Canadian Solar Reports Fourth Quarter and Full Year 2015 Results

Canadian Solar Inc. one of the world’s largest solar power companies,recently announced its financial results for the fourth quarter ended December 31, 2015.

Fourth Quarter 2015 Highlights

• Total solar module shipments were a quarterly record high of 1,430 MW, of which 1,398 MW were recognized in revenue, compared to 1,150 MW recognized in revenue in the third quarter of 2015.
• Net revenue was a quarterly record high of $1,120.3 million, compared to $849.8 million in the third quarter of 2015.
• Net revenue from the total solutions business as a percentage of total net revenue was 30.7%, compared to 26.6% in the third quarter of 2015.
• Gross margin was 17.9%, compared to 14.9% in the third quarter of 2015.
• Net income attributable to Canadian Solar was $62.3 million, or $1.05 per diluted share, compared to $30.4 million, or $0.53 per diluted share, in the third quarter of 2015.
• Cash, cash equivalents and restricted cash balances at the end of the quarter totaled $1.1 billion, compared to $1.0 billion at the end of the third quarter of 2015.
• Net cash generated from operating activities was $201.7 million, compared to $41.4 million in the third quarter of 2015.
• During the quarter, the Company completed the construction and tax-equity financing of all of its late-stage, utility-scale project pipeline in the U.S., and sold controlling stakes in two projects totaling 246.9 MWp.
• During the quarter, the Company completed the sale of three solar power plants valued at over C$197.1 million ($144.5 million), in Canada.
• The Company has recently started the operation and retained ownership of solar power plants totaling 144.0 MWp, including 14.1 MWp in Canada, 6.2 MWp in Japan, 22.9 MWp in the United Kingdom and 100.8 MWp in China.

Full Year 2015 Highlights

• Total solar module shipments were an annual record high of 4,706 MW, of which 4,384 MW were recognized in revenue, compared to 2.8 GW recognized in revenue in 2014.
• Net revenue was an annual record high at $3.47 billion, compared to $2.96 billion in 2014.
• Net revenue from the total solutions business as a percentage of total net revenue was 30.9%, compared to 44.5% in 2014.
• Income from operations was $247.4 million and non-cash charges for depreciation, amortization and equity compensation were$100.2 million.
• Net income attributable to Canadian Solar was $171.9 million, or $2.93 per diluted share, compared to $239.5 million, or $4.11per diluted share, in 2014.
• During the year, the Company delivered a total of 388 MW of system kits and utility-scale solar power plants to all of its key markets.
• Cash flow from operations was $397.0 million, compared to $265.1 million in 2014.

Fourth Quarter 2015 Results

Net revenue in the fourth quarter of 2015 was $1,120.3 million, up 31.8% from $849.8 million in the third quarter of 2015 and up17.2% from $956.2 million in the fourth quarter of 2014. Total solar module shipments in the fourth quarter of 2015 were 1,430 MW, of which 1,398 MW were recognized in revenue, compared to 1,150 MW recognized in revenue in the third quarter of 2015 and 897 MW recognized in revenue in the fourth quarter of 2014. Solar module shipments recognized in revenue in the fourth quarter of 2015 included 63.8 MW used in the total solutions business, compared to 110.5 MW in the third quarter of 2015 and 163.3 MW in the fourth quarter of 2014.

By geography, in the fourth quarter of 2015, sales to the Americas represented 51.9% of net revenue, sales to Asia represented 41.1% of net revenue, and sales to Europe and others represented 7.0% of net revenue, compared to 52.6%, 41.3% and 6.1% respectively, in the third quarter of 2015 and 61.8%, 31.8%, 6.4% respectively, in the fourth quarter of 2014.

Gross profit in the fourth quarter of 2015 was $200.5 million, compared $126.8 million in the third quarter of 2015 and $184.9 millionin the fourth quarter of 2014.  Gross margin in the fourth quarter of 2015 was 17.9%, compared to 14.9% in the third quarter of 2015 and 19.3% in the fourth quarter of 2014.  The sequential increase in gross margin was primarily due to higher margin and higher contribution from the total solutions business, as well as lower module manufacturing cost.

Total operating expenses were $95.2 million in the fourth quarter of 2015, down 0.8% from $95.9 million in the third quarter of 2015 and up 38.1% from $68.9 million in the fourth quarter of 2014.

Selling expenses were $39.4 million in the fourth quarter of 2015, up 5.7% from $37.2 million in the third quarter of 2015 and up 8.7% from $36.2 million in the fourth quarter of 2014. The sequential increase in selling expenses was primarily due to higher shipping and handling expenses, partially offset by lower sales commission. The year-over-year increase was primarily due to higher shipping and handling expenses and higher sales commission.

General and administrative expenses were $51.0 million in the fourth quarter of 2015, down 6.7% from $54.6 million in the third quarter of 2015 and up 74.1% from $29.3 million in the fourth quarter of 2014.  Excluding the $20.8 million expense related to the settlement of LDK arbitration case in the third quarter of 2015, the sequential increase in general and administrative expenses was primarily due to impairment of certain idle assets of approximately $7.0 million, an increase in bad debt expense as well as higher salary and bonus expenses. The year-over-year increase was primarily due to consolidation of Recurrent Energy’s general and administrative expenses.

Research and development expenses were $4.8 million in the fourth quarter of 2015, compared to $4.1 million in the third quarter of 2015 and $3.4 million in the fourth quarter of 2014.

