Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Such statements, include but are not limited to statements regarding our expectations as to future financial performance; expense levels; liquidity sources; the capabilities and performance of our technology and products and planned changes; timing of new product releases; our business strategies, including anticipated trends; growth and developments in markets in which we target; the anticipated market adoption of our current and future products; performance in operations, including component supply management; product quality and customer service; risks related to supply chain disruptions, the ongoing COVID-19 pandemic; geo-political events, such as the conflict inUkraine ; new government regulations, such as the Inflation Reduction Act of 2022 ("IRA"); and the anticipated benefits and risks relating to our recent acquisitions. You should be aware that the forward-looking statements contained in this report are based on our current views and assumptions, and are subject to known and unknown risks, uncertainties and other factors that may cause actual events or results to differ materially. For a discussion identifying some of the important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see below, those discussed in the section entitled "Risk Factors" herein and those included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed onFebruary 11, 2022 (the "Form 10-K"). Unless the context requires otherwise, references in this report to "Enphase," "we," "us" and "our" refer toEnphase Energy, Inc. and its consolidated subsidiaries.
Business Overview
We are a global energy technology company. We deliver smart, easy-to-use solutions that manage solar generation, storage and communication on one platform. We revolutionized the solar industry with our microinverter technology and we produce a fully integrated solar-plus-storage solution. As ofSeptember 30, 2022 , we have shipped more than 52 million microinverters, and over 2.7 million Enphase residential and commercial systems have been deployed in more than 145 countries. The Enphase® Energy System™, powered by IQ® Microinverters and IQ™ Batteries, our current generation integrated solar, storage and energy management offering, enables self-consumption and delivers our core value proposition of yielding more energy, simplifying design and installation, and improving system uptime and reliability. The IQ family of microinverters, like all of our previous microinverters, is fully compliant with NEC 2014 and 2017 rapid shutdown requirements. Unlike string inverters, this capability is built-in, with no additional equipment necessary. The Enphase Energy System brings a high technology, networked approach to solar generation plus energy storage, by leveraging our design expertise across power electronics, semiconductors and cloud-based software technologies. Our integrated approach to energy solutions maximizes a home's energy potential while providing advanced monitoring and remote maintenance capabilities. The Enphase Energy System with IQ uses a single technology platform for seamless management of the whole solution, enabling rapid commissioning with the Enphase® Installer App; consumption monitoring with IQ™Gateway with IQ Combiner+™, Enphase® App, a cloud-based energy management platform, and our IQ™ Battery. System owners can use the Enphase App to monitor their home's solar generation, energy storage and consumption from any web-enabled device. Unlike some of our competitors, who utilize a traditional inverter, or offer separate components of solutions, we have built-in system redundancy in both photovoltaic generation and energy storage, eliminating the risk that comes with a single point of failure. Further, the nature of our cloud-based, monitored system allows for remote firmware and software updates, enabling cost-effective remote maintenance and ongoing utility compliance. InMarch 2022 , we completed the acquisition ofSolarLeadFactory, LLC . ("SolarLeadFactory"), a privately-held company. SolarLeadFactory provides high quality leads to solar installers. As part of the purchase price, we paid approximately$26.1 million in cash onMarch 14, 2022 . In addition to the purchase price paid, we are obligated to pay up to approximately$10.0 million in shares of our common stock in the second quarter of 2023 subject to achievement of certain operational and employment targets.Enphase Energy, Inc. | 2022 Form 10-Q | 38
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Further details on the above acquisition may be found in Note 4 , "Business Combinations," in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. OnOctober 10, 2022 , we completed the acquisition of 100% of the voting interest ofGreenCom Networks AG , a privately-held company. GreenCom provides Internet of Things software solutions for customers to connect and manage a wide range of distributed energy devices within the home. As part of the consideration, we paid approximately$34.9 million in cash. We are currently in the process of completing the preliminary purchase price allocation, which will be included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Factors Affecting our Business and Operations
