Canadian Solar Reports First Quarter 2016 Results and Raises Annual Revenue Guidance

First Quarter 2016 Results

Net revenue in the first quarter of 2016 was $721.4 million, down 35.6% from $1,120.3 million in the fourth quarter of 2015 and 16.2% from $860.9 million in the first quarter of 2015. Total solar module shipments in the first quarter of 2016 were 1,198 MW, of which 1,172 MW were recognized in revenue, compared to 1,398 MW recognized in revenue in the fourth quarter of 2015 and 1,027 MW recognized in revenue in the first quarter of 2015. Solar module shipments recognized in revenue in the first quarter of 2016 included 24.8 MW used in the total solutions business, compared to 63.8 MW in the fourth quarter of 2015 and 124.3 MW in the first quarter of 2015.

By geography, in the first quarter of 2016, sales to the Americas represented 43.1% of net revenue, sales to Asia represented 44.4% of net revenue, and sales to Europe and others represented 12.5% of net revenue, compared to 51.9%, 41.1% and 7.0% respectively, in the fourth quarter of 2015 and 48.7%, 32.9%, 18.4% respectively, in the first quarter of 2015.

Gross profit in the first quarter of 2016 was $112.5 million, compared $200.5 million in the fourth quarter of 2015 and $153.0 million in the first quarter of 2015. Gross margin in the first quarter of 2016 was 15.6%, compared to 17.9% in the fourth quarter of 2015 and 17.8% in the first quarter of 2015. The sequential decrease in gross margin was primarily due to lower contribution from the total solutions business, partially offset by lower module manufacturing cost and higher module average selling price.

Total operating expenses were $74.1 million in the first quarter of 2016, down 22.1% from $95.2 million in the fourth quarter of 2015 and down 0.2% from $74.2million in the first quarter of 2015.

Selling expenses were $34.8 million in the first quarter of 2016, down 11.7% from $39.4 million in the fourth quarter of 2015 and down 14.8% from $40.8 million in the first quarter of 2015. The sequential decrease in selling expenses was primarily due to lower shipping and handling expenses as well as decrease in external sales commission. The year-over-year decrease in selling expenses was primarily due to lower shipping and handling unit costs, partially offset by higher shipment volume.

General and administrative expenses were $34.8 million in the first quarter of 2016, down 31.7% from $51.0 million in the fourth quarter of 2015 and up 17.8% from $29.5 million in the first quarter of 2015.  The sequential decline in general and administrative expenses was primarily due to a decrease in incentive compensation as well as lower non-cash charges for bad debt and asset impairment. The year-over-year increase in general and administrative expenses was primarily due to consolidation of Recurrent Energy’s general and administrative expenses, partially offset by lower professional service fees.

Research and development expenses were $4.5 million in the first quarter of 2016, compared to $4.8 million in the fourth quarter of 2015 and $3.9 million in the first quarter of 2015.

Income from operations was $38.4 million in the first quarter of 2016, compared to $105.3 million in the fourth quarter of 2015, and $78.7 million in the first quarter of 2015. Operating margin was 5.3% in the first quarter of 2016, compared to 9.4% in the fourth quarter of 2015 and 9.1% in the first quarter of 2015.

Non-cash depreciation and amortization charges were approximately $25.7 million in the first quarter of 2016, compared to$24.7 million in the fourth quarter of 2015, and $22.0 million in the first quarter of 2015. Non-cash equity compensation expense was $2.5 million in the first quarter of 2016, compared to $1.4 million in the fourth quarter of 2015, and $1.2 million in the first quarter of 2015.

Interest expense was $16.1 million in the first quarter of 2016, compared to $17.1 million in the fourth quarter of 2015, and $11.2 million in the first quarter of 2015.

Interest income was $3.4 million in the first quarter of 2016, compared to $4.2 million in the fourth quarter of 2015 and $4.3 million in the first quarter of 2015.

The Company recorded a gain on change in fair value of derivatives of $2.7 million in the first quarter of 2016, compared to a loss on change in fair value of derivatives of $9.4 million in the fourth quarter of 2015 and a gain on change in fair value of derivatives of $7.9 million in the first quarter of 2015. The gain on change in fair value of derivatives of $2.7 million in the first quarter of 2016 comprised a gain on change in fair value of warrants of $15.2 million, a foreign currency hedging loss of $5.0 million and a $7.5 million loss in change in fair value of swap/swaption for projects in U.S. and Canada. The warrants were issued in conjunction with the $180 million in financing arranged by Credit Suisse in the fourth quarter of 2015.  These warrants can be settled in cash at the discretion of the holder and as a result they are liability derivatives which were fair valued at issuance and are subsequently marked to market at the end of each reporting period.

Foreign exchange gain in the first quarter of 2016 was $8.5 million compared to a foreign exchange gain of $11.3 million in the fourth quarter of 2015 and a foreign exchange loss of $1.0 million in the first quarter of 2015.