Income from operations was $105.3 million in the fourth quarter of 2015, compared to $30.9 million in the third quarter of 2015, and$116.0 million in the fourth quarter of 2014. Operating margin was 9.4% in the fourth quarter of 2015, compared to 3.6% in the third quarter of 2015 and 12.1% in the fourth quarter of 2014.

Non-cash depreciation and amortization charges were approximately $24.7 million in the fourth quarter of 2015, compared to $24.8 million in the third quarter of 2015, and $22.2 million in the fourth quarter of 2014. Non-cash equity compensation expense was $1.4 million in the fourth quarter of 2015, compared to $1.4 million in the third quarter of 2015, and $1.2 million in the fourth quarter of 2014.

Interest expense was $17.1 million in the fourth quarter of 2015, compared to $13.0 million in the third quarter of 2015, and $12.1 million in the fourth quarter of 2014.

Interest income was $4.2 million in the fourth quarter of 2015, compared to $4.2 million in the third quarter of 2015 and $4.2 million in the fourth quarter of 2014.

The Company recorded a loss on change in fair value of derivatives of $9.4 million in the fourth quarter of 2015, compared to a loss of$12.3 million in the third quarter of 2015 and a gain of $14.9 million in the fourth quarter of 2014.  The loss on change in fair value of derivatives in the fourth quarter of 2015 included a loss on change in fair value of foreign currency hedging loss of $0.9 million and loss on change in fair value of warrants of $8.9 million. 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 fourth quarter of 2015 was $11.3 million compared to a foreign exchange gain of $17.1 million in the third quarter of 2015 and a foreign exchange loss of $19.8 million in the fourth quarter of 2014.

Income tax expense was $31.0 million in the fourth quarter of 2015, compared to tax benefit of $3.9 million in the third quarter of 2015 and income tax expense of $27.5 million in the fourth quarter of 2014.

Net income attributable to Canadian Solar was $62.3 million, or $1.05 per diluted share, in the fourth quarter of 2015, compared to net income of $30.4 million, or $0.53 per diluted share, in the third quarter of 2015, and net income of $75.7 million, or $1.28 per diluted share, in the fourth quarter of 2014.

Financial Condition

The Company had $1.13 billion of cash, cash equivalents and restricted cash as of December 31, 2015, compared to $1.00 billion as of September 30, 2015.

Accounts receivable, net of allowance for doubtful accounts, at the end of the fourth quarter of 2015 were $426.8 million, compared to$431.9 million at the end of the third quarter of 2015.  Accounts receivable turnover was 43 days in the fourth quarter of 2015, compared to 48 days in the third quarter of 2015.

Inventories at the end of the fourth quarter of 2015 were $334.5 million, compared to $426.4 million at the end of the third quarter of 2015.  Inventory turnover was 40 days in the fourth quarter of 2015, compared to 63 days in the third quarter of 2015.

Accounts and notes payable at the end of the fourth quarter of 2015 were $985.8 million, compared to $1.02 billion at the end of the third quarter of 2015.

Short-term borrowings at the end of the fourth quarter of 2015 were $1.16 billion, compared to $1.06 billion at the end of the third quarter of 2015.  Long-term debt at the end of the fourth quarter of 2015 was $606.6 million, compared to $514.3 million at the end of the third quarter of 2015.  Senior convertible notes totaled $150.0 million at the end of the fourth quarter of 2015, unchanged from the end of the third quarter of 2015.  Short-term borrowings and long-term debt directly related to utility-scale solar power projects totaled$560.6 million at the end of the fourth quarter of 2015.

At the end of the fourth quarter of 2015, the Company booked approximately $1.2 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.

The purchase price paid by the Company for Recurrent Energy and the operating solar projects acquired from KKR has been allocated on a preliminary basis to assets acquired and liabilities assumed based on available information and management’s best estimates. The Company is still finalizing this allocation. The final allocation may differ from this preliminary allocation.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: “This was a record breaking year for Canadian Solar.  Our track record of consistent and reliable execution continues to reinforce our competitive position and strong bankability.  This in turn is providing us with excellent support from financial institutions and investors worldwide.  The more than 4.7 GW of total solar module shipments in 2015 underscores the vast growth opportunities we see ahead in our key markets worldwide.  Equally important, we continue to make impressive progress in the buildout of our Energy or total solutions business, with 398 MW of solar plants in operation, a late-stage project pipeline totaling 2.0GW in execution, and an early stage project pipeline of 8.3 GW in development, 2.6 GW of which is in the U.S. and will benefit from the recent ITC extension.  This gives us considerable visibility into our earnings power, as well as flexibility over the timing of the potential launch of our own YieldCo.”

Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “Our revenue increased 31.8% over the third quarter of 2015 to $1,120.3 million.  We reduced our inventory by $91.9 million as we tightened controls over working capital.  Gross margin of 17.9% was above the high end of our guidance of 13% to 15%, driven by favorable currency trends that resulted in higher than expected average selling prices for our Module business and higher than expected margins in our Energy business.  The Energy business margins were higher due to timing on the recognition of US project sales and better than expected results from sales of projects in Canada.  We closed all of the required construction and tax equity financing for our near-term US projects in 2015 at what we believe to be low and very competitive rates.  We continue to believe that our track record of execution and our strong financial results position us well to implement our plans for the next few years.  We remain flexible on our plans to launch a YieldCo and are willing to sell projects in the short term to recycle growth capital while maintaining enough size and scale to launch a YieldCo should market conditions become favorable.”