Supply Chain Constraints. Due to increased demand across a range of industries, the global supply chain and the semiconductor industry have experienced significant disruptions in recent periods. We have seen supply chain challenges and logistics constraints increase, including component shortages, which have, in certain cases, caused delays in critical components and inventory, longer lead times, and have resulted in increased costs. We believe these supply chain challenges will persist for the foreseeable future. In addition, the impact of inflation on the price of components, raw materials and labor has increased, although in the near term we have not seen our gross margin impacted by inflation as we increased prices for our product offerings in the second half of 2021 and in 2022 as well. During the three months endedSeptember 30, 2022 , overall reliability of supply improved and the majority of our suppliers were able to deliver components by their promised, though in many cases, extended, lead times. We continue to work to mitigate the effects from supply chain constraints and the impacts of inflation. In the event we are unable to mitigate the impact of delays and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our products, which would adversely impact our cash flows and results of operations, including revenue and gross margin. COVID-19 Pandemic. The impact of the COVID-19 pandemic and countermeasures taken to contain its spread remain dynamic. We continue to monitor the situation and actively assess further implications for our business, supply chain, fulfillment operations and overall demand. We continue to take meaningful precautions in accordance with relevant guidelines to protect the health and safety of our employees. The extent of the continuing impact of COVID-19 on our operational and financial performance will depend on various developments, including the duration and spread of the virus and its variants, impact on our end-customers' spending, volume of sales, impact on our partners, suppliers and employees, and actions that may be taken by governmental authorities, including the effects of government-mandated lockdowns in several cities inChina during 2022. If the COVID-19 pandemic or its adverse effects become more severe or prevalent or are prolonged in the locations where we, our customers, suppliers or manufacturers conduct business, or we experience more pronounced disruptions in our business or operations, or in economic activity and demand for our products and services generally, our business and results of operations in future periods could be materially adversely affected. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic may be found in Part I, Item 1A "Risk Factors" of the Form 10-K. Inflation Reduction Act of 2022. InAugust 2022 , the IRA was enacted, which includes extension of the investment tax credit ("ITC") and production tax credit ("PTC") for solar as well as a new advanced manufacturing PTC to incentivize clean energy component sourcing and production, including for the production of solar related components, battery cells and battery packs. The IRA provides for an advanced manufacturing PTC on microinverters of11 cents per alternating current watt basis. The manufacturing PTC for each component including on microinverters decreases by 25% each year beginning in 2030 and ending after 2032. Under the IRA, the ITC was extended until 2032 to allow a qualifying homeowner to deduct 30% of the cost of installing residential solar systems from theirU.S. federal income taxes, thereby returning a material portion of the purchase price of the residential solar system to homeowners. Under the terms of the current extension, the ITC will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034, and further reduce to 0.0% after the end of 2034 for residential solar systems, unless it is extended before that time. We believe the enactment of the IRA is favorable to our overall business worldwide; however, we are continuing to evaluate the overall impact and applicability of the IRA to our results of operations going forward, including the revisions to theU.S. Internal Revenue Code, which includes a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning afterDecember 31, 2022 .Russia and Ukraine Conflict. InFebruary 2022 , armed conflict escalated betweenRussia andUkraine .The United States and certain other countries have imposed sanctions onRussia and could impose further sanctions, which could damage or disrupt international commerce and the global economy. While we do not have sales orEnphase Energy, Inc. | 2022 Form 10-Q | 39
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operations inRussia orUkraine , it is possible that the conflict or actions taken in response, could adversely affect some of our markets and suppliers, the broader economic and financial markets, or costs and availability of components and materials, or cause further supply chain disruptions.
