SOLAREDGE TECHNOLOGIES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections of this Annual Report on Form 10-K captioned "Selected Financial Data" and "Business" and our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forwardlooking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forwardlooking statements as a result of many factors, including those discussed under the sections of this Annual Report captioned "Special Note Regarding ForwardLooking Statements" and "Risk Factors". For discussion related to changes in financial condition and the results of operations for the yearDecember 31, 2018 , refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 27, 2020 .
Overview
We develop, manufacture and sell products that address a broad range of energy market segments through our diversified product offering, including residential, commercial and large scale photovoltaic or PV, energy storage and backup solutions, electric vehicle or EV charging, home energy management, grid services and virtual power plants, as well as products in our non-solar businesses which address e-Mobility, automation machines, lithium-ion cells and battery packs, andUPS solutions.
Further information regarding our business is provided in "Part I, Item 1. Business" of this Annual Report.
In the year endedDecember 31, 2020 , one customer accounted for 14.8% of our revenues and our top three customers (all distributors) together represented 29.5% of our revenues. Our revenues were$1,425.7 million , and$1,459.3 million for fiscal 2019, and fiscal 2020 respectively. Gross margins were 33.6% and 31.6% for fiscal 2019, and fiscal 2020, respectively. Net profits were$146.5 million and$140.3 million for fiscal 2019 and fiscal 2020, respectively.
Performance Measures
In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business, and formulate projections. We use metrics relating to yearly shipments (inverters shipped, power optimizers shipped, and megawatts shipped) to evaluate our sales performance and to track market acceptance of our products from year to year. We use metrics relating to monitoring (systems monitored and megawatts monitored) to evaluate market acceptance of our products and usage of our solution. We provide the "megawatts shipped" metric, which is calculated based on nameplate capacity shipped, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the maximum rated power output capacity of an inverter and corresponds to our financial results in that higher total capacities shipped are generally associated with higher total revenues. However, revenues increase with each additional unit sold, not necessarily each additional MW of capacity sold. Accordingly, we also provide the "inverters shipped" and "power optimizers shipped" operating metrics.
COVID-19 Impact & Response
We continue to monitor the evolving impact of COVID-19 on our operations and business. Our first priority continues to be to protect and support our employees while maintaining company operations and support of our customers with as few disruptions as possible. We follow the guidance issued by applicable local authorities and health officials in each region in which we do business, including in our headquarters located inIsrael , and have been able to continue our operations remotely or from our offices. We have maintained a flexible attendance policy that has allowed our employees to work remotely where possible in order to reduce the number of people who are in our offices while our labs and manufacturing facilities remain fully operational. Our manufacturing facilities inKorea ,Italy andIsrael , as well as our contract manufacturers facilities inChina ,Vietnam andHungary have remained operational and at almost full capacity, with brief interruptions on a case by case basis in compliance with local laws. Our customer support centers are working at full capacity, primarily from home. Our operations and operating expenses have not been significantly impacted by these adjustments. Continued travel restrictions however have had an impact on our operations, including, by way of example delays in third party testing and certification of new products. The actions taken around the world to slow the spread of COVID-19 have impacted the installation rate of PV systems which we are closely tracking through our monitoring portal globally and per country. We saw and reported a decline in installations in certain regions such asthe United States andItaly beginning with the COVID-19 outbreak inMarch 2020 that negatively impacted our revenues in the second, third and fourth quarters of 2020 when compared to the first quarter of 2020. In certain cases we accommodated customers in certain regions who requested to cancel or delay the supply of their orders. 33
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We have taken actions in order to mitigate the negative impacts of COVID-19 on our business operating results and financial condition. In the second quarter of 2020, we adjusted our original pre-COVID-19 business plans to implement substantial reductions of new hiring, elimination of redundant positions, reduction, where possible, of our spending, management of operations including a review of all of our variable, research and development projects, as well as a voluntary reduction of the base salaries/compensation of our executives and board members. The impact of these reductions is reflected in our 2020 year-end financial results. Overall, despite our ability to mitigate some of the economic effects of the COVID-19 pandemic by reducing manufacturing levels and lowering expenses, our revenues, net profitability and the overall market grew less than we had anticipated. As anticipated, our fourth quarter revenues of$358.1 million , an increase from revenues of$338.1 million in the third quarter of 2020, reflect continuous improvement in installation rates in theU.S and rest of world, which were slightly decreased inEurope due to typical seasonality experienced inEurope during the winter. During the fourth quarter of 2020, many of our customers depleted existing accumulated inventory from previous quarters and we saw an increase in demand, resulting in higher quarterly revenues mainly from ourU.S. based customers.
