GUELPH, Ontario — Canadian Solar Inc. announced its financial results for the fourth quarter and full year ended December 31, 2018. The Company also announced the appointment of Arthur (Lap Tat) Wong as an independent director of the Company, effective March 8, 2019, which increased the size of the Board of Directors from five to six directors.
Fourth Quarter 2018 and Related Highlights
- Total solar module shipments were 1,951 MW, compared to 1,590 MW in the third quarter of 2018 and the revised fourth quarter guidance of 1.9 GW to 1.95 GW.
- Net revenue was $901.0 million, compared to $768.0 million in the third quarter of 2018 and the revised fourth quarter 2018 guidance of $850 million to $900 million.
- Gross margin was 30.1%, including the benefit of a U.S countervailing duty (CVD) reversal of $16.1 million, compared to 26.1% in the third quarter of 2018, and the revised fourth quarter guidance of 27.0% to 28.0%. Excluding the CVD reversal benefits, gross margin was 28.3%, compared to 25.0% in the third quarter of 2018.
- Net income attributable to Canadian Solar was $111.6 million, or $1.81 per diluted share, compared to net income of $66.5 million, or $1.09 per diluted share, in the third quarter of 2018.
- Non-GAAP adjusted net income attributable to Canadian Solar was $99.5 million, or $1.61 per diluted share. This excludes the CVD reversal of $16.1 million, net of income tax effect. For a reconciliation of results under generally accepted accounting principles in the United States (“GAAP”) to non-GAAP results, see accompanying tables “Reconciliation of U.S. GAAP to Non-GAAP Financial Measures”
- During the quarter, the Company completed sales of the Garland and Tranquillity solar power plants totaling 260 MWp and the 210 MWp Mustang 2 solar power project (at pre-NTP stage) in the U.S., 247 MWp of solar power plants in China and its 20% interest in the 399 MWp Pirapora portfolio in Brazil.
- As of February 28, 2019, the Company’s portfolio of utility-scale solar power plants in operation was approximately 986 MWp with an estimated total resale value of approximately $1.2 billion. Only the value of the class B shares which the Company holds in its tax equity solar power plant in the U.S. is included in this resale value.
Full Year 2018 Results
- Total solar module shipments were 6,615 MW, compared to 6,828 MW in 2017 and the revised full year guidance in the range of 6.56 GW to 6.61 GW.
- Net revenue was $3.74 billion, compared to $3.39 billion in 2017 and the revised full year guidance in the range of $3.69 billion to $3.74 billion.
- Net income attributable to Canadian Solar was $237.1 million, or $3.88 per diluted share, compared to $99.6 million, or $1.69 per diluted share in 2017.
- Non-GAAP adjusted net income attributable to Canadian Solar was $199.4 million, or $3.28 per diluted share. (This excludes the benefit of a U.S. AD/CVD reversal of $50.2 million, net of income tax effect.)
- Net cash provided by operating activities was approximately $216.3 million, compared to $203.9 million in 2017.
Fourth Quarter 2018 Results
Net revenue in the fourth quarter of 2018 was $901.0 million, an increase of 17.3% from $768.0 million in the third quarter of 2018, as the Company benefited from the successful monetization of solar power projects and increased solar module shipments. Net revenue in the fourth quarter of 2018 declined 18.7% from $1.11 billion in the fourth quarter of 2017, due to a lower average module selling price and reduction in project revenue. The revised fourth quarter 2018 guidance was $850 million to $900 million.
Total solar module shipments in the fourth quarter of 2018 were 1,951 MW, compared to 1,590 MW in the third quarter of 2018 and the revised fourth quarter of 2018 guidance of 1,900 MW to 1,950 MW. Total solar module shipments in the fourth quarter of 2018 included 169 MW shipped to the Company’s utility-scale solar projects. Solar module shipments recognized in revenue in the fourth quarter of 2018 totaled 2,076 MW, compared to 1,521 MW in the third quarter of 2018 and 1,983 MW in the fourth quarter of 2017.
