Canadian Solar Inc. (the "Company", "we" or "Canadian Solar") (NASDAQ: CSIQ), one of the world's largest solar companies, announced financial results for the second quarter ended June 30, 2011.
Second Quarter 2011 Highlights
- Solar module shipments were 287 MW, up 58.6% from 181 MW in the second quarter of 2010
- Net revenue was $481.8 million, up 46.6% from $328.7 million in the second quarter of 2010
- Gross profit was $63.7 million, up 42.8% from $44.6 million in the second quarter of 2010
- Gross margin was 13.2%, compared to 13.6% in the second quarter of 2010
- Operating profit was $25.0 million, up 47.1% from $17.0 million in the second quarter of 2010
- Net income attributable to Canadian Solar Inc. was $7.1 million, up 121.9% from $3.2 million in the second quarter of 2010
- Diluted earnings per share were $0.16, up from $0.07 in the second quarter of 2010
Second Quarter 2011 Results
Net revenue for the second quarter of 2011 was $481.8 million, up 8.7% from $443.4 million in the first quarter of 2011 and up 46.6% from $328.7 million in the second quarter of 2010. Solar module shipments for the second quarter of 2011 totaled 287 MW compared to shipments of 244 MW in the first quarter 2011 and 181 MW in the second quarter of 2010. During the quarter, the Company recognized approximately 15.7 MW of previously disclosed approximately 100 MW Delivery Duty Unpaid ("DDU") or Cash on Delivery ("COD") shipments that had originally been expected to be recognized in the third quarter of 2011. In addition, when the Company issued its updated guidance last month, shipments were expected to be approximately 295 MW, of which 10.1 MW constitute shipments to one customer that are now expected to be recognized in the third quarter of 2011, as those shipments have not fulfilled all revenue recognition criteria in the second quarter of 2011.
Sales to European markets in the second quarter of 2011 accounted for 76.6% of revenue, while sales to North America represented 15.2%, with sales to Asia and others representing 8.2% of revenue, compared to 86.4%, 7.4% and 6.2%, respectively, in the second quarter of 2010.
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Revenue by Geography |
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|
Q22011 |
Q12011 |
Q22010 |
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|||
|
US$M |
% |
US$M |
% |
US$M |
% |
|
|
|
Europe |
369.1 |
76.6% |
335.4 |
75.6% |
284.1 |
86.4% |
|
|
America |
73.0 |
15.2% |
54.0 |
12.2% |
24.2 |
7.4% |
|
|
Asiaand others |
39.7 |
8.2% |
54.0 |
12.2% |
20.4 |
6.2% |
|
|
Total |
481.8 |
100.0% |
443.4 |
100.0% |
328.7 |
100.0% |
|
Gross profit for the second quarter of 2011 was $63.7 million, down 2.5% from $65.3 million in the first quarter of 2011 and up 42.8% from $44.6 million in the second quarter of 2010. Gross margin was 13.2% in the second quarter of 2011, compared to 14.7% in the first quarter of 2011 and 13.6% in the second quarter of 2010. The sequential decline in gross margin was primarily due to the higher level of outside cell purchases required to meet customers' increased demand requirements in the quarter and lower average selling prices partially offset by lower raw material and manufacturing costs. Year-over-year, gross margin was down slightly as result of lower average selling prices partially offset by lower raw material and manufacturing processing costs.
Total operating expenses were $38.7 million in the second quarter of 2011, compared to $31.3 million in the first quarter of 2011 and 27.6 million in the second quarter of 2010.
Selling expenses were $17.0 million in the second quarter of 2011, up 34.5% from the first quarter of 2011 and up 42.0% from the second quarter of 2010. The sequential increase in selling expenses was driven by increases in freight and export related costs, annual salary adjustment, higher advertisement as well as insurance expenses.
General and administrative expenses were $16.8 million in the second quarter of 2011, compared to $16.6 million in the first quarter of 2011 and $14.0 million in the second quarter of 2010. In the second quarter 2011 general and administrative expense includes an accrual of $3.3 million in taxes for which the Company may be liable. This accrual relates to Canadian tax liabilities incurred by two investors that had purchased Canadian Solar convertible notes prior to the Company's initial public offering. When such convertible notes were converted into the Company's common shares, these investors paid Canadian taxes in amounts based in part on their own valuation of the Company. The Canadian tax authority has, however, recently proposed a higher valuation than the valuation the investors relied upon in determining their respective tax liabilities at the time of the conversion. Because the investors were not Canadian residents, Canadian Solar may become liable for additional taxes resulting from a higher valuation. While the Company believes that the investors are ultimately liable for any additional taxes in the event that the Canadian tax authority revises the valuation, Canadian Solar may be unable to recover all potential taxes assessed upon the Company. Therefore, the Company has decided to accrue the expense as a potential tax liability. The accrual for potential tax liability in the second quarter of 2011 was offset by lower-than-estimated consulting fees, resulting in only a small increase in general and administrative expenses relative to the first quarter of 2011.