Products
Our Enphase IQ Battery storage systems, with usable and scalable capacity of 10.1 kWh and 3.4 kWh, are based on our Ensemble OS™ energy management technology, which powers the world's first grid-independent microinverter-based storage system to customers inNorth America , and has been shipping since the second quarter of 2020. The Enphase IQ Battery storage systems feature our embedded grid-forming microinverters that enable the Always-On capability that keeps homes powered when the grid goes down, and the ability to save money when the grid is up. These systems are now compatible with both new and existing Enphase IQ solar systems with M-series™, IQ6™ and IQ7™ microinverters. InJanuary 2021 , we announced expanded compatibility of the Enphase® Energy System™ with our M-series microinverters and string inverters. The expanded compatibility provides approximately 300,000 additional Enphase system owners with the possibility of achieving grid-agnostic energy resilience through the Enphase Upgrade Program. The program provides solar installers the opportunity to renew engagements with the installed base of Enphase system owners through microinverter, solar, and energy storage upgrades, and reflects our continued commitment to reliability, service, and long-term customer relationships. We currently ship our Enphase IQ Battery storage systems to customers inNorth America ,Belgium andGermany . Enphase IQ Batteries inBelgium andGermany can be installed with both single-phase and three-phase third-party solar energy inverters, enabling homeowners to upgrade their existing home solar systems with a residential battery storage solution that reduces costs while providing increased self-reliance. During the second quarter of 2021, we introduced IQ™ Load Controller for our Enphase IQ Battery storage systems. Load control allows homeowners to decide what gets power in their home in the event of a grid outage, with the ability to choose up to four loads. These loads will be on when the grid is present and shed automatically in the event of a grid failure. We began shipping our IQ Load Controller, which includes updated features, inDecember 2021 . Our Enphase Energy System integrates with most leading models of home standby AC generators, providing enhanced performance and a glitch-free transition for homeowners during power outages. Homeowners can also monitor real-time power flow, start and stop their generator remotely, set quiet hours to prevent their generator from operating until their batteries fall below a designated threshold, and control it all with the Enphase® App. The new feature functions without a generator automatic transfer switch and is designed to eliminate the power glitches that reset home electronic appliances when switching to generator power. We began shipping our Enphase Energy System with IQ8™ microinverters in the fourth quarter of 2021 to customers inNorth America . Our investment in custom application specific integrated circuit chips has resulted in a software-defined microinverter smart enough to form a microgrid. Many homeowners often assume that their solar systems will function if the sun is shining, even during a power outage. This has unfortunately not been true until the introduction of IQ8. Now, with IQ8 homeowners can realize the true promise of solar - to make and use their own power. IQ8 solar microinverters can provide Sunlight Backup™ during an outage, even without a battery. In the second quarter of 2022 the Enphase IQ8 Microinverter-based system was certified by UL, a global safety science leader, for the new North American safety and grid interconnection standards for connecting solar inverters, energy storage systems, and distributed energy resources to the grid.Enphase Energy, Inc. | 2022 Form 10-Q | 40
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We participate in the ConnectedSolutions program, which is an incentive program implemented by two utilities in the Northeast region ofthe United States to reduce electrical demand during high-use periods. Enphase Storage customers inConnecticut ,Massachusetts andRhode Island can sign-up, monitor, track money earned, and control participation in the program using the Enphase App. We announced during the third quarter of 2021 our participation in Hawaiian Electric's Battery Bonus grid services program. This program offers a new incentive for homeowners on the island ofOahu to install a new home battery. During the fourth quarter of 2021, we announced our participation in theArizona Public Service ("APS") residential battery services program. The APS program offers homeowners who install Enphase IQ Batteries in its service territory the chance to participate and earn money through one-time, upfront incentives. In addition, we announced during the first quarter of 2022 that theVermont -based utilityGreen Mountain Power ("GMP") will offer Enphase Energy Systems to its customers in a cutting-edge battery lease grid services pilot program. Homeowners can also enroll in GMP's "Bring Your Own Device" grid services program, which enables customers with their own Enphase Energy Systems to participate and earn an up-front incentive. These grid services programs enable utilities to leverage the IQ Battery instead of turning on polluting peaker plants, while generating an income stream for the IQ Battery owner. While these programs do not currently drive material revenues, we believe that facilitating grid services participation for our customers can reduce the lifetime cost of IQ Batteries and help drive increased demand for our Enphase Energy Systems.
Results of Operations
Net Revenues Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Net revenues$ 634,713 $ 351,519 $ 283,194 81 %$ 1,606,201 $ 969,330 $ 636,871 66 %
Three months ended
Net revenues increased by 81%, or$283.2 million , in the three months endedSeptember 30, 2022 , as compared to the same period in 2021, driven primarily by a 67% increase in microinverter units volume shipped and a 104% increase in Enphase IQ Battery Megawatt-hour ("MWh") shipped. In the three months endedSeptember 30, 2022 , consumer demand increased and component supply improved as we sold approximately 4.3 million microinverter units, as compared to approximately 2.6 million units in the three months endedSeptember 30, 2021 . In the three months endedSeptember 30, 2022 , we also increased shipments of our Enphase IQ Batteries to customers inthe United States andEurope to 133.6 MWh as compared to 65.4 MWh shipped in the same period in 2021. The average selling price of our microinverter products increased by 9% in the three months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily driven by a favorable product mix as we sold more IQ8 microinverters relative to IQ7 microinverters in the three months endedSeptember 30, 2022 and increased prices for our product offerings in the second half of 2021 and in 2022 to partially offset the impact of higher logistics costs and component costs from global supply chain pricing pressures.
