Canadian Solar Inc. — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; quarterly Q4 results are not clearly provided in the filing text. Financial statements are audited and prepared under U.S. GAAP. Amounts below are in U.S. dollars.
Business context
Canadian Solar manufactures and sells solar modules and provides project development, EPC and operations and maintenance services, while also owning and operating solar power plants. The 2015 results reflect the March acquisition of Recurrent Energy and a larger electricity-generation business. Module sales remained the largest revenue source.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $3,467.6 million | $2,960.6 million | Up 17.1% |
| Gross profit / margin | $576.8 million / 16.6% | $581.0 million / 19.6% | Profit down 0.7%; margin contracted 3.0 percentage points |
| Operating income / margin | $247.4 million / 7.1% | $366.3 million / 12.4% | Down 32.5%; margin contracted 5.3 points |
| Net income attributable to Canadian Solar / margin | $171.9 million / 5.0% | $239.5 million / 8.1% | Down 28.2% |
| Basic / diluted EPS | $3.08 / $2.93 | $4.40 / $4.11 | Both declined |
| Operating cash flow | $413.7 million | $265.1 million | Up $148.6 million |
| Investing cash flow | $(999.1) million | $(116.0) million | Higher project investment and acquisition spending |
| Financing cash flow | $619.5 million | $191.9 million | Higher net bank borrowing |
Module revenue rose 31.4% to $2,672.7 million as module shipments increased; the average selling price fell 12.9%, from $0.67 to $0.58 per watt. Energy development revenue declined 21.7% to $947.2 million, principally because fewer solar projects were sold. Electricity-generation revenue increased to $32.1 million from $2.9 million. Total solar-product shipments were 4,383.8 MW, compared with 2,812.6 MW in 2014.
At year-end, cash and cash equivalents were $553.1 million, while current assets were $2,264.1 million and current liabilities were $2,656.3 million, producing a working-capital deficit of $392.2 million. Restricted cash totaled $581.6 million, including current and non-current balances, and was not freely available for general use. Bank and non-bank borrowings totaled $1,763.2 million; convertible notes added $150.0 million, and short-term notes payable were $473.2 million. The filing reported $1,290.1 million of undrawn credit facilities at December 31, 2015. Net cash increased only $3.5 million after substantial investment outflows.
Material changes and unusual items
- Revenue increased, but lower module pricing, lower project-sale contribution, and higher expenses reduced earnings and margins. Operating expenses rose 53.4% to $329.4 million; general and administrative expense more than doubled to $162.6 million.
- U.S. countervailing and anti-dumping duty deposits materially affected results: $111.9 million was charged to cost of revenue in 2015, with a further $17.0 million remaining in inventory. Duty rates and assessments remained subject to reviews and litigation.
- The company recorded a $20.8 million charge for its LDK settlement. It paid the settlement and agreed to purchase 64.3 million silicon wafers at market prices over three years. A separate LDK arbitration rejected both parties’ claims.
- Inventory write-downs rose to $23.0 million from $17.0 million. The company also recorded $7.0 million of impairment charges on idle property, plant and equipment.
- Recurrent was acquired for approximately $261.4 million in cash; the company also acquired Canadian project entities for approximately $59.0 million. Recurrent contributed $266.9 million of revenue and $3.5 million of net income after acquisition.
Outlook, risks and contingencies
- Management expected to expand 2016 annual manufacturing capacity to 5.73 GW of modules, 3.9 GW of cells and 1.0 GW of wafers. The company also reported a 10.3 GWp project pipeline, including 2.0 GWp at late stage, as of March 2016. These are plans and pipeline figures, not guaranteed results.
- The company was preparing a potential Yieldco IPO, with timing dependent on market and other conditions; it could be delayed or not proceed. Management also cited project sales or other strategic alternatives if market conditions were unfavorable.
- Management believed available cash, operating cash flow and banking facilities would cover anticipated working capital and capital needs for the 12 months ending December 31, 2016, while acknowledging financing availability was not assured. Short-term borrowing dependence, particularly on Chinese banks, and covenant/default risks are significant.
- Key business risks include solar-module oversupply and falling prices, subsidy reductions, trade restrictions, project permitting/construction and financing risks, customer and supplier concentration, currency volatility, and long-term warranty obligations. One supplier accounted for 79.7% of silicon-wafer purchases in 2015.
- Litigation and contingencies include a Canadian securities class action at the merits stage; a Deutsche Solar claim of €148.6 million, against which the company recorded a $23.5 million loss-contingency accrual; and ongoing U.S. and EU trade-duty proceedings. The filing does not provide a clear estimate of additional potential U.S. duty losses.
- Management concluded disclosure controls and internal control over financial reporting were effective, but excluded Recurrent from its assessment. The auditor’s report on controls also excluded Recurrent. Deloitte China disclosed an SEC independence concern involving impermissible tax-payment processing by Deloitte Spain for a Spanish subsidiary; the services were stopped, and the audit committee concluded Deloitte China’s independence was not impaired. The filing also notes the auditor was not subject to PCAOB inspection in China.
Most important facts for investors to verify
- Whether subsequent filings show stabilization in module selling prices, gross margin and operating margin after the 2015 declines.
- Cash availability versus restricted cash, near-term debt maturities, bank renewals, covenant compliance and the extent of continuing reliance on Chinese lenders.
- Final U.S. trade-duty assessments, administrative-review outcomes, related cash deposits and any further impact on cost of revenue.
- Project pipeline conversion into financed, permitted, grid-connected projects, and whether the planned capacity expansion and Yieldco strategy proceeded.
- Collection of receivables and related-party balances, project funding requirements, and exposure to the Deutsche Solar claim and Canadian class action.
- Warranty reserve adequacy, inventory write-downs, and the effects of acquisition accounting and project-sale revenue recognition on reported earnings and cash flows.