Research and development expenses were $4.9 million in the second quarter of 2011, compared to $2.0 million in the first quarter of 2011 and $1.7 million in the second quarter of 2010. The sequential and year-over-year increases are associated with the Company's focus on reducing use of silver paste, and on developing its next-generation, high-efficiency cells, as well as other innovative product development initiatives.
Operating margin was 5.2% in the second quarter of 2011, compared to 7.7% in the first quarter of 2011 and 5.2% in the second quarter of 2010. The sequential decrease in operating margin was a result of lower gross margin and increase in selling expenses. Year-over-year, operating margins remained unchanged.
Interest expense in the second quarter of 2011 was $11.4 million, compared to $9.9 million in the first quarter of 2011 and $6.4 million in the second quarter of 2010. The sequential and year-over-year increases were due to additional bank borrowings and an increase in interest rates. Interest Income was $2.2 million in the second quarter of 2011, compared to $1.5 million in the first quarter of 2011 and $1.6 million in the second quarter of 2010.
The Company recorded a loss on change in fair value of derivatives of $5.4 million in the second quarter of 2011 from foreign exchange hedging activities, compared to a loss of $17.2 million in the first quarter of 2011 and a gain of $21.6 million in the second quarter of 2010. Foreign exchange loss in the second quarter of 2011 was $1.5 million compared to $0.7 million in the first quarter of 2011 and $30.5 million in the second quarter of 2010.
Income tax expense in the second quarter of 2011 was $1.9 million compared to an expense of $1.7 million in the first quarter of 2011 and an expense of $0.1 million in the second quarter of 2010.
Net income attributable to Canadian Solar Inc. for the second quarter of 2011 was $7.1 million, or $0.16 per diluted share, compared to net income of $5.9 million, or $0.13 per diluted share, for the first quarter 2011, and net income of $3.2 million, or $0.07 per diluted share, for the second quarter of 2010.
As of June 30, 2011 the Company had $686.3 million in cash, cash equivalents and restricted cash, compared to $477.6 million at the end of the first quarter of 2011 and $476.2 million as of December 31, 2010. The increase in cash, cash equivalents and restricted cash was largely the result of an increase in short-term and long-term borrowings of $268.1 million. Restricted cash increased mainly due to increased cash collateral of $135.2 million and $20.5 million for issuance of bank acceptance and letters of credit, respectively.
Accounts receivable balance at the end of the second quarter 2011 was $278.6 million, down from $306.7 million at the end of the first quarter of 2011 and up from $169.7 million at the end of the fourth quarter of 2010. The sequential decrease reflects the Company's more active receivables management, customer mix and a more linear quarter in terms of sales. Accounts receivable turnover days increased to 56 days in the second quarter 2011 from 50 days in the first quarter 2011.
Inventories at the end of the second quarter of 2011 were $436.3 million, compared to $265.4 million at the end of the first quarter of 2011 and $272.1 million at the end of the fourth quarter of 2010. The increase in inventory was primarily due to inventory in transit related to shipments whose title transfers upon receipt instead of upon shipment in addition to higher inventory needed to support the higher level of expected demand for our products. The Company reclassified approximately $40.1 million in inventory as other current assets for the first quarter of 2011 given its planned use in EPC projects.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "This was a solid quarter for Canadian Solar. We achieved impressive shipment growth due to our strategy of building desired capacity, our track record of quality, performance and service, and our increased brand recognition worldwide. We are confident we can continue to gain market share, based on continued strength in Germany, Italy, and the U.S., along with a rebound in Japan and the benefit of new regions, including India. We have also seen the market in Canada picking up in the past month. We accomplished a great deal in the second quarter, highlighted by impressive customer wins and two major strategic capacity joint-ventures. Our joint-venture agreements to build a new state-of-the-art 600 MW wafer and a new 600 MW cell plant in Suzhou, will help push Canadian Solar to the forefront of our industry, with a differentiated product offering, industry leading cost structure and 2 GW of virtually-integrated scale to continue our profitable growth in the quarters ahead."
Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, commented: "We are successfully operating in a challenging business environment. The demand for our products is increasing but there is increased volatility due to external, macro factors that affect the expected returns of our end customers. While we have been able to significantly reduce supply chain costs, industry-wide average selling price pressure is expected to limit our ability to improve gross margins in the short-term. We are adjusting to the macro factors not under our control by concentrating on building our downstream business, which is more stable and not as subject to spot market pricing. We also are concentrating on reducing inventory to minimize the impact of falling raw material prices and declining average selling prices."
Business Outlook
The Company's business outlook is based on management's current views with respect to operating and market conditions, order book and customers' forecasts. Management's views and estimates are subject to change.
For the third quarter of 2011, recognized shipments are expected to be in the range of approximately 350 MW to 360 MW, with gross margin expected to be between 9% and 12%.
