SolarEdge Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. SolarEdge designs and sells solar power optimizers, inverters and related monitoring and energy products. Its reportable segment is Solar; other activities include energy storage, e-mobility, UPS and automation machines. Financial statements are unaudited and in U.S. dollars.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $338.1 million | $410.6 million | $1,101.2 million | $1,007.4 million |
| Gross profit / margin | $108.1 million / 32.0% | $139.3 million / 33.9% | $351.0 million / 31.9% | $336.1 million / 33.4% |
| Operating income / margin | $30.4 million / 9.0% | $66.0 million / 16.1% | $128.1 million / 11.6% | $139.4 million / 13.8% |
| Net income attributable to SolarEdge | $43.8 million | $41.6 million | $122.7 million | $93.8 million |
| Diluted EPS | $0.83 | $0.81 | $2.33 | $1.87 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $195.4 million | $175.9 million |
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $1,048.1 million. Marketable securities totaled $131.6 million, short-term bank deposits $20.0 million, and restricted deposits $2.2 million.
- On September 25, the company issued $632.5 million principal of 0.00% convertible senior notes due 2025. Net proceeds were approximately $618 million; the balance-sheet carrying amount was $570.3 million after discount and issuance costs. The notes have a 2.10% effective interest rate under the accounting then applied.
- Current bank loans and accrued interest were $15.6 million. The company said cash and operating cash generation should cover anticipated needs, including capital spending, for at least 12 months.
- Nine-month investing cash flow was positive $0.7 million, including $89.8 million of capital investments. Financing provided $637.3 million, principally from the notes. Inventory increased $122.0 million and reduced operating cash flow.
- Commitments included $326.7 million of non-cancellable purchase obligations and $114.5 million of off-balance-sheet capital expenditure commitments.
Material changes and operating performance
- Q3 revenue fell 17.6% year over year, while nine-month revenue rose 9.3%. Management attributed the quarterly decline mainly to weaker U.S. sales amid COVID-19, partly offset by $18.5 million of higher sales in Europe and the rest of the world. Non-U.S. markets generated 68.4% of Q3 revenue versus 51.8% a year earlier.
- Q3 gross margin declined to 32.0% from 33.9%; nine-month margin declined to 31.9% from 33.4%. The filing cites reduced volumes, warranty support costs, production and inventory costs, COVID-related lower manufacturing volumes, and lower gross profit in newer businesses. Lower logistics and tariff costs and warranty accrual reductions partly offset pressure.
- Q3 operating income declined to $30.4 million from $66.0 million even as net income increased to $43.8 million from $41.6 million. Net financial income of $15.8 million, primarily associated with foreign-exchange movements, supported Q3 results; nine-month net financial income was $10.7 million versus $22.4 million of expense in 2019.
- Research and development expense increased 32.8% in Q3 and 33.7% for the nine-month period, primarily reflecting personnel and product-development investment. Nine-month net income attributable to SolarEdge increased to $122.7 million from $93.8 million.
- Solar segment revenue was $312.5 million in Q3; “All other” revenue was $25.6 million, with a segment loss of $6.6 million. Solar segment profit was $56.7 million.
Outlook, risks and unusual items
- Management expected Q4 2020 revenue to increase slightly from Q3, with lower European seasonal revenue offset by anticipated U.S. growth and e-mobility powertrain-kit sales. It expected gross margin to remain similar to Q3. These are expectations, not guarantees.
- COVID-19 reduced installation activity in some regions and led some customers to delay or cancel orders. Management reported strong European and rest-of-world installations but a slower U.S. recovery; customer inventory drawdowns also weighed on Q3 orders. It cautioned that demand, inventory and cash flow could remain affected.
- Supply risk remains material: two contract manufacturers represented 47.4% of trade payables, and the company relies on limited or single-source component suppliers. Sella 1 manufacturing ramp-up began in September 2020 and was expected to continue through Q2 2021.
- Foreign-exchange exposure is significant. Management estimated that a hypothetical 10% currency movement could change nine-month net income by $52.2 million for EUR/USD, $12.4 million for NIS/USD and $10.4 million for KRW/USD.
- Notable items include $4.9 million of other operating income from an indemnification related to a prior Kokam settlement, and a $1.55 million provision for a Chinese patent judgment under appeal. A German court invalidated one of two SMA patents in October 2020; proceedings regarding the other remained stayed.
- The notes may require cash payments upon conversion or repurchase following a fundamental change; the company disclosed that it might not have sufficient cash or financing to meet such obligations. Other risks include solar demand and policy changes, tariffs, competition, warranty costs, customer credit, and litigation.
Important facts for investors to verify
- Whether U.S. demand recovered as anticipated and whether Q4 revenue and gross-margin expectations were achieved.
- Whether inventory growth, purchase commitments and capital spending affect cash conversion and liquidity.
- The contribution and losses of non-solar businesses, and progress on Sella 1 and other manufacturing investments.
- The impact of foreign-exchange movements and any changes to hedging positions.
- Developments in the Huawei and SMA disputes, and the terms, dilution potential and potential cash obligations of the 2025 convertible notes.