Canadian Solar Inc. (CSIQ) adjusted EPS of 7 cents in the second quarter of fiscal 2010 ending June 30, 2010, fell short of the Zacks Consensus Estimate of 15 cents and way behind the year-ago quarterly number of 49 cents. The downside came from a sharp rise in expenses, which offset higher shipments year over year. However on a sequential basis the company was able to improve its performance as compared to 3 cents in the first quarter of 2010.
Canadian Solar as of now is undergoing a review by the U.S. Securities and Exchange Commission (SEC) into certain transactions identified in the subpoena issued to the company by the SEC. Earlier in June 2010 the company announced an investigation into the same by its internal audit committee which concluded that the transactions identified in the SEC subpoena were properly accounted in the company’s accounts.
Canadian Solar clocked revenues of $328.7 million, beating the Zacks Consensus Estimate of $318 million. Revenues were also greater than revenues of $114.2 million in the second quarter of 2009 but short of the $336.9 million in the first quarter of 2010.
Shipments in the reported quarter were 181.2 MW compared to shipments of 185.0 MW in the first quarter of 2010 and shipments of 48.2 MW in the second quarter of 2009. In the reported quarter, gross margin rose to 13.6% compared to a gross margin of 12.4% in the first quarter of 2010. Margins climbed due to lower reliance on third party solar cell and increasing internal cell capacity.
Canadian Solar’s sales came from its global markets, with Europe continuing to be the company’s largest contributing geographic market. Canadian Solar’s upside in quarterly sales came from its global markets with Europe continuing to be its largest contributor. Revenues from the European market in the reported quarter accounted for 86.4% of total sales, up from 58.6% in the year-ago quarter. Also in real terms, revenues from the European market increased to $284.1 million in the reported quarter from $66.9 million in the year-ago quarter.
Canadian Solar generated $24.2 million in revenues from the Americas in the reported quarter compared to $16.2 million in the year-ago quarter. Asia and others accounted for $20.4 million in revenues in the reported quarter compared to $31.1 million in the year-ago quarter.
Canadian Solar in the reported quarter witnessed sharp rise in operating expenses to $27.6 million compared to $10.2 million in the year-ago quarter. The upside was mainly due to rise in general and administrative expenses which went northward to $14 million from $6.4 million year over year.
However, of this, approximately $4.8 million related to the SEC subpoena and the internal audit committee investigation. Also foreign exchange loss spiked to $30.5 million from $6 million gain in the year-ago quarter. This was despite currency hedging reducing the impact of foreign exchange losses by $21.6 million during the quarter. Overall net income was $3.2 million in the reported quarter compared to $1.5 million in the first quarter of 2010 and $17.7 million in the second quarter of 2009.
Canadian Solar reported cash and cash equivalents of $255.2 million at the end of the reported quarter, up from $160.1 million at fiscal-end 2009. Long-term borrowings decreased to $13.3 million from $29.3 million at fiscal-end 2009, while Convertible notes marginally increased to $885 million from $866 million at fiscal-end 2009. However, short-term borrowings spiked to $548.9 million from $251.7 million at fiscal-end 2009.
Canadian Solar is a vertically-integrated manufacturer of silicon ingots, wafers, cells, solar modules (panels) and custom-designed solar power applications. Canadian Solar operates through seven wholly-owned manufacturing subsidiaries. The company has seven manufacturing facilities located at Suzhou, Changshu and Luoyang in China. It is also constructing a module plant in Ontario, Canada, which is expected to be operational in early 2011.
Canadian Solar sells its products to customers worldwide, spread across Germany, Spain, the U.S., France, the Czech Republic, Italy, South Korea, Canada and China. The company offers one of the broadest crystalline silicon solar module product lines in the industry ranging from modules made of medium power, low-cost upgraded metallurgical-grade silicon, or UMG-Si, to high efficiency, high power output mono-crystalline modules, along with a range of specialty products.
The fortunes of Canadian Solar look greener in the future with a geographically-diversified customer base, ongoing expansion programs, improving operating efficiencies, rising gross margins, material cost savings through its vertically-integrated production structure, higher captive generation of solar cells and higher conversion efficiency.
Canadian Solar expects gross margins to improve further in the second half of 2010 due to its focus on vertical integration, improvements in processing costs and shipping new products, including enhanced selective emitter modules. In the third quarter the company expects its gross margin in the range 14.5% – 15.5%. It is increasing its solar cell production capacity to 800 MW by the end of third quarter of 2010 and to 1.3 GW by early 2011. The company reaffirmed its fiscal 2010 shipments guidance range of 700 MW – 800 MW.
However in the near term, until Canadian Solar becomes fully self-sufficient in solar cells it will continue to affect the cost structure of the company. As the same strong demand environment pushing its modules shipment and margin, is also pushing northward the price of solar cells sourced from third parties. This will force the company in the near-term to cut-back and sacrifice volume for margins, since higher third-party cell purchases would affect its margins.