Nine months ended
Net revenues increased by 66%, or$636.9 million , in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, driven primarily by a 42% increase in microinverter units volume shipped and a 156% increase in Enphase IQ Battery MWh shipped. In the nine months endedSeptember 30, 2022 , consumer demand increased and component supply improved, as we sold approximately 10.5 million microinverter units, as compared to approximately 7.4 million units in the nine months endedSeptember 30, 2021 . In the nine months endedSeptember 30, 2022 , we also increased shipments of our Enphase IQ Batteries to customers inthe United States andEurope to 386.4 MWh, as compared to 150.8 MWh shipped in the same period in 2021. The average selling price of our microinverter products increased by 14% in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily driven by a favorable product mix, as we sold more IQ8 microinverters relative to IQ7 microinverters in the nine months endedSeptember 30, 2022 and increased prices for our product offerings in the second half of 2021 and in 2022 to partially offset the impact of higher logistics costs and component costs from global supply chain pricing pressures.Enphase Energy, Inc. | 2022 Form 10-Q | 41
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Cost of Revenues and Gross Margin
Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages)
Cost of revenues$ 366,797 $ 211,161 $ 155,636 74 %$ 942,307 $ 578,222 $ 364,085 63 % Gross profit$ 267,916 $ 140,358 $ 127,558 91 %$ 663,894 $ 391,108 $ 272,786 70 % Gross margin 42.2 % 39.9 % 2.3 % 41.3 % 40.3 % 1.0 %
Three months ended
Cost of revenues increased by 74%, or$155.6 million , in the three months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to higher volume of microinverter units sold, higher Enphase IQ Battery MWh shipped, and higher shipping and warranty costs associated with the higher volume of sales globally. The increase was also due to$1.4 million higher amortization of developed technology and$0.4 million higher stock-based compensation. Gross margin increased by 2.3 percentage points in the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to an increase in average selling prices driven by a favorable product mix as we sold more IQ8 microinverters relative to IQ7 microinverters in the three months endedSeptember 30, 2022 , and price increases to our products in the second half of 2021 and in 2022, as well as cost management efforts. This increase was partially offset by unfavorable impact of 2.1 percentage points from currency fluctuations in the euro relative to theU.S. dollar when we convert the current quarter euro denominated revenue into theU.S. dollar using the comparable prior period's average currency exchange rate and 0.2 percentage points from higher amortization of developed technology.
Nine months ended
Cost of revenues increased by 63%, or$364.1 million , in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to higher volume of microinverter units sold, higher Enphase IQ Battery MWh shipped, and higher shipping and warranty costs associated with the higher volume of sales, as well as higher shipping costs of our products due to supply chain disruptions and constraints globally. The increase was also due to$4.2 million higher amortization of developed technology and$4.2 million higher stock-based compensation. Gross margin increased by 1.0 percentage point in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to an increase in average selling prices driven by a favorable product mix, as we sold more IQ8 microinverters relative to IQ7 microinverters in the nine months endedSeptember 30, 2022 , and price increases to our products in the second half of 2021 and in 2022, as well as cost management efforts. The increase was partially offset by unfavorable impact of 1.4 percentage points from currency fluctuations in the euro relative to theU.S. dollar using the comparable prior period's average currency exchange rate and 0.3 percentage point from higher amortization of developed technology.Enphase Energy, Inc. | 2022 Form 10-Q | 42
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Table of Contents Research and Development Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Research and development$ 44,188 $ 29,411 $ 14,777 50 %$ 119,163 $ 73,937 $ 45,226 61 % Percentage of net revenues 7 % 8 % 7 % 8 %
Three months ended
Research and development expense increased by 50%, or$14.8 million , in the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to$12.3 million of higher personnel-related expenses and$2.5 million of equipment expense associated with our investment in the development, introduction and qualification of new product innovation. The increase in personnel-related expenses was primarily due to hiring and retention programs for employees inNew Zealand ,India andthe United States , which increased total compensation costs, including stock-based compensation. The amount of research and development expenses may fluctuate from period to period due to the differing levels and stages of development activity for our products.