Gross profit in the fourth quarter of 2018 was $271.3 million, compared to $200.4 million in the third quarter of 2018 and $218.6 million in the fourth quarter of 2017. Gross margin in the fourth quarter of 2018 was 30.1%, compared to 26.1% in the third quarter of 2018 and 19.7% in the fourth quarter of 2017. The fourth quarter gross margin included the benefit of a CVD reversal of $16.1 million. Excluding the CVD reversal benefits, gross margin would be 28.3%, compared to 25.0% in the third quarter of 2018. The revised fourth quarter guidance was 27.0% to 28.0%. The sequential increase in gross margin was primarily due to the realization of deferred module profits after project sales and a lower blended module manufacturing cost, partially offset by a lower average module selling price. The year-over-year increase in gross margin was primarily due to the benefit of the CVD reversal and a lower blended module manufacturing cost, partially offset by a lower average module selling price. Gross margin for the Company’s MSS business in the fourth quarter 2018 was 31.7%, or 28.8% excluding the CVD reversal benefit. This compares to a gross margin of 25.1% in the third quarter 2018, or 23.4% excluding the CVD reversal benefit in that quarter, and 15.4% in the fourth quarter of 2017. Gross margin for the Company’s Energy business for the fourth quarter of 2018 was 27.5%, compared to 28.2% in the third quarter of 2018 and 27.9% in the fourth quarter of 2017.
The Company has been operating in two principal businesses since 2016: MSS and Energy. The MSS business comprises primarily the design, development, manufacture and sale of solar modules, other solar power products and solar system kits. The MSS business also provides engineering, procurement and construction (EPC) and operating and maintenance (O&M) services. The Energy business comprises primarily the development and sale of solar projects, operating solar power projects and the sale of electricity. The module sales from the Company’s MSS business to its Energy business are on terms and conditions similar to sales to third parties.
The Company develops solar power projects worldwide. Where applicable, the Company may apply for and/or be entitled to receive a feed-in tariff (FIT) for its projects. Alternatively, the Company may participate in public or private energy auctions and bidding, which results in long-term power purchase agreements (PPA). The Company may also sell all or part of the electricity generated from its solar power projects on the merchant power market. Because of the longer lead time (two to four years) to develop solar power projects and bring them to a commercial operation date (COD), the actual gross margin for a project may deviate from the expected gross margin. The deviation may be caused by, but are not limited to, changes in the political and economic conditions in host countries, project specific conditions, price movements of solar modules and other components, EPC services and the capital return requirements of solar asset buyers. In recent years, the Company has sold some solar power projects before COD. We typically refer these sales as “notice to proceed” or NTP sales. Revenue will be lower, while gross margin percentage will be higher, in NTP sales compared to COD sales, even if the absolute margin is the same. Results from the Company’s Energy business may be lumpy from quarter to quarter, depending on project NTP or COD dates, project sale transaction dates and the profit level of each project.
Total operating expenses in the fourth quarter of 2018 were $134.7 million, compared to $104.5 million in the third quarter of 2018 and $88.4 million in the fourth quarter of 2017. The sequential and year-over-year increases were primarily due to a $26.8 million impairment charge related to certain manufacturing assets, and a $6 million increase in transaction fees associated with project sales.
Selling expenses in the fourth quarter of 2018 were $44.4 million, compared to $38.4 million in the third quarter of 2018 and $39.9 million in the fourth quarter of 2017. The sequential increase was primarily due to an increase in project transaction fees and shipping and handling expenses. The year-over-year increase was primarily due to higher project transaction fees and increased professional services expenses and labor costs, partially offset by a decrease in shipping and handling costs.
General and administrative expenses in the fourth quarter of 2018 were $81.3 million, compared to $58.9 million in the third quarter of 2018 and $69.7 million in the fourth quarter of 2017. The sequential and year-over-year increases were primarily due to the above-mentioned asset impairment charge and increased professional service expenses, partially offset by a decrease in the provision for bad debt.
Research and development expenses in the fourth quarter of 2018 were $15.4 million, compared to $10.1 million in the third quarter of 2018 and $8.6 million in the fourth quarter of 2017, as the Company further moved to strengthen its leadership position by investing in and commercializing solar technology enhancements, advancements and efficiencies.
Other operating income in the fourth quarter of 2018 was $6.4 million, compared to $2.9 million in the third quarter of 2018 and $29.8 million in the fourth quarter of 2017.
Income from operations in the fourth quarter of 2018 was $136.6 million, compared to $95.9 million in the third quarter of 2018, and $130.2 million in the fourth quarter of 2017. Operating margin was 15.2% in the fourth quarter of 2018, compared to 12.5% in the third quarter of 2018 and 11.7% in the fourth quarter of 2017.