Key Components of Our Results of Operations
The following discussion describes certain line items in our Consolidated Statements of Operations.
Revenues
We generate revenues from the sale of DC optimized inverter systems for solar PV installations which include power optimizers, inverters, EV chargers, smart energy devices, our cloudbased monitoring platform as well as grid services. Our customer base mainly includes distributors, large solar installers, wholesalers, EPCs, and PV module manufacturers. In addition, we also generate revenues from the sale of lithium-ion cells, batteries and energy storage solutions,UPS systems, automation machines and EV powertrain solutions for electric vehicles. Our revenues from the sale of solar-related products are affected by changes in the volume and average selling prices of our DC optimized inverter systems. The volume and average selling price of our systems is driven by the supply and demand for our products, changes in the product mix between our residential and commercial products, the customer mix between large and small customers, the geographical mix of our sales, sales incentives, enduser government incentives, seasonality, and competitive product offerings. Revenues from the sale of energy storage system or ESS products are affected by the type of product sold (cell, battery or system) and the type of the battery that is sold. Revenues from the sale ofUPS products,SolarEdge Automation Machines and SolarEdge e-Mobility products are affected by the changes in the volumes, customers' size and average selling prices of the products we sell. Our revenue growth is dependent on our ability to expand our market share in each of the geographies in which we compete, expand our global footprint to new evolving markets, grow our production capabilities to meet demand, continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers and expansion of the new businesses we acquired. In the year endedDecember 31, 2020 , 42.9% of our revenues were generated fromEurope , 42.0% of our revenues were generated fromthe United States and 15.1% of our revenues are generated from ROW. In the year endedDecember 31, 2019 , 38.2% of our revenues were generated fromEurope , 47.6% of our revenues are generated fromthe United States and 14.2% of our revenues were generated from ROW.
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of product costs, including purchases from
our contract manufacturers and other suppliers, as well as costs related to
shipping, customer support, product warranty, personnel, depreciation of test
and manufacturing equipment, hosting services for our cloudbased monitoring
platform, and other logistics services. Our product costs are affected by
technological innovations, such as advances in semiconductor integration and new
product introductions, economies of scale resulting in lower component costs,
and improvements in production processes and automation. Some of these costs,
primarily personnel and depreciation of test and manufacturing equipment, are
not directly affected by sales volume.
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With respect to ESS, Automation Machines and e-Mobility products cost of revenues consists primarily of materials costs, labor costs associated with the manufacturing, variable utility, and operational costs related to the manufacturing factories, depreciation of testing and manufacturing equipment and other fixed costs. Except for the manufacturing and assembly activities related to our acquired businesses and the manufacturing of solar products at Sella 1, we outsource our manufacturing to thirdparty manufacturers and negotiate product pricing on a quarterly basis. In fiscal 2020, the expansion of our manufacturing capabilities and increased inventory levels due to a decrease in demand as a result of COVID-19, enabled us to use ocean freight rather than previously used air freight to deliver the majority of our products. In addition, a higher portion of our products manufactured in non-tariff countries imported into theU.S. resulted in lower custom tariff charges. We anticipate maintaining inventory levels in 2021 to support our growth, continuing to deliver our products through ocean freight and reducingU.S customs tariffs exposure on imported products. We continue to develop our own manufacturing capabilities. For example, we have developed our own proprietary automated assembly lines for our power optimizers, manufacture sub-assemblies such as cables and magnetics, and own large amounts of equipment in connection with such manufacturing activities. We expect to continue to invest in additional automated assembly lines in the future. We have designed and are responsible for funding all of the capital expenses associated with existing and planned automated assembly lines. The current and expected capital expenses associated with these automated assembly lines will be funded out of our cash flows generation. Key components of our logistics supply channel consist of third party distribution centers in theU.S. ,Europe ,Australia , andJapan . Finished goods are either shipped to our customers directly from our contract manufacturers or shipped to third-party distribution centers and then, finally, shipped to our customers.
