Canadian Solar Reports Third Quarter 2015 Results

Canadian Solar Inc. one of the world’s largest solar power companies,recently announced its financial results for the third quarter ended September 30, 2015.

Third Quarter 2015 Highlights

• Total solar module shipments were 1,198 MW, of which 1,150 MW were recognized in revenue, compared to 809 MW recognized in revenue in the second quarter of 2015.
• Net revenue was $849.8 million, compared to $636.7 million in the second quarter of 2015.
• Net revenue from total solution sales as a percentage of total net revenue was 26.6% compared to 30.6% in the second quarter of 2015.
• Gross margin was 14.9%, compared to 15.2% in the second quarter of 2015.
• Net income attributable to Canadian Solar was $30.4 million, or $0.53 per diluted share, compared to $17.9 million, or $0.31 per diluted share, in the second quarter of 2015.
• Non-GAAP net income attributable to Canadian Solar was $46.0 million, or $0.79 per diluted share. A table that provides a reconciliation of GAAP to non-GAAP measure is available at the end of this press release.
• Cash, cash equivalents and restricted cash balances at the end of the quarter totaled $1.0 billion, compared to $1.04 billion at the end of the second quarter of 2015.
• Net cash generated from operating activities was $41.4 million, compared to $29.1 million in the second quarter of 2015.
• During the quarter, the Company completed the purchase of three solar power plants in Canada, started commercial operation of four solar power plants in Japan and won bids for five solar projects in Brazil.

Third Quarter 2015 Results

Net revenue in the third quarter of 2015 was $849.8 million, up 33.5% from $636.7 million in the second quarter of 2015 and down 7.1% from $914.4 million in the third quarter of 2014.  Total solar module shipments in the third quarter of 2015 were 1,198 MW, of which 1,150 MW were recognized in revenue, compared to 809 MW recognized in revenue in the second quarter of 2015 and 770 MW recognized in revenue in the third quarter of 2014.  Solar module shipments recognized in revenue in the third quarter of 2015 included 110.5 MW used in the Company’s total solutions, compared to 90 MW in the second quarter of 2015 and 173 MW in the third quarter of 2014.

By geography, in the third quarter of 2015, sales to the Americas represented 52.6% of net revenue, sales to Asia represented 41.3% of net revenue, and sales to Europe and others represented 6.1% of net revenue, compared to 47.6%, 45.5% and 6.9% respectively, in the second quarter of 2015 and 71.7%, 20.4%, 7.9% respectively, in the third quarter of 2014.

Gross profit in the third quarter of 2015 was $126.8 million, compared to $96.5 million in the second quarter of 2015 and $209.3 million in the third quarter of 2014.  Gross margin in the third quarter of 2015 was 14.9%, compared to 15.2% in the second quarter of 2015 and 22.9% in the third quarter of 2014.  The sequential decrease in gross margin was primarily due to lower margin and lower contribution from the Company’s total solutions business partially offset by lower module manufacturing cost.

Total operating expenses were $95.9 million in the third quarter of 2015, up 49.8% from $64.1 million in the second quarter of 2015 and up 80.3% from $53.2 million in the third quarter of 2014.

Selling expenses were $37.2 million in the third quarter of 2015, up 15.5% from $32.2 million in the second quarter of 2015 and up 5.3% from $35.4 million in the third quarter of 2014. The sequential increase in selling expenses was primarily due to an increase in sales commission and labor costs, partially offset by a decrease in shipping and handling costs. The year-over-year increase in selling expenses was primarily due to an increase in sales commission, partially offset by a decrease in shipping and handling expenses.

General and administrative expenses were $54.6 million in the third quarter of 2015, up 98.7% from $27.5 million in the second quarter of 2015 and up 272.7% from $14.7 million in the third quarter of 2014.  The sequential increase in general and administrative expenses was primarily due to a provision of $20.8 million related to settlement of the LDK arbitration case, as well as higher legal and consulting fees. The year-over-year increase was primarily due to the “LDK provision”, as well as consolidation of Recurrent Energy general and administrative expenses.

Research and development expenses were $4.1 million in the third quarter of 2015, compared to $4.3 million in the second quarter of 2015 and $3.2 million in the third quarter of 2014.

Income from operations was $30.9 million in the third quarter of 2015, compared to $32.5 million in the second quarter of 2015, and$156.1 million in the third quarter of 2014.  Operating margin was 3.6% in the third quarter of 2015, compared to 5.1% in the second quarter of 2015 and 17.1% in the third quarter of 2014.

Non-cash, depreciation and amortization charges were approximately $24.8 million in the third quarter of 2015, compared to $22.7 million in the second quarter of 2015, and $19.8 million in the third quarter of 2014. Non-cash, equity compensation expense was $1.4 million in the third quarter of 2015, compared to $2.0 million in the second quarter of 2015, and $1.4 million in the third quarter of 2014.