Nine months ended
Research and development expense increased by 61%, or$45.2 million , in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to$40.7 million of higher personnel-related expenses and$4.5 million of equipment expense associated with our investment in the development, introduction and qualification of new product innovation. The increase in personnel-related expenses was primarily due to hiring and retention programs for employees inNew Zealand ,India andthe United States , which increased total compensation costs, including stock-based compensation. The amount of research and development expenses may fluctuate from period to period due to the differing levels and stages of development activity for our products. Sales and Marketing Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Sales and marketing$ 55,257 $ 39,296 $ 15,961 41 %$ 150,189 $ 84,504 $ 65,685 78 % Percentage of net revenues 9 % 11 % 9 % 9 %
Three months ended
Sales and marketing expense increased by 41%, or$16.0 million , in the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to$14.8 million of higher personnel-related expenses from increased headcount as a result of our efforts to improve customer experience, to provide 24/7 support along with a field service desk for installers and Enphase system owners globally, and to support our business growth inthe United States and international expansion inEurope . In addition, annual retention programs for employees also resulted in the increase in total compensation costs, including stock-based compensation. The increase in sales and marketing expense in the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was also attributable to$2.3 million higher amortization of intangible assets acquired through business combinations and$2.5 million of higher professional services and facility costs to support our business growth. This increase was partially offset by a decrease of$3.6 million in the advertising costs and marketing expenses.
Nine months ended
Sales and marketing expense increased by 78%, or$65.7 million , in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to$57.7 million of higher personnel-related expenses from increased headcount as a result of our efforts to improve customer experience, to provideEnphase Energy, Inc. | 2022 Form 10-Q | 43
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24/7 support along with a field service desk for installers and Enphase system owners globally, and to support our business growth inthe United States and international expansion inEurope . In addition, annual retention programs for employees also resulted in the increase in total compensation costs, including stock-based compensation. The increase in sales and marketing expense in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was also attributable to$6.7 million higher amortization of intangible assets acquired through business combinations and$5.3 million of higher professional services and facility costs to support our business growth. This increase was partially offset by a decrease of$4.1 million in the advertising costs and marketing expenses. General and Administrative Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) General and administrative$ 32,436 $ 34,300 $ (1,864) (5) %$ 102,647 $ 74,530 $ 28,117 38 % Percentage of net revenues 5 % 10 % 6 % 8 %
Three months ended
General and administrative expense decreased by 5%, or$1.9 million , in the three months endedSeptember 30, 2022 , as compared to the same period in 2021. The decrease was primarily due to$5.9 million of lower stock-based compensation expense related to timing of the grant of annual retention awards in 2021, offset by a$3.1 million increase in investments in technological infrastructure and other operational and facilities costs to support scalability of our business growth, and$1.0 million of higher legal and professional services.
Nine months ended
General and administrative expense increased by 38%, or$28.1 million , in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. The increase was primarily due to$19.1 million of higher personnel-related expenses as a result of an increase in headcount increasing total compensation costs, including stock-based compensation and post business combination employment-related expense,$5.8 million of investments in technological infrastructure and other operational and facilities costs to support scalability of our business growth, and$3.1 million of higher legal and professional services. Restructuring Charges Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Restructuring charges$ 594 $ -$ 594 **$ 594 $ -$ 594 ** Percentage of net revenues 0 % 0 % 0 % 0 % ** Not meaningful
Three and nine months ended
In the three and nine months endedSeptember 30, 2022 , we began implementing restructuring actions to reorganize our global workforce, consolidate facilities and eliminate non-core projects. We expect to complete our restructuring activities in 2023. Restructuring charges for the three and nine months endedSeptember 30, 2022 primarily included$0.6 million of one-time termination benefits and other employee-related expenses and impairment of property and equipment, net. We had no restructuring charges in the three months and nine months endedSeptember 30, 2021 .Enphase Energy, Inc. | 2022 Form 10-Q | 44
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Other Income (Expense), Net
Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Interest income$ 3,680 $ 110 $ 3,570 3,245 %$ 4,936 $ 281 $ 4,655 1,657 % Interest expense (2,255) (12,628) 10,373 (82) % (7,159) (32,463) 25,304 (78) % Other (expense) income, net (2,611) 874 (3,485) (399) % (5,208) 814 (6,022) (740) % Loss on partial settlement of convertible notes - - - **% - (56,382) 56,382 (100) % Total other expense, net$ (1,186) $ (11,644) $ 10,458
(90) %$ (7,431) $ (87,750) $ 80,319 (92) % ** Not meaningful
Three months ended
Interest income of$3.7 million in the three months endedSeptember 30, 2022 increased, as compared to$0.1 million for the three months endedSeptember 30, 2021 , primarily due to an increase in interest rates earned and a higher average cash, cash equivalents and marketable securities balance in the three months endedSeptember 30, 2022 , as compared to the same period in 2021.