In the third quarter of 2020 we began commercial shipments to
Cost of revenues also includes our operations, production and support departments' costs. The operations and production departments are responsible for production management such as planning, procurement, supply chain, production methodologies, and machinery planning, logistics management and manufacturing support to our contract manufacturers, as well as the quality assurance of our products. Our support department provides customer and technical support at various levels through our call centers around the world as well as second and third-level support services which are provided by support personnel located in our headquarters. Our fulltime employee headcount in our operations, production and support departments has grown from 1,031 as ofDecember 31, 2019 to 1,549 as ofDecember 31, 2020 . Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs, and seasonality.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative and other expenses. Personnelrelated costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions and stockbased compensation. Our fulltime employee headcount in our research and development, sales and marketing, and general and administrative departments has grown from 1,400 as ofDecember 31, 2019 to 1,625 as ofDecember 31, 2020 . We expect to continue to hire significant numbers of new employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.
Research and development expenses
Research and development expenses include personnelrelated expenses such as
salaries, benefits, stockbased compensation, and payroll taxes. Our research
and development employees are engaged in the design and development of power
electronics, semiconductors, software, power line communications, networking and
chemistry. Our research and development expenses also include thirdparty design
and consulting costs, materials for testing and evaluation, ASIC development and
licensing costs, depreciation expense, and other indirect costs. We devote
substantial resources to ongoing research and development programs that focus on
enhancements to, and cost efficiencies in, our existing products and timely
development of new products that utilize technological innovation, thereby
maintaining our competitive position.
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Sales and marketing expenses
Sales and marketing expenses consist primarily of personnelrelated expenses such as salaries, sales commissions, benefits, payroll taxes, and stockbased compensation. These expenses also include travel, fees of independent consultants, trade shows, marketing, costs associated with the operation of our sales offices, and other indirect costs. The expected increase in sales and marketing expenses is due to an expected increase in the number of sales and marketing personnel and the expansion of our global sales and marketing footprint, enabling us to increase our penetration into new markets. These expenses will be determined to the extent that marketing activities resume, contingent upon the recovery of certain activities which have been halted due to COVID-19 such as travel, trade shows and in person customer trainings. We currently have a sales presence in many countries worldwide and intend to continue to expand our sales presence to additional regions.
General and administrative expenses
General and administrative expenses consist primarily of salaries, employee benefits, and stockbased compensation related to our executives, finance, human resources, information technology, and legal organizations, travel expenses, facilities costs, fees for professional services, and registration fees related to being a publicly-traded company. Professional services consist of audit and legal costs, remuneration to board members, insurance, information technology, and other costs. General and administrative expenses also include allowance for doubtful accounts in the event of uncollectable account receivables balances.
Other expenses
Other expenses consist primarily of losses related to the sale of aSolarEdge Automation Machines (formerly named SMRE) subsidiary originally acquired as part of that acquisition, stockbased compensation related to the untimely death of Mr.Guy Sella , our Founder, who had served as CEO and Chairman of the Board of Directors until shortly before his passing onAugust 25, 2019 , modification of PSU terms originally granted as part of the acquisition ofSolarEdge Automation Machines , a claim acquired as part of the Kokam acquisition which was later settled in arbitration in 2020 and costs related to the write-off of identifiable intangible assets in SolarEdge e-Mobility which we ceased to use Non-Operating Expenses Financial expenses (income)
Financial expenses (income) consists primarily of interest income, interest expense, gains or losses from foreign currency fluctuations and hedging transactions.
Interest income consists of interest from our investment in available for sale marketable securities.
Interest expense consists of interest related to loans taken by Kokam andSolarEdge Automation Machines , advance payments received for performance obligations that extend for a period greater than one year, related to Accounting Standard Codification 606, "Revenue from Contracts with Customers" (ASC 606), interest related to Accounting Standard Codification 842, "Leases" (ASC 842) and the accretion of the debt discount and amortization of debt issuance cost associated with our Notes due 2025. Our functional currency is theU.S. Dollar. With respect to certain of our subsidiaries, the functional currency is the applicable local currency. Financial expenses, net is net of financial income which consists primarily of the effect of foreign exchange differences between theU.S. Dollar and the New Israeli Shekel, the Euro, the Korean Won and other currencies related to our monetary assets and liabilities, and the realization of gains or losses from hedging transactions. Taxes on income
We are subject to income taxes in the countries where we operate.