Interest expense was $13.0 million in the third quarter of 2015, compared to $12.9 million in the second quarter of 2015, and $12.0 million in the third quarter of 2014.

Interest income was $4.2 million in the third quarter of 2015, compared to $4.1 million in the second quarter of 2015 and $3.7 millionin the third quarter of 2014.

The Company recorded a loss on change in fair value of derivatives of $12.3 million in the third quarter of 2015, compared to a gain of $1.6 million in the second quarter of 2015 and a gain of $15.4 million in the third quarter of 2014.  Foreign exchange gain in the third quarter of 2015 was $17.1 million compared to a foreign exchange loss of $4.4 million in the second quarter of 2015 and a foreign exchange loss of $20.9 million in the third quarter of 2014.

Income tax benefit was $3.9 million in the third quarter of 2015, compared to income tax expense of $2.7 million in the second quarter of 2015 and income tax expense of $34.4 million in the third quarter of 2014.

Net income attributable to Canadian Solar was $30.4 million, or $0.53 per diluted share in the third quarter of 2015, compared to net income of $17.9 million, or $0.31 per diluted share, in the second quarter of 2015, and net income of $104.2 million, or $1.75 per diluted share, in the third quarter of 2014.

Non-GAAP net income attributable to Canadian Solar, excluding the impact of the LDK provision, was $46.0 million, or $0.79 per diluted share in the third quarter of 2015. A table that provides a reconciliation of GAAP to non-GAAP measure is available at the end of this press release.

Financial Condition

The Company had $1.00 billion of cash, cash equivalents and restricted cash as of September 30, 2015, compared to $1.04 billion as of June 30, 2015.

Accounts receivable, net of allowance for doubtful accounts, at the end of the third quarter of 2015 were $431.9 million, compared to$303.8 million at the end of the second quarter of 2015.  Accounts receivable turnover was 48 days in the third quarter of 2015, compared to 58 days in the second quarter of 2015.

Inventories at the end of the third quarter of 2015 were $426.4 million, compared to $521.1 million at the end of the second quarter of 2015.  Inventory turnover was 63 days in the third quarter of 2015, compared to 82 days in the second quarter of 2015.

Accounts and notes payable at the end of the third quarter of 2015 were $1.02 billion, compared to $973.3 million at the end of the second quarter of 2015.

Short-term borrowings at the end of the third quarter of 2015 were $1.06 billion, compared to $940.1 million at the end of the second quarter of 2015.  Long-term debt at the end of the third quarter of 2015 was $514.3 million, compared to $353.2 million at the end of the second quarter of 2015.  Senior convertible notes totaled $150.0 million at the end of the third quarter of 2015, unchanged from the end of the second quarter of 2015.  Short-term borrowings and long-term debt directly related to utility-scale solar power projects totaled $453.5 million at the end of the third quarter of 2015.

At the end of the third quarter of 2015, the Company booked approximately $1.0 billion of solar power plant assets in property plant and equipment. This includes plants already in operation, as well as plants in construction to be owned and operated.

A preliminary allocation of the purchase price of Recurrent Energy and  the acquired operating solar projects from KKR 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:  “This has been a solid quarter as we benefited from strong demand for our modules in the U.S., Japan, China and India. We also made good progress on our Energy business, as we expanded our fleet of operating power plants in Japan and in Canada, grew our pipeline of high quality solar projects in Brazil andChina, closed the sale of a controlling interest in our 200 MW Tranquillity Solar Project in California and secured financing for three of our seven U.S. projects. Our accomplishments across both our Module and Energy businesses are a testament to our track record of successful execution and the skill and dedication of our team.  Major financial institutions recognize our leadership position and seek us out to help finance our growth, giving us added flexibility and confidence as we move forward and remain focused on delivering long-term value to our shareholders.”

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “We were able to deliver a 33.5% increase in net revenue to $849.8 million in the third quarter, compared to the second quarter.  Our strategic decision to build inventory levels in the second quarter helped us to seamlessly meet anticipated higher demand levels in the third quarter and has positioned us well entering the fourth quarter.  Gross margin of 14.9% was above the high end of our guidance of 12% to 14%, as higher than expected average selling prices for our modules helped offset the lower gross margin from the partial Tranquillity project sale.  We remain committed to maximizing the valuation of our asset portfolio for our shareholders.  We continue to work hard on a potential YieldCo, while keeping all options open given recent market volatility.”

Utility Scale Project Pipeline Update

Canadian Solar’s late-stage, utility-scale solar project pipeline now totals approximately 2.5 GWp, with an estimated resale value and gross profit contribution exceeding $5.0 billion and $850 million, respectively, once these projects are built and connected to the grid over the next three years.