Cash interest expense
Cash interest expense for each of the three months endedSeptember 30, 2022 and 2021 totaled$0.2 million . Cash interest expense in the three months endedSeptember 30, 2022 primarily includes$0.2 million interest incurred with the Notes due 2025 and Notes due 2023. Cash interest expense in the three months endedSeptember 30, 2021 primarily includes approximately$0.1 million coupon interest incurred with our Notes due 2025, Notes due 2024 and Notes due 2023 and less than approximately$0.1 million accretion of interest expense on contingent consideration. Non-cash interest expense Non-cash interest expense of$2.1 million in the three months endedSeptember 30, 2022 primarily related to$2.1 million for the debt discount amortization with our Notes due 2025 and amortization of debt issuance costs with our Notes due 2023, Notes due 2025, Notes due 2026 and Notes due 2028. Non-cash interest expense of$12.4 million in the three months endedSeptember 30, 2021 primarily related to$12.4 million for the debt discount and amortization of debt issuance costs with our Notes due 2024, Notes due 2025, Notes due 2026 and Notes due 2028. Other expense, net of$2.6 million expense in the three months endedSeptember 30, 2022 relates to a$3.1 million net loss due to foreign currency denominated monetary assets and liabilities, partially offset by$0.5 million non-cash net gain related to change in the fair value of debt securities. Other income, net of$0.9 million in the three months endedSeptember 30, 2021 relates to a$0.8 million non-cash gain for the change in the fair value of debt securities and$0.1 million net loss related to foreign currency exchange and remeasurement.
Nine months ended
Interest income of$4.9 million in the nine months endedSeptember 30, 2022 increased, as compared to$0.3 million for the nine months endedSeptember 30, 2021 , primarily due to an increase in interest rates earned and a higher average cash, cash equivalents and marketable securities balance in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021.
Cash interest expense
Cash interest expense in the nine months endedSeptember 30, 2022 and 2021 totaled$1.1 million and$0.6 million , respectively. Cash interest expense in the nine months endedSeptember 30, 2022 primarily includes$0.9 million interest incurred with the Notes due 2025 and Notes due 2023,$0.1 million bank charges and$0.1 million accretion of interest expense on contingent consideration for an acquisition. Cash interest expense in the nine months endedSeptember 30, 2021 primarily included$0.4 million coupon interest incurred with our Notes dueEnphase Energy, Inc. | 2022 Form 10-Q | 45
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2025, Notes due 2024 and Notes due 2023 and
Non-cash interest expense
Non-cash interest expense of$6.1 million in the nine months endedSeptember 30, 2022 primarily related to$6.1 million for the debt discount amortization with our Notes due 2025 and amortization of debt issuance costs with our Notes due 2023, Notes due 2025, Notes due 2026 and Notes due 2028. Non-cash interest expense of$31.9 million in the nine months endedSeptember 30, 2021 primarily related to$31.8 million for the debt discount and amortization of debt issuance costs with our Notes due 2024, Notes due 2025, Notes due 2026 and Notes due 2028 and less than$0.1 million relates to the amortization of debt issuance costs associated with Notes due 2023. Other expense, net of$5.2 million in the nine months endedSeptember 30, 2022 relates to$5.4 million net loss due to foreign currency denominated monetary assets and liabilities and$0.3 million impairment of a note receivable, partially offset by$0.4 million non-cash net gain related to change in the fair value of debt securities and$0.2 million interest income. Other income, net of$0.8 million in the nine months endedSeptember 30, 2021 relates to a$3.2 million non-cash gain for the change in the fair value of debt securities, partially offset by a$2.4 million net loss related to foreign currency exchange and remeasurement. Loss on partial settlement of convertible notes recorded in the nine months endedSeptember 30, 2021 primarily related to the$9.5 million non-cash loss on partial settlement of$87.1 million aggregate principal amount of the Notes due 2024,$9.5 million non-cash loss on partial settlement of$217.8 million aggregate principal amount of the Notes due 2025 and$37.5 million non-cash inducement loss incurred on the repurchase of Notes due 2025. We did not have any such loss in the nine months endedSeptember 30, 2022 .