In the year endedDecember 31, 2019 , we recorded net income tax expenses of$6.7 million for federal and state tax in theU.S. , which consists of$10.1 million current income tax expenses and$3.4 million deferred tax benefit. In the year endedDecember 31, 2020 , we recorded net income tax expenses of$4.6 million for federal and state tax inthe United States , which consists of$1.8 million current income tax expenses and$2.8 million deferred tax expenses. The decrease in tax liability was mainly due to lower taxable income for Federal tax and Global Intangible Low-Taxed Income or GILTI Tax. OnDecember 22, 2017 , the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law making significant changes toU.S. income tax law. These changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years 2018 onwards, created new tax liability on certain foreign-sourced earnings and certain related-party payments. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements as ofDecember 31, 2017 . As we collected and prepared necessary data, and interpreted the additional guidance issued by theU.S. Treasury Department , theIRS , and other standard-setting bodies, we made adjustments, over the course of 2018, to the provisional amounts including refinements to deferred taxes. The accounting for the tax effects of the Tax Act was completed as ofDecember 31, 2018 . 36
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The Tax Act required us to payU.S. income taxes on accumulated foreign subsidiary earnings not previously subject toU.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. The Company has elected to pay its transition tax over an eight-year period as provided in the Tax Act.
Our Israeli subsidiary elected tax year 2012 as a "Year of Election" for "Benefited Enterprise" under the Israeli Investments Law, which provides certain benefits, including tax exemptions and reduced tax rates. Upon meeting the requirements under the Israeli Investments Law, income derived from productive activity under the Benefited Enterprise status, would subject to certain terms and limits, will be exempt from tax for two years from the year in which the Israeli subsidiary first generated taxable income. Since the Israeli subsidiary utilized all of its carryforwards losses in the six months ended onDecember 31, 2016 , and was granted an approval by the Israeli Tax Authorities ("ITA") in this regard, the two-year tax exemption has ended onDecember 31, 2018 . The Investment Law was amended in 2005 and was further amended as ofJanuary 1, 2011 and inAugust 2013 (the "2011 Amendment"). The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investments Law prior to 2011 and, instead, introduced new benefits for income generated by a "Preferred Company " through its "Preferred Enterprise" (both as defined in the 2011 Amendment). Under the 2011 Amendment, income derived by Preferred Companies from Preferred Enterprise would be subject to a uniform rate of corporate tax for an unlimited period as opposed to the incentives prior to the 2011 Amendment that were limited to income from Approved or Benefited Enterprise during the respective benefits period. According to the 2011 Amendment (considering the rates as amended in the 2017 Amendment as defined herein), the tax rate applicable to such income, referred to as "Preferred Income", would be 7.5% in areas inIsrael that are designated as Development Zone A and 16% elsewhere inIsrael in the year 2017 and thereafter. Under the transitional provisions of the 2011 Amendment, companies may elect to irrevocably implement the 2011 Amendment while waiving benefits provided under the legislation prior to the 2011 Amendment or keep implementing the legislation prior to the 2011 Amendment. InDecember 2016 , Amendment 73 to the Investments Law (the "2017 Amendment") was published. According to the 2017 Amendment, special tax tracks for technological enterprises have been introduced, which are subject to rules that were issued by theIsraeli Ministry of Finance . A Technological Preferred Enterprise, as defined in the 2017 Amendment, that is located in the central region ofIsrael , will be subject to tax at a rate of 12% on profits deriving from intellectual property (in Development Zone A - a tax rate of 7.5%). Our Israeli subsidiary has established its own manufacturing facilities for inverters and optimizers inIsrael , located in a Development Zone A. OnJune 14, 2017 , the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological Enterprise), 2017 (the "Regulations") were published. The Regulations describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE regime and determine certain requirements relating to documentation of intellectual property for the purpose of the PTE. According to these provisions, a company that complies with the terms under the PTE regime may be entitled to certain tax benefits with respect to certain income generated during the company's regular course of business and derived from the preferred intangible asset (as determined in the Investments Law), excluding certain portion of income as prescribed therein. As ofJanuary 2019 , our Israeli subsidiary elected to implement the 2011 and 2017 Amendments starting as of tax year 2019 and as a result, under the PTE regime with respect to our business activities inIsrael , we expect that it will be entitled to an effective tax at a rate of approximately 12% in 2020. The Law for the Encouragement of Industry (Taxes), 1969, (the "Industry Encouragement Law"), provides certain tax benefits for an 'Industrial Company' as such term is defined in the Industry Encouragement Law. AnIndustrial Company is entitled to certain tax benefits including, inter alia: (i) amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the company; and (ii) accelerated depreciation rates on equipment and buildings. Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We believe that our Israeli subsidiary currently qualifies as anIndustrial Company ; however, there can be no assurance that it will continue to so qualify or that the benefits described above will be available to it in the future. Furthermore, the ITA may determine that we do not qualify as anIndustrial Company , which could entail a loss of the benefits that relate to that status. Israeli tax law (Section 20A of the Tax Ordinance) allows, under certain conditions, a tax deduction for certain research and development expenses as prescribed in the Tax Ordinance for the year in which they are paid, subject to appropriate approval by the relevant Israeli government ministry, determined by the field of research. Expenses incurred in scientific research that are not approved by the relevant Israeli government ministry will be deductible over a three-year period commencing from the tax year in which they are paid. To date, our Israeli subsidiary has not obtained such approval. 37
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Results of Operations
The following tables set forth our consolidated statements of income for the years endedDecember 31, 2019 and 2020. We have derived this data from our consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for any future period.
