Canadian Solar Inc. (CSIQ) reported an adjusted EPS of 24 cents in the second quarter of 2011, falling short of the Zacks Consensus Estimate of 29 cents. The company’s results, however, surpassed the year-ago quarterly earnings of 7 cents.
The upside came from higher shipments, cost efficiencies and lower raw material costs. On a reported basis, Canadian Solar reported an EPS of 16 cents versus 7 cents in the year-ago period.
Operational Performance
Canadian Solar had revenues of $481.8 million, beating the Zacks Consensus Estimate of $438 million. Revenues were also 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 in the reported quarter totaled 287 MW compared to shipments of 244 MW in the first quarter 2011 and 181 MW in the second quarter of 2010. 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 76.6% of total sales, down from 86.4% in the year-ago quarter.
However in real terms, revenues from the European market increased to $369.1 million from $284.1 million in the year-ago quarter. Canadian Solar has significantly increased its sales to the Asia Pacific region and America as part of its market diversification strategy.
The company generated $73 million in revenues from America in the reported quarter compared to $24.2 million last year. Asia and others accounted for $39.7 million of revenues, compared to $20.4 million last year.
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 external solar cell purchases and lower average selling prices. This was partially offset by lower raw material and manufacturing costs.
Year-over-year, gross margin was down as a result of lower average selling prices. This was 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 and 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. 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 the use of silver paste, and on developing its next-generation, high-efficiency cells and other 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.
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.
Overall net income came in at $7.1 million compared to net income of $5.9 million for the first quarter 2011, and net income of $3.2 million for the second quarter of 2010.
Financial Condition
Canadian Solar reported cash, cash equivalents and restricted cash of $686.3 million at the end of the reported period, up from $476.2 million at fiscal-end 2010.
The increase in cash and cash equivalents was largely the result of an increase in short-term and long-term borrowings. Restricted cash increased mainly due to increased cash collateral and issuance of bank acceptance and letters of credit. Long term borrowings increased to $183.3 million from $69.5 million at fiscal-end 2010.
Outlook
Canadian Solar is a vertically-integrated manufacturer of silicon ingots, wafers, cells, solar modules and custom-designed solar power applications. The company sells its products to customers worldwide, spread across Germany, Spain, the U.S., France, the Czech Republic, Italy, South Korea, Canada and China.
Canadian Solar 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, to high efficiency, high power output mono-crystalline modules, along with a range of specialty products.
Canadian Solar's standard solar modules are sold to distributors and system integrators, and specialty solar modules and products to various manufacturers, who integrate these solar modules into their own products or sell and market them as part of their own product portfolio.
Canadian Solar’s China-based manufacturing assets have a distinct cost advantage over its peers. The company also pursues a balanced and diversified supply channel mix by entering into long-term supply contracts and toll manufacturing arrangements.
In addition to in-house solar cell, wafer and ingot manufacturing, it is also ramping up its internal solar cell capacity to cut back its reliance on third party solar cells for the manufacture of solar modules.
In the near-term, however, the benefits of its ongoing cost reduction program were however offset by higher than forecasted wafer prices on the spot market, higher polysilicon prices and higher non-silicon materials costs, including silver paste.
Also, in the near-term its shipments were curtailed by higher solar cell prices in the market, which were eating into its margins. The company is addressing this by ramping up its captive solar cell capacity. However, it will take some time before the company becomes fully self-sufficient for its solar cells requirements.
Canadian Solar currently has a short term Zacks #3 Rank (Hold) in line with peers like Ascent Solar Technologies, Inc. (ASTI) and Energy Conversion Devices, Inc. (ENER). Over the longer run, we maintain our Neutral recommendation on Canadian Solar shares.
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