Income Tax (Provision) Benefit
Three Months Ended Nine Months Ended September 30, Change in September 30, Change in 2022 2021 $ % 2022 2021 $ % (In thousands, except percentages) Income tax (provision) benefit$ (19,443) $ (3,898) $ (15,545) 399 %$ (40,261) $ 22,471 $ (62,732) (279) %
Three months ended
The income tax provision of$19.4 million in the three months endedSeptember 30, 2022 increased, as compared to the income tax provision of$3.9 million in the same period in 2021, both calculated using the annualized effective tax rate method, primarily due to higher projected tax expense inU.S. and foreign jurisdictions that are more profitable in 2022 compared to 2021, partially offset by tax deduction from employee stock-based compensation.
Nine months ended
The income tax provision of$40.3 million in the nine months endedSeptember 30, 2022 was calculated using the annualized effective tax rate method, primarily related to higher projected tax expense inU.S. and foreign jurisdictions that are more profitable in 2022, partially offset by tax deduction from employee stock-based compensation. The income tax benefit of$22.5 million for the nine months endedSeptember 30, 2021 was calculated using the annualized effective tax rate method, primarily related to higher tax deduction from employee stock-based compensation, partially offset by higher projected tax expense in foreign jurisdictions that are profitable in 2021.
Liquidity and Capital Resources
Sources of Liquidity
As ofSeptember 30, 2022 , we had$1.4 billion in net working capital, including cash, cash equivalents and marketable securities of$1.4 billion , of which approximately$1.4 billion were held inthe United States . Our cash, cash equivalents and marketable securities primarily consist ofU.S. treasuries, money market mutual funds, corporate notes and bonds and both interest-bearing and non-interest-bearing deposits, with the remainder held in various foreign subsidiaries. We consider amounts held outsidethe United States to be accessible and have provided for the estimatedU.S. income tax liability associated with our foreign earnings.Enphase Energy, Inc. | 2022 Form 10-Q | 46
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Table of Contents As of September 30, Change in 2022 2021 $ % (In thousands, except percentages) Cash, cash equivalents and marketable securities$ 1,417,296 $ 1,394,123 $ 23,173 2 % Total Debt$ 1,288,281 $ 1,026,283 $ 261,998 26 % Our cash, cash equivalents and marketable securities increased by$23.2 million in the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to cash generated from operations, partially offset by cash used to fund acquisitions, make investments in private companies, repurchase our outstanding common stock and make payments of withholding taxes related to net share settlement of equity awards. Total carrying amount of debt increased by$262.0 million in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to adoption of ASU 2020-06 as ofJanuary 1, 2022 , partially offset by repayment of the Notes due 2024 and partial repayment of the Notes due 2025. Refer to Note 1, "Description of Business and Basis of Presentation - Recently Adopted Accounting Pronouncements" in this Quarterly Report on Form 10-Q for further information on adoption of ASU 2020-06. We had net operating loss carryforwards for federal andCalifornia income tax purposes of approximately$153.9 million and$92.8 million , respectively, as well as federal and state research credit carryforwards of approximately$17.3 million and$9.8 million , respectively, as ofDecember 31, 2021 . When we utilize all of our net operating loss and research credit carryforwards, which we expect to occur for the taxable year of 2022, our cash paid for taxes inthe United States will substantially increase. We plan to fund any cash requirements from our existing cash, cash equivalents and marketable securities on hand, and cash generated from operations. We anticipate that access to the debt market will be more limited compared to prior years as interest rates have increased and are expected to continue to rise. Our ability to obtain debt or any other additional financing that we may choose to, or need to, obtain will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the continued effects of COVID-19, the ongoing conflict inUkraine , new regulations and other risk factors discussed in the section entitled "Risk Factors" herein and those included in the Form 10-K. We believe that our cash flow from operations with existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months and thereafter for the foreseeable future, including our ability to make payments on our outstanding debt. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, the costs to acquire or invest in complementary businesses and technologies, the costs to ensure access to adequate manufacturing capacity, the continuing market acceptance of our products and macroeconomic events, such as the impacts from the COVID-19 pandemic, inflation, increase in interest rates, and the ongoing conflict inUkraine . We may also choose to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected. Repurchase of Common Stock. InMay 2021 , our board of directors authorized a share repurchase program (the "2021 Repurchase Program") pursuant to which we may repurchase up to an additional$500.0 million of our common stock. The repurchases may be executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. Such purchases are expected to continue throughMay 2024 unless otherwise extended or shortened by our board of directors. As ofSeptember 30, 2022 , we have approximately$200.0 million remaining for repurchase of shares under the 2021 Repurchase Program. Enphase Energy, Inc. | 2022 Form 10-Q | 47