Comparison of year ended
Year ended December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Revenues $ 1,459,271 $ 1,425,660 33,611 2.4 %
Cost of revenues 997,912 946,322 51,590 5.5 %
Gross profit 461,359 479,338 (17,979 ) (3.8 )%
Operating expenses:
Research and development 163,123 121,351 41,772 34.4 %
Sales and marketing 95,985 87,984 8,001 9.1 %
General and administrative 63,119 49,361 9,858 20.0 %
Other operating expenses (income) (3,429 ) 30,696 (34,125 ) N/A
Total operating expenses 318,798 289,392 25,506 8.8 %
Operating income 142,561 189,946 (43,485 ) (22.9 )%
Financial expenses (income), net (21,105 ) 11,343 (32,448 ) N/A
Income before taxes on income 163,666 178,603 (11,037 ) (6.2 )%
Taxes on income 23,344 33,646 (9,841 ) (29.2 )%
Net income $ 140,322 $ 144,957 (1,196 ) (0.8 )%
Net loss attributable to
Non-controlling interests - 1,592 (1,592 ) (100.0 )%
Net income attributable to SolarEdge
Technologies Inc. $ 140,322 $ 146,549 (2,788 ) (1.9 )%
Revenues
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Revenues $ 1,459,271 $ 1,425,660 $ 33,611 2.4 %
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Revenues increased by$33.6 million , or 2.4%, in the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 , primarily due to (i) an increase of$99.1 million in sales generated fromEurope and the rest of world;(ii) an increased proportion of solar related products and services; (iii) price increases on products sold inthe United States intended to offset the increase in tariffs onChina made products imposed inJune 2019 . This increase was partially offset by$65.5 million less sales inthe United States compared to 2019 which we attribute principally to the negative impact of the COVID-19 pandemic on the economy inthe United States . Revenues from outside of theU.S. comprised 58.0% of our revenues in the year endedDecember 31, 2020 as compared to 52.4% in the year endedDecember 31, 2019 . The number of power optimizers recognized as revenues decreased by approximately 0.2 million units, or 1.7%, from approximately 15.7 million units in 2019 to approximately 15.5 million units in 2020. The number of inverters recognized as revenues decreased by approximately 1,000 units, or 0.2%, from approximately 664,000 units in 2019 to approximately 663,000 units in 2020. Our blended ASP per watt for solar products shipped decreased by$0.018 , or 7.5%, in 2020 as compared to 2019. This reduction in both product units and blended ASP is primarily attributed to higher revenues from the sale of commercial products mainly in theU.S , that are characterized with lower ASP per watt, as well as a change in our customer mix inthe United States toward larger customers that enjoy preferable pricing. This ASP erosion was partially offset by an increased rate of revenues driven from the sale of residential products mainly inEurope that are characterized with higher ASP per watt, as well as the strengthening of the Euro against theU.S. dollar. In our solar business, we expect that revenues in the first quarter of 2021, will increase inthe United States . This increase is expected to be slightly offset by decrease in revenues inEurope due to seasonality which is typically experienced inEurope during the first quarter of the year. In addition, we expect an increase in overall revenues from the sale of full powertrain kits and batteries to an automotive manufacturer by SolarEdge e-Mobility which is part of our non-solar business.
