SolarEdge Technologies, Inc. — Q3 2019 Form 10-Q
Business and period: SolarEdge designs and sells solar power optimizers, inverters, monitoring and storage solutions. It has also expanded into uninterruptible power supplies, batteries and electric-vehicle powertrain technology through acquisitions. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $410.6 million | $236.6 million | $1,007.4 million | $673.6 million |
| Gross profit / margin | $139.3 million / 33.9% | $78.0 million / 33.0% | $336.1 million / 33.4% | $239.5 million / 35.6% |
| Operating income | $66.0 million | $34.0 million | $139.4 million | $115.5 million |
| Net income attributable to SolarEdge | $41.6 million | $45.6 million | $93.8 million | $115.9 million |
| Diluted EPS | $0.81 | $0.95 | $1.87 | $2.41 |
| Net cash from operating activities | $68.7 million | $34.3 million | $175.9 million | $142.2 million |
Balance sheet and liquidity
- At September 30, 2019, cash and cash equivalents were $247.3 million; marketable securities totaled $178.2 million, and short-term and restricted bank deposits totaled $7.4 million.
- Current assets were $834.8 million versus current liabilities of $335.4 million. Trade receivables were $292.2 million, up from $173.6 million at year-end 2018.
- Bank loans totaled approximately $21.0 million on the balance sheet, including current maturities; management describes the acquired Kokam and SMRE loan balances as $17.9 million and $3.0 million, respectively. The loans have variable rates and staggered maturities.
- Management said cash, cash equivalents and operating cash generation should meet anticipated needs for at least the next 12 months. No off-balance-sheet arrangements were reported.
- Nine-month investing cash use was $58.4 million, including $39.7 million of capital expenditures and $38.4 million for the SMRE acquisition, partly offset by marketable-security maturities and sales. Financing cash use was $68.3 million, primarily reflecting $67.1 million related to purchases of non-controlling interests.
Changes versus the prior period
- Q3 revenue rose 73.5% year over year; nine-month revenue rose 49.6%. Management attributed growth to higher inverter and optimizer sales, geographic expansion and acquired businesses. Acquired businesses contributed $22.8 million of Q3 revenue and $59.9 million for the nine-month period.
- Shipments increased: Q3 inverters were 187,887 and power optimizers 4.59 million; nine-month shipments were 478,676 and 11.35 million, respectively.
- Q3 gross margin improved 0.9 percentage points, while nine-month gross margin fell 2.2 points. Management cited tariff, shipping and air-freight costs, warranty accruals, acquired-product mix and facility underutilization as pressures on year-to-date margin.
- Despite revenue growth, attributable net income declined 8.6% in Q3 and 19.1% for the nine months. Higher foreign-exchange expenses, taxes and operating costs contributed; nine-month net financial expense rose to $22.4 million from $2.6 million.
- Warranty obligations rose to $171.4 million from $121.8 million at year-end 2018. Trade receivables also increased substantially, contributing to working-capital use.
Outlook, risks and unusual items
- The filing provides no specific forward revenue or earnings guidance. Management identifies demand for solar, policy and incentive changes, tariffs, competition, industry cyclicality, product quality, forecasting, and the ability to scale manufacturing as key risks.
- SolarEdge relies on a contract manufacturer and limited or single-source suppliers; one vendor represented 59.2% of trade payables at quarter-end. A major customer represented 24.5% of trade receivables, and two customers together represented 32.3% of Q3 revenue.
- Tariffs on Chinese-made goods imported into the U.S. increased from 10% to 25% effective June 1, 2019. The company raised U.S. prices to offset tariffs, but reported higher tariff and logistics costs.
- Foreign-exchange movements were a significant earnings headwind. For the nine-month period, management estimated that a hypothetical 10% currency move would change net income by $33.4 million for the Euro, $9.8 million for the Israeli shekel and $1.0 million for the Korean won. No currency forwards were outstanding at quarter-end.
- The death of founder Guy Sella, who had served as CEO and Chairman shortly before his passing, resulted in $8.3 million of Q3 non-recurring payroll, bonus and accelerated stock-compensation expense.
- SMRE was acquired in January 2019; SolarEdge held 99.8% by September 30. Its purchase-price allocation remained preliminary. The company also increased its Kokam ownership to 94.3%. Acquired businesses contributed revenue but also added costs and goodwill/intangibles.
- Non-cancellable purchase obligations were approximately $363.0 million, with $2.2 million provisioned for loss; capital-expenditure commitments were approximately $75.1 million. Legal matters include Huawei patent lawsuits seeking about $4.3 million in damages and an SMRE shareholder lawsuit seeking approximately $3 million. The company said it believes it has meritorious defenses and does not expect litigation to materially affect its financial statements.
- The company adopted the new lease standard in 2019, recognizing $34.6 million of operating lease right-of-use assets and $29.1 million of long-term operating lease liabilities. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth and shipment momentum continue, and how much growth is attributable to acquired businesses versus the core solar business.
- Whether tariff, freight, product mix and warranty costs stabilize enough to recover year-to-date gross-margin declines.
- Collection of the sharply higher receivables balance and the effects of customer concentration on liquidity and credit risk.
- The scale and duration of foreign-exchange exposure, including its impact on reported earnings.
- Warranty-cost trends, the final SMRE and Kokam purchase accounting, and the integration and profitability of the acquired businesses.
- Any developments in the disclosed litigation, purchase commitments and manufacturing-supplier dependencies.