Japan, with a total of approximately 5.2 MWp: the 2.2 MWp Tsukuba Stones Solar Power Plant in Kasama City, Ibaraki Prefecture, the 2.0 MWp Tomigaoka Solar Power Plant in Isa City, Kagoshima Prefecture, and the 1.0MWp Isa City Solar Power Plant in Isa City, Kagoshima Prefecture.

On June 23, 2015, Canadian Solar announced that its wholly owned subsidiary, Canadian Solar Solutions Inc., completed the sale of LunarLight, a 10 MW AC solar power plant located in Belleville, Ontario, to a subsidiary of BluEarth Renewables Inc. This is the last in a series of power plants acquired by BluEarth from Canadian Solar. The facility is valued at approximately C$65 million (USD$53 million) and uses Canadian Solar’s CS6X-300/305P modules made in Canada.

On June 19, 2015, Canadian Solar announced that it signed a financing agreement pursuant to which Deutsche Bank has agreed to provide C$71.6 Million (USD$58 Million) in non-recourse, short-term construction financing to Canadian Solar for the construction of two solar power projects inOntario, Canada. The two power plants, both 10 MW AC each, have been awarded a 20-year power purchase contract by the Independent Electricity System Operator (IESO) under Ontario’s Feed-in-Tariff Program.

On June 17, 2015, Canadian Solar announced that it served as the supplier of photovoltaic modules for the 42.9 MW Takataya Hibiki PV plant inKitakyushu, Japan. In total, Canadian Solar provided 168,240 Canadian Solar CS6P-255P solar panels to the project.

On June 12, 2015, Canadian Solar announced that, effective June 1, the Company has been offering a new upgraded warranty on its polycrystalline photovoltaic modules by guaranteeing a lower first year power output degradation, less than 2.5%. This is in contrast to the industry standard of 3% degradation during the first year.

On June 8, 2015, Canadian Solar announced that on May 7, 2015 it closed a GBP35 million ($53 million) project financing facility with Investec Bank plcfor a portfolio of four solar power plants with an installed capacity totaling 40.2 MW.

On June 5, 2015, Canadian Solar announced the European Commission’s decision to withdraw the acceptance of the Company’s undertaking and confirmed its belief that it had duly complied with all of the undertaking’s terms and conditions.

On May 28, 2015, Canadian Solar announced that it supplied modules to Turkey’s largest PV project, the Kayseri Organized Industrial Zone PV Plant.

On May 18, 2015, Canadian Solar announced that Natixis, New York Branch/Norddeutsche Landesbank Gironzentrale, New York Branch/ Cooperative Centrale Raiffeisen-Boerenleenbank B.A./ “Rabobank Nederland,” New York Branch will provide the company with up to C$53.5 Million (USD$44.4 Million) in non-recourse, construction plus term financing.  The loan facility will finance the 10 MW utility-scale solar power project located in the town of Scugog, Ontario, which is being acquired by DIF Infra 3 RE Canada Limited. (Original Source)

In reaction to the earnings results, shares of Canadian Solar slipped 8.06% to $22.70 in after-hours trading. CSIQ has a 1-year high of $41.12 and a 1-year low of $18.68. The stock’s 50-day moving average is $25.95 and its 200-day moving average is $31.10.

On the ratings front, Canadian Solar has been the subject of a number of recent research reports. In a report issued on June 16, Nomura analyst Nitin Kumar reiterated a Buy rating on CSIQ, with a price target of $46, which represents a potential upside of 87.5% from where the stock is currently trading. Separately, on June 1, FBR’s Aditya Satghare reiterated a Buy rating on the stock and has a price target of $45.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Nitin Kumar and Aditya Satghare have a total average return of 50.7% and -16.9% respectively. Kumar has a success rate of 44.0% and is ranked #137 out of 3738 analysts, while Satghare has a success rate of 31.6% and is ranked #3607.

Canadian Solar Inc is a solar power company. The Company designs, develops and manufactures solar wafers, cells and solar power products.