Cost of Revenues and Gross Profit
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Cost of revenues $ 997,912 $ 946,322 $ 51,590 5.5 %
Gross profit $ 461,359 $ 479,338 $ (17,979 ) (3.8 )%
Cost of revenues increased by
•
an increase in warranty expenses and warranty accruals of
•
an increase in other production costs of$32.7 million , which is mainly attributed to changes in raw material inventory valuations related to manufacturing volumes, anticipated future use of such raw materials and inventory write-offs. In addition, this amount includes$1.3 million related to ramp up costs associated with the commencement of production in our Sella 1 manufacturing facility and$2.9 million related to the ramp of manufacturing in SolarEdge e-Mobility; and • an increase in personnel-related costs of$5.8 million related to the expansion of our production, operations and support headcount which grew in parallel to our growing install base worldwide and in connection with entering into the machinery and integrated powertrain markets.
These increases were partially offset by
•
a slight decrease in the volume of products sold; and
•
a decrease in shipment and logistic costs of
In our solar business we anticipate that our cost of revenues per unit will remain stable in the first quarter of 2021.
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Gross profit as a percentage of revenue decreased from 33.6% in 2019 to 31.6% in 2020 as a result of the above detailed analysis.
We expect that gross margin as a percent of revenues will increase in the first quarter of 2021 compared to that of the fourth quarter of 2020.
In light of the uncertain impact of COVID-19 on the rate of growth of our
acquired businesses, accounting estimates and assumptions related to goodwill,
intangible and other assets may change over time in response to uncertain
circumstances related to this evolving situation. Such changes could result in
future impairments of goodwill, intangible and other assets.
Operating Expenses:
Research and Development
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Research and development
Research and development costs increased by
•
an increase in personnel-related costs of$30.0 million resulting from an increase in our research and development headcount as well as salary expenses associated with employee equity-based compensation. The increase in headcount reflects our continuing investment in enhancements of existing products as well as research and development expenses associated with bringing new products to the market; and •
increased expenses related to consultants and subcontractors in an amount of
We expect that our research and development expenses in the first quarter of
2021 will slightly increase compared to the fourth quarter of 2020, primarily
due to the expected return to growth trajectory and our continued investment in
our non-solar businesses.
Sales and Marketing
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Sales and marketing $ 95,985 $ 87,984 $ 8,001 9.1 %
Sales and marketing expenses increased by $8.0 million , or 9.1%, in 2020
compared to 2019, primarily due to increased personnel-related costs of $11.8
million as a result of an increase in headcount supporting our growth in Israel
and rest of world, as well as salary expenses associated with employee
equity-based compensation.
These were partially offset by:
•
a decrease in expenses related to marketing activities by$2.5 million due to the cancellation or postponement of marketing activities, exhibitions and shows, which changes were triggered by COVID-19; and
•
decreased expenses related to travel in an amount of
We expect sales and marketing expenses to slightly decrease in the first quarter of 2021 primarily due to lower salary expenses associated with employee equity-based compensation partially offset by an increase in our sales and marketing headcount.
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General and Administrative
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
General and administrative
General and administrative expenses increased by
•
increased personnel-related costs of$8.2 million resulting from an increase in headcount due to hiring of senior executives and the expansion of G&A functions in the non-solar businesses, as well as salary expenses associated with employee equity-based compensation; and
•
increased provision of
We expect that in the first quarter of 2021, G&A expenses will continue to increase as a result of senior management expansion and the roll back of certain COVID-19 measures.
Other operating (income) expenses
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(in thousands)
Other operating (income) expenses
Other operating income was
•
a decrease in expenses in the amount of$8.3 million related to payroll, bonus and employees' equity-based compensation acceleration incurred in 2019 due to the untimely death of Mr.Guy Sella , our Founder, who had served as CEO and Chairman of the Board of Directors until shortly before his passing;
•
a decrease in expenses in the amount of$12.2 million related to compensation expenses incurred in 2019 resulting from a modification in PSU terms originally granted as part of the acquisition ofSolarEdge Automation Machines . This modification was part of a separation agreement with a former SolarEdge Automation Machines executive;
•
a decrease in expenses in the amount of$5.3 million related to the sale of a SolarEdge e-Mobility subsidiary originally acquired as part of theSolarEdge Automation Machines acquisition; and
•
a decrease in expenses in the amount of
These were partially offset by$1.5 million expenses related to write-offs of identifiable intangible assets in SolarEdge e-Mobility, which we ceased to use during 2020.
