Business context and reporting period
SolarEdge Technologies, Inc. designs and sells solar power optimizers, inverters and related monitoring and energy products, with additional businesses in energy storage, critical power, e-mobility and automation machinery. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $331.9 | $325.0 | $763.1 | $596.9 |
| Gross profit / margin | $103.0 / 31.0% | $110.7 / 34.1% | $243.0 / 31.8% | $196.8 / 33.0% |
| Operating income | $30.0 | $45.4 | $97.7 | $73.4 |
| Net income attributable to SolarEdge | $36.7 | $33.1 | $78.9 | $52.1 |
| Diluted EPS | $0.70 | $0.66 | $1.51 | $1.05 |
| Operating cash flow | — | — | $167.1 | $107.2 |
Q2 revenue fell from $431.2 million in Q1 2020, reflecting weaker installations, particularly in the United States. For the six-month period, revenue grew 27.8% and attributable net income grew 51.4% year over year. Q2 operating income declined despite higher revenue; reported net income benefited from $11.6 million of net financial income, primarily foreign-exchange gains. Six-month results included $4.9 million of other operating income from indemnification related to a Kokam claim settlement.
Liquidity, debt and other financial position
At June 30, 2020, cash and cash equivalents were $428.4 million; short- and long-term marketable securities totaled $158.7 million, restricted deposits were $2.1 million and short-term bank deposits were $3.4 million. Current assets were $1,073.0 million versus current liabilities of $405.1 million. Stockholders’ equity was $924.8 million. Cash increased $202.9 million during the first half.
Six-month investing cash flow was positive $26.9 million, including $53.7 million of property, plant and equipment purchases. Financing cash flow was positive $9.0 million. Kokam had $15.2 million of bank loans outstanding at quarter-end, due in two installments through December 31, 2020, at a 1.64% annual interest rate. Management said available cash and operating cash flow should cover anticipated needs, including capital commitments, for at least 12 months.
Material changes and management commentary
- Q2 revenue rose 2.1% year over year, while gross margin declined 3.1 percentage points. Management cited tariffs and logistics costs, COVID-related lower manufacturing volumes and production costs, product and geographic mix, and lower gross profit in acquired businesses. The six-month gross margin also declined, from 33.0% to 31.8%.
- Q2 operating expenses increased 11.8% year over year, led by a 29.1% increase in research and development. Sales and marketing fell 5.4%, partly due to canceled or postponed events and reduced travel.
- Management said manufacturing facilities remained operational at nearly full capacity, while COVID-related restrictions reduced installation rates in certain regions. U.S. installations gradually recovered from May but remained slightly below the prior-year rate; some European markets showed continued installation growth.
- To manage the downturn, the company reduced hiring, eliminated some positions, scrutinized spending, reprioritized R&D, and temporarily suspended planned salary increases. Senior executives and directors also reduced compensation. Management expected these actions to affect Q3 results.
- Operating cash flow included a $94.2 million increase in inventories, partly offset by a $116.0 million decrease in receivables. Management warned inventory could rise further in the second half as demand slows while previously incurred purchase commitments remain.
Outlook, risks and contingencies
The filing gives no numeric revenue or earnings guidance. Management expected Q3 U.S. revenue to be below Q3 2019, with continued strength in Europe and the rest of the world; it expected gross margin and several expense categories to remain at levels similar to Q2. It also expected profitability to decrease in coming quarters amid COVID-19 uncertainty.
Key risks include the pandemic’s duration and economic effects, solar demand and policy changes, tariffs, foreign-exchange movements, customer credit, and reliance on two contract manufacturers and limited or single-source suppliers. The two contract manufacturers represented 54.7% of trade payables at quarter-end. The company reported approximately $335.3 million of non-cancellable purchase obligations, net of a recorded $3.8 million loss provision, and $80.3 million of off-balance-sheet capital expenditure commitments. It also disclosed guarantees totaling approximately $20.9 million.
Legal matters include patent litigation brought by SMA in Germany, Huawei patent claims in China, a former-shareholder claim related to SMRE, and a former consultant’s claim. The company said it believes it has meritorious defenses and intends to defend the claims. The filing does not provide a clear estimate of potential losses for these matters. Management reported no material changes to the risk factors from its prior filings and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether U.S. installations and revenue recover, and whether European and other markets offset continued U.S. weakness.
- Whether gross margins stabilize as expected, given tariffs, logistics, product mix, COVID-related production costs and acquired-business performance.
- Inventory levels, purchase commitments and cash conversion as demand and manufacturing plans adjust.
- The effects of foreign-exchange fluctuations, including the filing’s stated sensitivity of net income to a hypothetical 10% currency-rate change.
- Potential outcomes and financial exposure from the disclosed litigation, guarantees and capital commitments.