The Company's internal cell and module capacities are expected to reach 1,300 MW and 2,000 MW, respectively, during the third quarter of 2011, with utilization levels at around 90%, reflecting strong demand for Canadian Solar's products. Usage of internally produced cells is expected to be higher in the third quarter of 2011 than in the second quarter of 2011, as the Company benefits from the ongoing ramp-up of its new 500 MW cell plant in Suzhou.
The Company remains on track to expand its annualized capacity for modules to 2 GW by September 2011. The new module capacity includes 200 MW of capacity in Guelph, Canada, enabling Canadian Solar to provide Ontario-content qualified solar modules to the Company's downstream solar projects and customers in Ontario.
For the full year 2011, the Company reiterates its previous guidance of shipments of approximately 1.2 GW to 1.3 GW.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "From an operations standpoint, we are moving towards more substantial cell and module vertical integration. Other than the capacity expansion mentioned above, we have nearly completed the planning of the next phase of our solar cell capacity expansion, from which we expect to add another 600 MW of high-efficiency cell capacity through a proposed joint venture. The new solar cell plant is expected to adopt our proprietary ELPS technology. With this expansion, we expect to bring our internal name plate cell capacity to 1.9 GW by early 2012. The joint venture is planned to allow us to achieve significant vertical integration from cell to module. We are also partnering with a leading wafer supplier in order to add another 600 MW of wafer capacity dedicated to Canadian Solar, thereby securing up to 2 GW of high-quality and low-cost wafers for 2012. These planned strategic alliances are expected to enable us to expand significantly while minimizing the impact on our cash flows."
"We saw significant declines in raw materials costs in the second quarter of 2011, including lower costs for polysilicon, wafers and cells, which we expect to help lessen the impact of expected declines in module ASP. We are also pursuing further internal cost reduction measures. On the module side, we expect to benefit from price declines in glass and other materials. We expect these actions to contribute to our efforts to maintain a reasonable margin structure towards 2012. Meanwhile, we are making steady progress on key R&D and on new product development initiatives. In the near term, we expect to start commercial shipment of our high-efficiency ELPS modules in the fourth quarter of 2011. We are also on track to expand our EPC and solar system kits business, which is expected to account for approximately 10% of our total MW sold in 2011 and is expected to further grow in 2012. We expect our strong global sales and service network, our leading brand name and strong net cash position, together with our technology innovations and diversified business strategy, to help drive our future growth."
Recent Developments
On August 15, 2011, the Company announced a new world-class photovoltaic solar module product and performance warranty policy backed by an industry leading insurance policy. Effective August 1, 2011, Canadian Solar's warranty now provides a linear performance guarantee for the Company's PV module power output over a 25-year period. In addition, under this new policy, Canadian Solar has expanded its product warranty covering workmanship and material defects to 10 years.
On August 1, 2011, the Company announced it signed a photovoltaic solar module sales agreement with Cirus Solar Systems Private Limited, a solar engineering, procurement and construction company based in Hyderabad, India. Under the terms of the agreement, Canadian Solar is expected to deliver 33 MW of solar modules in the third and fourth quarters of 2011 at agreed prices denominated in U.S. dollars. The modules are expected to be utilized for solar PV projects that are designed, installed and commissioned by Cirus on behalf of two prominent Indian conglomerates. Initial shipments have already commenced.
On June 14, 2011, the Company announced it become an official sponsor of the New York Yankees.
On June 7, 2011, the Company announced its new ELPS solar cell technology boasting up to 19.5 percent cell efficiency for the monocrystalline and up to 18 percent for polycrystalline cells.
On June 1, 2011, the Company announced that it has signed an agreement with Suzhou New District Economic Development Group Corporation and Suzhou Science and Technology City Development Co., Ltd to build a 600 MW photovoltaic cell production factory in Suzhou, Jiangsu Province.
On May 31, 2011, the Company announced a major solar joint-venture with GCL to build a 600 MW capacity wafer plant in Suzhou dedicated to Canadian Solar's requirements. The initial 600 MW can be expanded to 1.2 GW.
On May 26, 2011, the Company announced a further expansion of its activities in the UK solar market. Under the agreement, Canadian Solar will supply an aggregate of over 15 MW of solar modules for three UK solar farms, constructed by Spanish renewable energy project company Isolux. These three PV systems, are located in Churchtown, East Langford and Manor Farm, and use Canadian Solar's high quality and high-performing CS6P solar modules.
On May 16, 2011, the Company announced an agreement to sell 81 MW of solar modules to Saferay GmbH.
On May 12, 2011, the Company announced that it became a sponsor of Major League Baseball's World Champion San Francisco Giants for the second year in a row.
On April 21, 2011, the Company announced a 97 MW supply agreement with GP Joule. Under the agreement, Canadian Solar will supply its high performance solar modules to GP Joule, with all deliveries to occur before December 31, 2011. The companies have worked together since 2009. GP Joule operates four offices in the North and South of Germany and has joint ventures in North America and France. In the PV sector, JP Joules focuses primarily on implementing ground mounted large solar power plants.
