SEC subpoenas Canadian Solar; company postpones Q1 financials, updates operating results, guidance

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Canadian Solar has postponed the release of its full financial results for the first quarter ended March 31 because of the launch of an investigation by the company’s audit committee relating to certain sales transactions in 2009. While the investigation is ongoing, Canadian Solar has updated its first-quarter operating results as well as its guidance for the second quarter and second half of 2010, stating that it shipped 186.4MW of PV modules during the quarter just ended.

The investigation was initiated after Canadian Solar received a subpoena from the U.S. Securities and Exchange Commission requesting company documents relating to certain sales transactions in 2009 and other items. The company says it has fully cooperated with the SEC. The firm’s audit committee has retained outside counsel and independent forensic accountants to assist in reviewing, among other things, the transactions described in the subpoena, according to the company.

Canadian Solar also announced that it may revise its fourth-quarter 2009 net revenues because of its intention to recognize sales only after receiving full cash payments from certain customers and also because of certain subsequent return of goods after the quarter’s end. These sales transactions will be deferred to Q1 and Q2 of 2010; full-year 2009 net revenues may be revised accordingly, the company said.

“Market demand was very strong in the first quarter,” said Shawn Qu, chairman/CEO of Canadian Solar. “We reached record-high shipment levels in Q1, which we believe demonstrates the success of our diversified sales channels and our strong brand-name recognition. Our performance also reflects the advantage of our flexible vertical integration model, which allowed us to quickly tap our suppliers in order to capture sales opportunities.

“On the other hand, the unexpected depreciation of the Euro combined with a higher ratio of external purchased cells put pressure on our margins. We have taken steps to stabilize and improve our margin structure.

“These steps include the following:

•    We have implemented a more robust foreign currency hedging plan, raising our hedging level to more than 90% of our expected Q2 cash flow.
•    We are now hedging well into Q3.
•    We are on track to expand our internal cell capacity from the current 420MW to 700MW.
•    We intend to commence ramping up our new cell lines on July 1 and complete the ramping-up process in September.
•    We have successfully revamped our ingot and wafer plant and expect it to contribute positively to our P&L in Q2.
•    We will take advantage of our global market profile and increase sales in non-Euro currencies.”

“Canadian Solar plans to be proactive in our hedging practices as we work to mitigate the impact of continued currency volatility,” he continued. “We have hedged a very large percentage of our expected Euro exposure for Q2 and Q3 2010. This will improve our earnings visibility and mitigate some of the near-term impact of foreign exchange on our financial performance.

“We had a high customer concentration in Germany in Q1 and early Q2, in order to help customers to meet their project deadlines as much as possible. However, Canadian Solar has a well-diversified global customer profile, and we have started to shift our focus to non-German customers and conduct U.S. dollar-denominated sales with certain European customers.

“We expect to realize a higher percentage of our sales in non-Euro currencies starting this June,” Qu noted. “We are also evaluating other natural hedges, including Euro-denominated purchases of polysilicon and wafers. We expect purchase prices for wafer and cell to be slightly higher in Q2 compared with Q1, while polysilicon prices appear to be stable. We have increased Euro module prices in Q2 slightly to adjust for this.”

The company also offered several operations updates.  

Canadian Solar said it began commercial manufacturing of enhanced selective emitter (ESE) modules in March and has shipped over 3MW of ESE modules to date, with conversion efficiencies approaching 18% in initial production runs. Canadian Solar expects to increase ESE cell production capacity to 120MW by the end of the third quarter.

The company increased its module production capacity from 820MW at the end of 2009 to 1.3GW at the end of May. It also said it has 420MW of internal solar cell production capacity and expects to reach 700MW of internal solar cell production capacity by September.

Canadian Solar also manufactured approximately 50% of the cells used in Q1 internally and expects to produce approximately 110MW of cells internally, representing approximately 60% of its Q2 shipments. The company forecasts it will produce approximately 165MW of cells internally by Q4, representing approximately 70% of its expected Q4 shipments.

The company said its internal ingot and wafer operation stopped incurring losses in Q1. The furnaces have been repaired, and the plant is expected to contribute to margins in Q2, with approximately 30MW to 35MW of wafers expected to be produced internally in Q2.
The company sees shipments reaching 170MW to 180MW in the second quarter, with anticipated gross margins of 13-14%.

For the second half of the year, Canadian Solar believes shipments will exceed levels experienced during the first half of 2010, with margins possibly improving by the second half because of increased vertical integration and improvements in processing costs, provided there is no further deterioration in the Euro or supply shortage, among other factors.

For the full year, the company expects to be supply constrained until late in 2010, given the strong market demand for its products; however, Canadian Solar is increasing its shipments guidance from the prior 600-700MW range to 700-800MW.

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