In Canada, in the third quarter of 2015, the Company started the commercial operation of its BeamLight solar power plant, which is being held on its balance sheet, and reached substantial completion on its 100 MW AC (141 MWp) Samsung Phase II, Kingston 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 September 30, 2015 is summarized below:

In the United States, in the third quarter of 2015, the Company’s wholly-owned subsidiary, Recurrent Energy, entered into an agreement with Southern Power, a subsidiary of Southern Company (NYSE: SO), whereby Southern Power acquired a controlling interest in the Tranquillity solar power project. Subsequently, the Company announced a financing agreement with NORD/LB as the lead arranger, to provide project-level construction debt, LC facilities and a back-leveraged term facility, totaling $337 million for the Tranquillity project. During the third quarter of 2015, the Company also secured a debt facility with Santander Bank, N.A. and a tax equity investment commitment with U.S. Bancorp Community Development Corporation, securing financing for the Mustang solar power project. In addition, in the first week of November 2015, the Company announced a financing agreement with a consortium of banks led by Rabobank to provide $113 million in construction financing, a tax equity bridge loan, and a term loan option, in addition to closing on a separate tax equity investment commitment from U.S. Bancorp Community Development Corporation, thus securing financing for the Barren Ridge solar power project. The Company expects to announce additional financing transactions for the remaining four U.S. projects in the weeks ahead. As of the end of the third quarter of 2015, the Company’s late-stage, utility-scale solar project pipeline in the U.S. totals approximately 1.0 GWp as detailed below:

In Japan, as recently announced, the Company started commercial operation of four of its solar photovoltaic (PV) power plants, with a total capacity of approximately 8.6 MWp. As of the end of October 2015, the Company’s pipeline of projects in late stage of development was approximately 608 MWp, of which approximately 336 MWp have obtained full grid connection approval (Keitou Renkei Shoudakusho) and approximately 103.7 MWp were either in construction or near ready to start construction.

In China, the Company expanded its pipeline of late stage projects under development to 459 MWp, and expects to connect 135 MWp to the grid in the fourth quarter of 2015.

In the United Kingdom, the Company’s late-stage project pipeline totals 25.1 MWp, with 23.2 MWp on target to connect to the grid in the fourth quarter of 2015, and the balance in 2016.

In Brazil, following our recent success in bids for five solar power projects totaling 184 MWp in Pirapora, Minas Gerais, the Company’s late-stage solar project pipeline now totals 274 MWp.  Canadian Solar expects these solar power plants to be connected to the grid in 2017.  Once connected, the electricity generated will be purchased by a Brazilian government entity under a 20-year power purchase agreement.

Solar Power Plants in Operation

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 257 MWp, with 99 MWp in China, 86 MWp in Canada, 40 MWp in the U.K., 15 MWp inJapan and 17 MWp, owned through Recurrent Energy, in the U.S. and Spain. Sales of electricity in the third quarter of 2015 totaled$8.6 million, compared to $7.1 million in the second quarter of 2015. The resale value of the Company’s fleet of solar power plants is estimated at over $500 million.

Manufacturing Capacity Expansion

In order to meet the expected strong growth in global demand for solar modules in the quarters ahead,   the Company is increasing its manufacturing capacity, with plans to expand its wafer, cell and module capacities to 1.0 GW, 3.4 GW and 5.63 GW, respectively,by December 31, 2016.

The Company’s wafer manufacturing capacity at its Luoyang plant, Henan Province, is expected to reach 1.0 GW by June of 2016; the Company’s cell manufacturing capacity at its Suzhou plant, Jiangsu Province, is expected to reach 2.0 GW by the end of 2015; and the Company’s cell manufacturing capacity at its Funning plant, Jiangsu Province, is expected to reach 1.0 GW by July of 2016. In addition, a new 400 MW cell manufacturing plant, to be located in South East Asia, is expected to be commissioned in the second half of 2016. The Company’s planned module manufacturing capacity by the end of 2016 includes 3.0 GW in Changshu, Jiangsu Province, and 1.1 GW in Luoyang, Henan Province, while approximately 1.53 GW will be at existing and new locations outside China, including 500 MW in Canada, 300 MW in Vietnam, 30 MW in Indonesia, 300 MW in Brazil and 400 MW in South East Asia.

Under this updated capacity expansion roadmap, the Company is decreasing its reliance on merchant suppliers of wafers and cells in order to improve its cost structure and more consistently deliver target gross margin for its solar module business in the 15% to 20% range.

The capital expenditure budget to achieve this planned capacity expansion is estimated at $104.0 million in the second half of 2015 and $297.0 million in 2016, funded by capital leases and borrowing from local financial institutions.