Income tax expense was $12.3 million in the first quarter of 2016, compared to $31.0 million in the fourth quarter of 2015 and$19.7 million in the first quarter of 2015.

Net income attributable to Canadian Solar was $22.6 million, or $0.39 per diluted share, in the first quarter of 2016, compared to net income of $62.3 million, or $1.05 per diluted share, in the fourth quarter of 2015, and net income of $61.3 million, or $1.04per diluted share, in the first quarter of 2015.

Financial Condition

The Company had $1.0 billion of cash, cash equivalents and restricted cash as of March 31, 2016, compared to $1.13 billion as ofDecember 31, 2015.

Accounts receivable, net of allowance for doubtful accounts, at the end of the first quarter of 2016 were $394.0 million, compared to $426.8 million at the end of the fourth quarter of 2015. Accounts receivable turnover was 72 days in the first quarter of 2016, compared to 43 days in the fourth quarter of 2015.

Inventories at the end of the first quarter of 2016 were $413.2 million, compared to $334.5 million at the end of the fourth quarter of 2015.  Inventory turnover was 58 days in the first quarter of 2016, compared to 40 days in the fourth quarter of 2015.

Accounts and notes payable at the end of the first quarter of 2016 were $961.2 million, compared to $985.8 million at the end of the fourth quarter of 2015.

Short-term borrowings at the end of the first quarter of 2016 were $1.35 billion, compared to $1.16 billion at the end of the fourth quarter of 2015. Long-term debt at the end of the first quarter of 2016 was $818.5 million, compared to $606.6 million at the end of the fourth quarter of 2015.  Senior convertible notes totaled $132.2 million at the end of the first quarter of 2016, compared to$150 million at the end of the fourth quarter of 2015. Short-term borrowings and long-term debt directly related to utility-scale solar power projects totaled $758.9 million at the end of the first quarter of 2016, compared to $560.6 at the end of the fourth quarter of 2015.

At the end of the first quarter of 2016, the Company booked approximately $1.6 billion of solar power plant assets under non-current assets. This includes plants already in operation, as well as plants under construction to be owned and operated.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: “Our results for the first quarter came in above guidance, driven by robust demand in our solar module business.  The results do not include the benefit of any solar project sales in the quarter, however, in the future we will continue our balanced approach of project retention and project sales to maximize both flexibility and valuation, as well as to balance our cash flow.  We now have approximately 438 MWp of solar power plants in operation, with a resale value estimated to be approximately $950 million. The company does plan to sell some of these assets in the second half of this year, at the same time as we bring additional solar power plants into operation. Our steady, longer-term approach has positioned Canadian Solar for sustained success and has set Canadian Solar apart from competitors.  We remain confident in our business model, outlook and in our ability to manage our profitable growth.”

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “We were pleased that we were able to deliver gross margins substantially above our expectations.  We had a combination of lower than expected costs due to strong execution in our factories and a favorable country mix, including better than expected currency results as the US Dollar weakened against several of our key trading currencies.  The results reflect the confidence we continue to have in the strength of our module business.  Our strong results and financial position have enabled us to continue to expand our upstream cell and wafer capacity which we expect to result in better and tariff free margins this year.  Our project business also continues to be strong with on schedule progress for construction in the USA, Japan and the U.K.  Our financial strength has allowed us to finance our projects at lower than expected rates.  Since the YieldCo market remains closed, we expect to start selling some projects in the second half of the year to recycle capital and reduce our debt.  These are challenging times in the industry combining growth and more than usual uncertainly; however, times like these are when we have excelled in the past. We are strong and expect to get stronger.”

Utility Scale Solar Project Pipeline

The Company’s solar project pipeline totals 13.5 GWp, including approximately 2.1 GWp of projects in late-stage development, and 11.4 GWp in early- to mid-stage development. The Company would like to caution that some of the projects under development may fail to secure all the required permits and grid-connection approvals and as a result may not reach completion.

Late-Stage Solar Project Pipeline

Canadian Solar’s late-stage, utility-scale solar project pipeline totals approximately 2.1 GWp, of which 849MWp are in the U.S., 600 MWp are in Japan, 384 are in Brazil, 150 MWp are in China, 63 MWp are in Mexico, and 36 MWp are in the United Kingdom. The estimated resale value and gross profit contribution of the Company’s late-stage utility-scale solar project pipeline exceeds$4.5 billion and $850 million, respectively, once these projects have been built and connected to the grid.

In the United States, all seven of the Company’s solar projects currently under construction totaling 771 MWp are connected to the grid, and Barren Ridge, Mustang and Tranquillity are already delivering electricity and RECs. In addition, Recurrent Energy has secured power purchase agreements totaling 78MWp for 2017 and 2018 projects in California.