Non-cash depreciation and amortization charges in the fourth quarter of 2018 were approximately $32.2 million, compared to $32.5 million in the third quarter of 2018 and $37.2 million in the fourth quarter of 2017. Non-cash equity compensation expense in the fourth quarter of 2018 was $2.4 million, compared to $2.5 million in the third quarter of 2018 and $2.2 million in the fourth quarter of 2017.
Interest expense in the fourth quarter of 2018 was $23.0 million, compared to $26.8 million in the third quarter of 2018 and $33.5 million in the fourth quarter of 2017.
Interest income in the fourth quarter of 2018 was $2.2 million, compared to $2.6 million in the third quarter of 2018 and $3.2 million in the fourth quarter of 2017.
The Company recorded a loss on change in fair value of derivatives in the fourth quarter of 2018 of $7.3 million, compared to a loss of $8.9 million in the third quarter of 2018 and a gain of $7.6 million in the fourth quarter of 2017. Foreign exchange gain in the fourth quarter of 2018 was $7.3 million, compared to a gain of $10.1 million in the third quarter of 2018, and a loss of $9.5 million in the fourth quarter of 2017.
Investment income in the fourth quarter of 2018 was $35.4 million, compared to $6.5 million in the third quarter of 2018 and a loss of $3.6 million in the fourth quarter of 2017. The sequential and year-over-year increase was primarily due to investment income of $40.4 million from sale of non-controlling interests in Tranquillity and Garland projects in the U.S. and Pirapora project portfolio in Brazil, partially offset by $5.0 million investment impairment charge.
Income tax expense in the fourth quarter of 2018 was $36.7 million, compared to $13.4 million in the third quarter of 2018 and $28.9 million in the fourth quarter of 2017.
Net income attributable to Canadian Solar in the fourth quarter of 2018 was $111.6 million, or $1.81 per diluted share, compared to $66.5 million, or $1.09 per diluted share, in the third quarter of 2018 and $61.4 million, or $1.01 per diluted share, in the fourth quarter of 2017.
Non-GAAP adjusted net income attributable to Canadian Solar in the fourth quarter of 2018 was $99.5 million, or $1.61 per diluted share. This excludes the impact of the CVD reversal, net of income tax effect.
Financial Condition
The Company had $941.0 million of cash, cash equivalents and restricted cash as of December 31, 2018, compared to $995.0 million as of September 30, 2018.
Accounts receivable, net of allowance for doubtful accounts, at the end of the fourth quarter of 2018 were $498.2 million, compared to $322.9 million at the end of the third quarter of 2018. Accounts receivable turnover in the fourth quarter of 2018 was 46 days, compared to 47 days in the third quarter of 2018.
Inventories at the end of the fourth quarter of 2018 were $262.0 million, compared to $322.0 million at the end of the third quarter of 2018. Inventory turnover in the fourth quarter of 2018 was 44 days, compared to 55 days in the third quarter of 2018.
Accounts and notes payable at the end of the fourth quarter of 2018 were $749.2 million, compared to $856.7 million at the end of the third quarter of 2018.
Short-term borrowings and long-term borrowings on project assets – current at the end of the fourth quarter of 2018 were $1.3 billion, compared to $1.9 billion at the end of the third quarter of 2018. Long-term borrowings at the end of the fourth quarter of 2018 were $393.6 million, compared to $120.2 million at the end of the third quarter of 2018.
Senior convertible notes totaled $127.4 million at the end of the fourth quarter of 2018, compared to $127.2 million at the end of the third quarter of 2018. The Company repaid the entire $127.5 million outstanding balance of senior convertible notes in February 2019.
Total borrowings directly related to the Company’s utility-scale solar power projects were $735.1 million at the end of the fourth quarter of 2018, compared to $1.07 billion at the end of the third quarter of 2018, a decrease of $334.3 million. Total debt at the end of the fourth quarter of 2018 was approximately $1.96 billion, compared to approximately $2.27 billion at the end of the third quarter of 2018, a decrease of approximately $310 million.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, commented: “2018 was a record year for us as our revenue, total module shipments and gross margin all exceeded our expectations for both the fourth quarter and full year 2018. Our integrated business strategy and commitment to profitability helped us achieve a new high for Canadian Solar, as we delivered net income of $3.88 per diluted share. The acceleration on the sale of certain solar power projects also positively contributed to the revenue and profit in 2018. However, this will reduce our project sales revenue and profit in 2019, as noted in our outlook. Our portfolio of solar power plants in operation as of February 28, 2019 was approximately 986 MWp, with an estimated total resale value of approximately $1.2 billion. Our portfolio of late-stage, utility-scale solar power projects as of February 28, 2019, including those under construction, was approximately 2.9 GWp. Our focus remains on downstream Energy Business where we can leverage our expertise and competitive advantage to deliver a higher return on investment. This includes consistently winning new projects in sought-after markets, reliably developing projects on time and on budget and leveraging our powerful global network of banking and investor partners. We are also pleased with our continued success in introducing innovative solar module products and expanding our services to engineering, procurement and construction (“EPC”), solar component sales and operation and maintenance (“O&M”).”