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Cash Flows. The following table summarizes our cash flows for the periods presented: Nine Months Ended September 30, 2022 2021 (In thousands) Net cash provided by operating activities$ 491,103 $
254,855
Net cash used in investing activities (253,775)
(663,029)
Net cash provided by (used in) financing activities (14,116) 615,643 Effect of exchange rate changes on cash
(4,945)
(1,302)
Net increase in cash and cash equivalents$ 218,267 $
206,167
Cash Flows from Operating Activities
Cash flows from operating activities consist of our net income adjusted for certain non-cash reconciling items, such as stock-based compensation expense, non-cash interest expense, change in the fair value of debt securities, deferred income taxes, depreciation and amortization, asset impairment, and changes in our operating assets and liabilities. Net cash provided by operating activities increased by$236.2 million in the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, primarily due to an increase in our gross profit as a result of increased revenues, partially offset by higher operating expenses as we continue to invest in the long-term growth of our business.
Cash Flows from Investing Activities
For the nine months endedSeptember 30, 2022 , net cash used in investing activities of$253.8 million was primarily from$572.2 million purchase of marketable securities,$27.7 million net cash used to acquireSolarLeadFactory and Clipper Creek, Inc. ,$30.0 million used in purchases of test and assembly equipment to expand our supply capacity, related facility improvements and information technology enhancements including capitalized costs related to internal-use software and$1.0 million used to invest in a private company, partially offset by$377.2 million maturities of marketable securities. For the nine months endedSeptember 30, 2021 , net cash used in investing activities of$663.0 million was primarily from approximately$545.5 million used in purchases of marketable securities,$58.0 million from the investment in a debt security,$55.3 million net cash used to acquireSofdesk Inc. andDIN Engineer Service LLP's solar design services business, and$39.1 million used in purchases of test and assembly equipment to expand our supply capacity, related facility improvements and information technology enhancements including capitalized costs related to internal-use software, partially offset by approximately$35.0 million maturities of marketable securities.
Cash Flows from Financing Activities
For the nine months endedSeptember 30, 2022 , net cash used by financing activities of approximately$14.1 million was primarily due to$19.4 million payment of employee withholding taxes related to net share settlement of equity awards, partially offset by$5.3 million net proceeds from employee stock option exercises and purchases under our employee stock purchase plan. For the nine months endedSeptember 30, 2021 , net cash provided by financing activities of approximately$615.6 million was primarily from$1,188.4 million net proceeds from the issuance of our Notes due 2028 and Notes due 2026,$220.8 million from sale of warrants related to our Notes due 2028 and Notes due 2026 and approximately$3.7 million net proceeds from employee stock option exercises, partially offset by$286.2 million purchase of convertible note hedge related to our Notes due 2028 and Notes due 2026,$289.3 million cash paid to settle both$87.1 million in aggregate principal amount of the Notes due 2024 and$217.8 million in aggregate principal amount of the Notes due 2025,$200.0 million paid to repurchase shares of our common stock,$20.3 million payment of employee withholding taxes related to net share settlement of equity awards, and$1.4 million of repayment on sale of long-term financing receivables.Enphase Energy, Inc. | 2022 Form 10-Q | 48
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Contractual Obligations
Our contractual obligations primarily consist of our Notes due 2028, Notes due 2026, Notes due 2025, Notes due 2023, obligations under operating leases and inventory component purchase. As ofSeptember 30, 2022 , there have been no material changes from our disclosure in the Form 10-K. For more information on our future minimum operating leases and inventory component purchase obligations as ofSeptember 30, 2022 , see Note 10 , "Commitments and Contingencies - Purchase Obligations" and for more information on our notes and other related debt, see Note 9 , "Debt" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in theU.S. ("GAAP"). In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We consider an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the condensed consolidated financial statements.
Adoption of New and Recently Issued Accounting Pronouncements
Refer to Note 1 , "Description of Business and Basis of Presentation - Summary of Significant Accounting Policies" of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of adoption of new and recently issued accounting pronouncements.
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