Canadian Solar Inc. — FY2012 Form 20-F
Reporting period: Fiscal year ended December 31, 2012; filed April 26, 2013. This is an annual report, not a standalone fourth-quarter filing, and the supplied text does not provide clear Q4-only financial results. Amounts below are in U.S. dollars unless stated otherwise. The company designs and manufactures solar products, primarily in China, and is expanding into solar project development and other downstream services. Financial statements are prepared under U.S. GAAP.
Key financial and operating metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $1.295 billion | $1.899 billion |
| Gross profit / margin | $90.4 million / 7.0% | $182.3 million / 9.6% |
| Operating income (loss) / margin | $(142.5) million / (11.0)% | $6.8 million / 0.4% |
| Net income (loss) attributable to Canadian Solar / EPS | $(195.5) million / $(4.53) | $(90.8) million / $(2.11) |
| Cash from (used in) operating activities | $(147.8) million | $60.1 million |
| Cash from (used in) investing activities | $(306.5) million | $(193.6) million |
| Cash from financing activities | $249.6 million | $177.7 million |
| Cash and cash equivalents at year-end | $142.0 million | $344.0 million |
| Total assets / net assets | $2.259 billion / $301.6 million | $1.880 billion / $467.0 million |
| Short-term borrowings / long-term borrowings | $858.9 million / $214.6 million | $743.7 million / $88.2 million |
| Net current assets (liabilities) | $(98.0) million | $59.1 million |
- Solar module shipments increased 16.6% to 1,543 MW, while average module selling price fell to $0.77 per watt from $1.34. Total solution shipments were 53 MW, versus 56.9 MW.
- Revenue declined 31.8%; higher shipment volume did not offset lower prices. Europe contributed 50.7% of revenue, down from 65.0%; America rose to 26.4% from 17.6%.
- Operating expenses rose to $232.9 million, or 18.0% of revenue, from $175.4 million, or 9.2%. General and administrative expense included a $30.3 million non-cash provision following the LDK arbitration award and higher doubtful-account allowances.
- Restricted cash was $422.4 million at year-end. Current liabilities exceeded current assets by $98.0 million; the filing reports $858.9 million of borrowings due within one year. Total borrowings, including short- and long-term amounts, were approximately $1.073 billion.
Material changes versus the prior year
- Revenue fell 31.8%, while module shipments grew 16.6%; the module ASP decline was the principal driver of weaker results.
- Gross margin contracted 2.6 percentage points, and the company moved from near break-even operating income to a $142.5 million operating loss.
- Attributable net loss more than doubled. Operating cash flow swung from a $60.1 million source to a $147.8 million use, including $162.3 million of cash paid to acquire solar projects.
- Short-term borrowings increased by $115.2 million and long-term borrowings by $126.3 million. Cash and cash equivalents declined by $202.0 million.
- Inventory turnover increased from 65 to 94 days. Doubtful-account allowances rose substantially, including an $18.6 million reserve related to a Chinese customer with severe liquidity problems.
Outlook, risks, contingencies and unusual items
- Management outlook: Management forecast positive operating cash flow in 2013, assuming relatively stable module selling prices and raw-material costs and cash receipts from project asset sales beginning in the second half. It expected total solutions to reach about 50% of 2013 revenue, primarily from project sales and Japanese system kits. These are forecasts, not reported outcomes.
- Liquidity dependence: Management said it expected adequate liquidity and the ability to renew short-term bank borrowings, while acknowledging no assurance of refinancing. In Q1 2013, the company renewed and drew short-term borrowings of about $304.6 million; $159.4 million was due beyond 2013. Much of the cash was restricted or tied to financing arrangements.
- Project execution: The company was developing a significant downstream project portfolio, including a 255 MW U.S. pipeline and Canadian projects. Delays, permitting, grid access, financing, construction costs, buyer acceptance or delayed sales could affect liquidity and revenue timing.
- Trade actions: U.S. cash-deposit rates on covered China-origin products were 13.94% anti-dumping and 15.24% countervailing. EU anti-dumping and anti-subsidy investigations and an Indian anti-dumping investigation were pending; resulting duties could raise costs or restrict market access.
- Supplier disputes and contingencies: LDK received an arbitration award of RMB248.9 million plus RMB2.2 million in expenses (about $40.4 million total); Canadian Solar recorded a $30.3 million provision, disputed the award and said it would challenge enforcement. Deutsche Solar claimed €148.6 million in damages; the company had accrued $27.9 million and recorded a full allowance against its $17.4 million advance. The ultimate outcomes were uncertain.
- Other legal matters: The U.S. securities class action was dismissed with prejudice in March 2013; a related Ontario action remained pending, with motions scheduled for June 2013. The company also disclosed an SEC subpoena concerning certain 2009 sales; the investigation’s outcome was not known.
- Market and operating risks: Persistent industry oversupply, falling prices, reduced government incentives, customer financing constraints, foreign-exchange movements, customer and supplier credit risk, long-term product warranties, and reliance on Chinese bank financing could pressure margins and cash flows.
- Other items: The company fully impaired a $1.1 million investment in Nernst, repaid its remaining $1.0 million convertible notes, and recognized a $54.1 million valuation allowance against deferred tax assets. No dividends had been paid, and none were planned in the foreseeable future.
Important facts for investors to verify
- Whether 2013 operating cash flow turned positive and whether forecast project sales generated the expected cash, especially given the $98.0 million working-capital deficit and substantial restricted cash.
- Short-term borrowing renewals, current maturities, collateral requirements and the availability of committed versus non-binding bank facilities.
- Realized module pricing, gross margins, inventory levels and write-downs as industry supply and demand changed.
- Project construction, customer acceptance and sale timing, including the TransCanada and Ontario project portfolios and the anticipated contribution of downstream revenue.
- Final U.S., EU and Indian trade-duty outcomes and their effects on landed costs, shipments and market access.
- LDK award enforcement and the Deutsche Solar claim, including whether recorded provisions adequately reflect potential exposure.
- Collection of receivables and recovery of supplier advances; confirm the concentration and adequacy of the related allowances.
- Tax exposure, including uncertain tax positions and the possible treatment of the company as a PRC tax resident. Management and the auditor reported effective internal controls and the audited statements received an unqualified opinion; the filing also disclosed that the PCAOB could not inspect auditors in China at that time.