SolarEdge Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results are compared with Q1 2020; balance-sheet figures are compared with December 31, 2020. The company designs and sells solar power optimizers, inverters, monitoring and related smart-energy products. Amounts below are in U.S. dollars unless noted.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $405.5 million | $431.2 million | Down 6.0% |
| Gross profit / margin | $140.1 million / 34.5% | $140.0 million / 32.5% | Margin up 2.0 percentage points |
| Operating income / margin | $44.1 million / 10.9% | $67.8 million / 15.7% | Down 34.9% |
| Net income / diluted EPS | $30.1 million / $0.55 | $42.2 million / $0.81 | Net income down 28.8% |
| Operating cash flow | $24.1 million | $107.7 million | Down $83.7 million |
| Capital expenditures | $24.5 million | $27.1 million | Down $2.5 million |
Revenue from the Solar segment was $376.3 million, down from $407.6 million; “All other” segment revenue was $29.1 million, up from $23.6 million. Solar segment profit was $85.5 million versus $88.0 million, while the other segments recorded a $13.6 million loss versus a $9.3 million loss. Solar product blended ASP per watt declined 3.6%. Shipments included 3.7 million power optimizers and 181,905 inverters, compared with 5.1 million and 202,009, respectively, in Q1 2020.
Liquidity, debt and balance sheet
At March 31, 2021, cash and cash equivalents were $685.2 million; short-term bank deposits were $43.6 million, marketable securities totaled $433.9 million, and restricted deposits were $2.5 million. Cash and cash equivalents declined $142.0 million from year-end. Current assets were $1.585 billion and current liabilities $397.7 million.
Current bank-loan maturities and accrued interest were $16.2 million. Convertible senior notes had a $632.5 million principal amount and $619.4 million net carrying value; the notes bear 0% stated interest and mature in 2025. The company reported $24.9 million of finance lease liabilities and $32.7 million of operating lease liabilities. Stockholders’ equity was $1.100 billion.
Investing cash outflow was $153.6 million, driven chiefly by $186.5 million of marketable-security purchases, partly offset by maturities and bank-deposit withdrawals. Financing cash outflow was $2.1 million. Operating cash flow was pressured by a $57.4 million increase in receivables and a $39.0 million decrease in payables.
Material changes and management commentary
- Revenue declined primarily because Q1 2020 included $51.4 million of U.S. safe-harbor-related revenue, alongside softer U.S. demand and a shift toward larger U.S. customers with lower pricing. Europe and other regions partly offset the U.S. decline; international markets represented 59.7% of revenue versus 42.6% a year earlier.
- Gross margin improved due to the absence of lower-margin safe-harbor sales, lower shipping and logistics costs, reduced U.S. tariff charges, favorable currency effects and cost reductions. Higher warranty costs, inventory valuation accruals and weaker results in certain non-solar businesses partly offset those benefits.
- Operating expenses rose: R&D increased 28.0% to $47.0 million, sales and marketing rose 11.0% to $26.9 million, and G&A increased 22.6% to $19.8 million. The increases reflected hiring, compensation and equity-based compensation; G&A also included a higher provision related to legal claims.
- Management said Q1 revenue increased 13.2% from Q4 2020, reflecting recovery and stronger U.S. demand, though U.S. installation rates had not returned to pre-pandemic levels. It reported operations and manufacturing generally remained operational, while travel restrictions continued to affect the business.
Outlook, risks and unusual items
- No specific revenue or earnings guidance for future periods is provided in the supplied filing text. Management expected Sella 1 in Israel to reach full manufacturing capacity in Q2 2021; Sella 2, a planned lithium-ion cell factory in Korea, was expected to begin operations in the first half of 2022.
- Management believed cash, cash generation and other resources would cover anticipated needs for at least 12 months, including capital expenditures. The company disclosed approximately $84.8 million of capital-expenditure commitments and $699.3 million of non-cancelable purchase obligations, with a $5.0 million provision for loss against the latter.
- Two contract manufacturers accounted for 37.9% of trade payables at quarter-end. The filing also identifies reliance on limited or single-source suppliers, component availability, manufacturing capacity, ocean freight, COVID-19 effects, foreign-exchange movements, solar demand and policy changes as risks.
- Huawei litigation included an injunction affecting seven inverter models and first-instance damages judgments of approximately $1.6 million and $7.7 million. The company appealed; the judgments were not effective or enforceable pending appeal. It reported $9.3 million accrued for legal claims overall. A separate SMA patent dispute and a former-consultant lawsuit are also described.
- The company early adopted ASU 2020-06 for convertible-note accounting, increasing the notes’ net carrying value by $45.3 million and reducing additional paid-in capital by $36.3 million, among other adjustments. Q1 included $2.2 million of asset write-offs; Q1 2020 included $4.9 million of indemnification income relating to a Kokam pre-acquisition claim.
- The filing reports no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether U.S. demand and installation activity recovered, and whether international growth and pricing trends persisted after Q1.
- Whether gross-margin improvement continued despite warranty costs, inventory accruals and cost pressures.
- Cash conversion and working-capital trends, especially receivables, payables and inventory, alongside planned capital spending and purchase commitments.
- Supplier and manufacturing capacity, including Sella 1 ramp-up and Sella 2 construction and timing.
- Developments in the Huawei and other legal matters, including appeals, injunction compliance and potential financial exposure.
- Foreign-exchange exposure and the effectiveness of hedging; the filing estimates that a hypothetical 10% currency move could change quarterly net income by $14.1 million for EUR/USD, $4.5 million for NIS/USD and $12.8 million for KRW/USD.