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Before markets opened today, Canadian Solar Inc. (CSIQ - Analyst Report) reported higher quantum of losses for the second quarter of 2012. In the reported quarter, the company with a loss per share of 59 cents missed the Zacks Consensus Estimate of a loss of 30 cents per share. Results were also much lower when compared to earnings of 16 cents in the year-ago period.

Operational Performance

In the reported quarter, Canadian Solar had revenues of $348.2 million, falling behind the Zacks Consensus Estimate of $393 million. Revenue was, however, up 6.9% from $325.8 million in the first quarter of 2012 and down 27.7% from $481.8 million in the second quarter of 2011.

Quarterly Highlights

Solar module shipments in the reported quarter totaled 412 megawatts (MW), compared to 343 MW for the first quarter 2012 and 287 MW for the second quarter of 2011.  Total solar module shipments for the second quarter of 2012 included 8.7 MW used in the company's total solutions business.

By geography, in the second quarter of 2012, sales to European markets represented 69.4% of net revenue, sales to North America represented 15.7% of net revenue, and sales to Asia and all other markets represented 14.9% of net revenue. In the above order, first quarter of 2012 revenue breakdown was 42.6%, 45.1% and 12.3%, respectively, and in the second quarter of 2011 the breakdown was 76.6%, 15.2% and 8.2%, respectively. 

Gross profit in the second quarter of 2012 was $43.2 million, compared with $25.1 million in the first quarter of 2012 and $63.7 million in the second quarter of 2011. The sequential increase in gross profit was primarily due to the increase in revenue as a result of higher shipment volume, as well as an adjustment resulting from the recognition of the benefit from the company's purchased warranty insurance.

On the other hand, the year-over-year decline was primarily due to the decline in average selling prices, partially offset by lower manufacturing costs, higher shipment volume and the positive effect of the warranty insurance adjustment. Gross margin in the second quarter of 2012 was 12.4% compared to 7.7% in the first quarter of 2012 and 13.2% in the second quarter of 2011. 

Overall the company in the second quarter of 2012 digested a net loss of $25.5 million compared with a net loss of $21.3 million in the first quarter 2012, and net income of $7.1 million in the second quarter of 2011.

Financial Condition

Canadian Solar reported cash, cash equivalents and restricted cash of $692.1 million at the end of the reported period, up from $625.2 million as of March 31, 2012. Operating cash outflow was approximately $69.6 million in the second quarter of 2012, reflecting the impact of approximately $70.4 million cash outflow for the acquisition of the 16 projects in Ontario, Canada.

Operating cash inflow was approximately $12.1 million in the first quarter of 2012. Excluding the impact of the above mentioned acquisition, adjusted operating cash inflow was $0.8 million in the second quarter of 2012.

Short-term borrowings at the end of the second quarter of 2012 totaled $927.7 million, compared to $861.9 million at the end of the first quarter of 2012.  Long-term debt at the end of the second quarter 2012 was $136.3 million, compared to $88.3 million at the end of the first quarter of 2012.  The increase in long-term debt is primarily due to drawdown of a syndicate loan.


Canadian Solar plans to prudently manage manufacturing utilization, inventory and mix levels, and operating expenses, as demand levels fluctuate. It also expects to continue to explore ways to increase manufacturing efficiency and lower processing and consumable costs where possible.

The company expects shipments to be in the range of 390 MW to 420 MW in the third quarter of 2012, with gross margin expected to be between 2% and 5%. Despite the challenging global financing environment that leads to customer demand uncertainty, the company reaffirmed its shipment guidance range of approximately 1,800 MW to 2,000 MW of solar products in full-year 2012.

Our Take

In recent times, Canadian Solar booked positive growth in Europe, most notably Germany, which offset weaknesses in the U.S. market.  However higher volumes were more than offset by steadily falling average selling prices. Average Selling Prices continued to decline as the Euro weakened and Germany transitioned to a new, lower feed-in-tariff regime. 

Looking forward, the company is actively branching out aggressively to capture new opportunities in key solar markets worldwide.  The company continues to see attractive opportunities for growth in China, Japan and India, as well as other emerging markets in Asia, Africa and Latin America. Moreover, its specialization at the downstream total solutions business makes it a higher margin business.

In the second quarter of 2012, the company completed construction of an 11.5 MW power plant in Stone Mills, Ontario. By focusing on such projects, the company would be able to reduce financing and execution risks. Also in 2011, the company started to acquire, or joint venture, approximately 140 MW of utility-scale solar development projects in the U.S. 

These transactions would give the company an expanded presence in the U.S., which the company believes to be an attractive growth market despite near-term headwinds.  The company also completed the acquisition of 16 solar projects from SkyPower and launched an equally owned joint venture with SkyPower Limited, called CSI SkyPower. The JV would allow the companies to more rapidly expand its total solutions business in Africa, the Middle East and South America. 

However, in the near term, fortunes of Canadian Solar would be impacted by the industry-wide oversupply glut leading to sharply falling Average Selling Prices, tepid module demand in Europe , and rising competition in the market. Given the industry-wide high inventory level, we do not foresee any short-term improvement in margins of the company.

The company presently retains a short-term Zacks #4 Rank (Sell). In the near term, we would advise investors to focus on its Zacks #2 Rank (Buy) peer First Solar, Inc. (FSLR - Analyst Report).

Canadian Solar Inc. is one of the world's largest solar companies. As a leading vertically integrated provider of ingots, wafers, solar cells, solar modules and other solar applications, the company designs, manufactures and delivers solar products and solar system solutions for on-grid and off-grid use to customers worldwide.

With operations in North America, Europe, Australia and Asia, Canadian Solar provides premium quality, cost-effective and environmentally-friendly solar solutions to support global, sustainable development. Over the longer run we thus maintain our Neutral recommendation on the stock.

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