SolarEdge Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results are presented under U.S. GAAP. SolarEdge designs and sells solar power optimizers, inverters, monitoring and related energy products; its other businesses include energy storage, e-mobility, critical power and automation machines.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $480.1 | $331.9 | $885.5 | $763.1 |
| Gross profit / margin | $156.2 / 32.5% | $103.0 / 31.0% | $296.3 / 33.5% | $243.0 / 31.8% |
| Operating income | $55.6 | $30.0 | $99.7 | $97.7 |
| Net income | $45.1 | $36.7 | $75.2 | $78.9 |
| Diluted EPS | $0.82 | $0.70 | $1.36 | $1.51 |
| Operating cash flow | $38.7 | $59.3 | $62.8 | $167.1 |
Q2 revenue grew 44.7% year over year; first-half revenue grew 16.1%. Q2 net income rose 23.0%, while first-half net income declined 4.7%. Q2 operating income increased despite higher operating expenses. First-half operating income was nearly flat. The filing attributes the first-half earnings decline in part to foreign-exchange effects and higher expenses.
For the first half, net cash used in investing activities was $336.0 million, largely reflecting $422.5 million of purchases of marketable securities and $65.3 million of capital expenditures. Financing activities used $21.2 million, including $16.4 million of loan repayments. Cash and cash equivalents fell to $524.1 million from $827.1 million at year-end 2020. The company also held $603.0 million of marketable securities, $13.6 million of short-term bank deposits and $2.5 million of restricted deposits.
At June 30, 2021, total current assets were $1,488.9 million and current liabilities were $399.6 million. Convertible senior notes, net, were $620.1 million; the filing also reports a $1.4 million outstanding bank loan. The notes have $632.5 million principal, bear no regular interest and mature in September 2025. Product warranty obligations totaled $232.2 million, including $167.3 million classified as long term.
Material changes and operating drivers
- Solar segment revenue was $431.4 million in Q2 and $807.7 million in the first half. “All other” segment revenue was $48.5 million and $77.6 million, respectively; this category remained loss-making at the segment-profit level.
- Management cited higher inverter and optimizer volumes, broad geographic growth and increased e-mobility powertrain-kit shipments as revenue drivers. Q2 e-mobility kit revenue was $20.4 million; first-half revenue was $30.8 million.
- First-half 2020 included $51.4 million of U.S. safe-harbor-related revenue that did not recur in 2021. Conversely, the absence of those lower-margin sales contributed to higher first-half gross margin.
- Gross margin improved year over year, supported by product mix, lower U.S. customs duties, favorable currency movements and cost reductions. Higher shipping costs, warranty and support costs, larger-customer pricing and lower-margin non-solar businesses partly offset those gains.
- Operating expenses increased: first-half R&D rose 33.2%, sales and marketing 24.7%, and general and administrative 30.1%, with management citing headcount, compensation and growth investments.
- First-half operating cash flow was lower than the prior year, notably due to a $128.6 million increase in trade receivables; the comparable 2020 period benefited from a large receivables decrease.
Outlook, risks and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management said cash, cash equivalents and operating cash generation should cover anticipated cash needs for at least the next 12 months, including planned capital spending. It reported approximately $80.0 million of capital-expenditure commitments and $874.9 million of non-cancelable purchase obligations, of which $4.6 million was provisioned for loss. Sella 1 reached full manufacturing capacity in Q2; Sella 2, a planned 2 GWh lithium-ion cell factory in Korea, was under construction and expected to begin manufacturing ramp-up in the first half of 2022. On August 2, 2021, the company agreed that Samsung SDI would supply 1 GW of lithium-ion cells during 2022.
Management reported higher shipping rates and temporary Vietnam manufacturing-line shutdowns due to government lockdowns, while other facilities were operating at or near full capacity. Key disclosed risks include COVID-19 and macroeconomic effects, freight and component availability, dependence on contract manufacturers and limited-source suppliers, product demand and policy changes, competition, foreign-exchange volatility, and execution of expansion plans. Two contract manufacturers represented 35.7% of trade payables at quarter-end. Two customers represented approximately 30.46% of net trade receivables.
Legal matters include patent litigation with SMA in Germany and Huawei in China, and a former-consultant claim. Huawei matters include an appealed first-instance judgment for approximately $7.8 million and a preliminary injunction affecting seven inverter models; the company says the judgment is not effective or enforceable pending appeal and that it has meritorious defenses. Accrued legal claims were $9.3 million. The company also recorded $2.1 million of asset write-offs in the first half and received $0.9 million from the Kokam acquisition escrow in Q2. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist as freight costs, warranty expenses and product mix evolve.
- Receivables collection and operating cash conversion, given the first-half receivables increase and lower operating cash flow.
- Progress on supplier capacity, Vietnam production stability, Sella 2 construction and the Samsung SDI supply agreement.
- Outcomes and potential financial or operational effects of the Huawei, SMA and former-consultant disputes.
- Foreign-exchange exposure: management estimated that a hypothetical 10% currency move could change first-half net income by $32.9 million for EUR/USD, $10.5 million for NIS/USD and $22.7 million for KRW/USD.
- Conversion and dilution exposure from the 2025 notes; the filing reports an if-converted value $169.1 million above principal at June 30, 2021.