Dr. Huifeng Chang, Senior Vice President and Chief Financial Officer of Canadian Solar, added: “In addition to the quarterly and yearly record net income, we achieved a record quarterly gross margin of 30.1% or 28.3% excluding the benefit of the US CVD reversal, as we continued to capture the benefits of our operational cost and inventory controls, and capitalize on declining raw material prices. We continue to successfully execute on our project monetization efforts, with the completion of the fourth quarter 2018 sales of 470 MWp solar projects in the U.S., 247 MWp of solar power plants in China and our 20% interests in the 399 MWp Pirapora portfolio in Brazil. Our ability to successfully monetize our solar project assets, while profitably running our module business, has allowed us to strengthen our balance sheet, including an approximately 14% reduction in debt in the fourth quarter of 2018 compared to the third quarter and our repayment in February 2019 of the full $127.5 million outstanding balance of senior convertible notes. We are also actively redeploying capital into attractive project opportunities as we lay the groundwork for the Company’s future success.”
Business Outlook
The Company’s business outlook is based on management’s views and estimates with respect to market conditions, production capacity, the current order book and the global economic environment. This outlook is subject to uncertainty on final customer demand, solar project construction and sale schedules. Management’s views and estimates are subject to change without notice.
For the first quarter of 2019, the Company expects total solar module shipments to be in the range of approximately 1.3 GW to 1.4 GW, including approximately 50 MW of shipments to the Company’s utility-scale solar power projects that may not be recognized as revenue in first quarter 2019. Total revenue for the first quarter of 2019 is expected to be in the range of $450 million to $480 million. Gross margin for the first quarter is expected to be between 16% and 18%. The Company expects the net profit for the first quarter of 2019 to be low or negative, primarily due to typical lower production and sales volume during the Chinese New Year holiday, IT upgrade, a lower module ASP, decreased sales of solar power projects compared to previous quarters, and an expected foreign exchange loss due to the appreciation of the Chinese RMB against the U.S. dollar.
For the full year 2019, the Company expects total module shipments to be in the range of approximately 7.4 GW to 7.8 GW. Total revenue for the full year 2019 is expected to be in the range of $3.5 billion to $3.8 billion. The full year revenue guidance reflects the impact of an expected lower module ASP and lower revenue from solar project sales. While the profit in subsequent quarters will likely recover from the first quarter of 2019 level, as module and project sales increase, the Company currently expects its net profit for 2019 to be lower than 2018.
Qu commented: “We had an exceptional year in 2018, with close to 140% growth of net profit from the 2017 level. This clearly demonstrated our global leadership position, the winning model of our solar project business, and the benefits of our manufacturing business strategy. As we discussed previously, the acceleration of certain high profit project sales also contributed to our success in 2018. This acceleration, however, will result in a reduction in solar project sale revenue and profit in 2019. And while we have a strong 2.9 GWp late-stage solar project pipeline, due to the typical project development cycle, we expect to realize sales for the majority of these late-stage projects in 2020 or later. This will likely create a temporary pullback in 2019 compared to 2018. We also expect lower profit from our module manufacturing business, partly due to higher costs caused by the appreciation of the Chinese RMB against the U.S. dollar and Euro over the past few months. Such cost increases would normally be offset by an adjustment of module ASP or by the cost reduction through technology improvements but that process takes time.”
Qu continued, “Overall, while we expect 2019 financial results to be lower than 2018 due to the timing issues noted, this does not change our view on the long-term health, growth and profitability of our core business. We expect a rebound in project sales in 2020 and beyond given our robust project pipeline. Our focus on new solar module technologies, innovative products and premium channels will also help the Company maintain its competitive edge in its Module and Solar System business. We will continue to focus on delivering improved results and maximizing shareholder value.”
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