Financial expenses (income), net
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Financial expenses (income), net
Financial income was$21.1 million in 2020 compared to financial expenses of$11.3 million in 2019, primarily due to an increase of$43.1 million in financial income resulted from foreign exchange fluctuations, mainly between each of the Euro, the New Israeli Shekel, the Australian Dollar and the South Korean Won against theU.S. Dollar. 41
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The increase in this income was partially offset by:
•
an increase of
•
a decrease of
•
an increase of
Taxes on Income
Year Ended
December 31, 2019 to 2020
2020 2019 Change
(In thousands)
Taxes on income $ 23,344 $ 33,646 $ (10,302 ) (30.6 )%
Taxes on income decreased by
•
a decrease of
•
a decrease in previous years taxes of
This decrease was partially offset by a decrease of$2.6 million in deferred tax assets, net. Net Income Year EndedDecember 31, 2019 to 2020
2020 2019 Change
(In thousands)
Net income $ 140,322 $ 144,957 $ (4,635 ) (3.2 )%
As a result of the factors discussed above, net income decreased by
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Liquidity and Capital Resources
The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:
Fiscal Year ended December 31,
2019 2020
(In thousands)
Net cash provided by operating activities $ 259,000 $ 222,655
Net cash used in investing activities (152,853 ) (236,637 )
Net cash provided by (used in) financing activities (73,021 ) 640,484
Increase (decrease) in cash, cash equivalents and
restricted cash $ 33,126 As ofDecember 31, 2020 , our cash and cash equivalents were$827.1 million . This amount does not include$291.1 million invested in available for sale marketable securities,$2.6 million invested in restricted bank deposits and$60.1 million invested in short-term bank deposits. Our principal uses of cash are for funding our operations and other working capital requirements. As ofDecember 31, 2020 , we have open commitments for capital expenditures in an amount of approximately$79.4 million . These commitments reflect purchases of automated assembly lines and other machinery related to our manufacturing operations. We also have purchase obligations in the amount of$380.1 million related to raw materials and commitments for the future manufacturing of our products. We believe that cash provided by operating activities as well as our cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months including the self-funding of our capital expenditure commitments. We expect cash flow from operating activities to continue and increase in the next quarter due to increased revenues and profitability, this cash in addition to the cash balances already exist is sufficient to meet the Company's entire operational and capital needs.
Operating Activities
During 2020, cash provided by operating activities was$222.7 million derived mainly from net income of$140.3 million that included$103.4 million of non-cash expenses, a decrease of$86.5 million in trade receivables, an increase of$11.6 million in accrued expenses and other accounts payable,$32.3 million in warranty obligations,$18.3 million accruals for employees,$3.3 million in trade payables and$1.4 million in operating lease liabilities. This was offset by an increase of$149.7 million in inventories and$3.3 million in prepaid expenses and other accounts receivable and a decrease of$21.4 million in deferred revenues. During 2019, cash provided by operating activities was$259.0 million derived mainly from net income of$145.0 million that included$87.3 million of non-cash expenses. An increase of$50.8 million in warranty obligations,$83.1 million in deferred revenues,$47.8 million in trade payables,$38.1 in accrued expenses and other accounts payable,$18.6 million accruals for employees and$2.2 million in operating lease liabilities. This was offset by an increase of$124.1 million in trade receivables,$22.5 million in inventories and$67.3 million in prepaid expenses and other accounts receivable. 43
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Investing Activities
During 2020 net cash used in investing activities was$236.6 million , of which$223.7 million was invested in available-for-sale marketable securities,$126.8 million was related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements and$54.7 million was invested in short term bank deposits. This was offset by$141.8 million from maturities of available-for-sale marketable securities,$25.3 million from the withdrawal from restricted bank deposits and$1.5 million in proceeds related to other investing activities. During 2019, net cash used in investing activities was$152.9 million , of which$160.1 million was invested in available-for-sale marketable securities,$38.4 million was utilized for the acquisition ofSolarEdge Automation Machines ,$72.6 million was related to capital investments in laboratory equipment, end of line testing equipment, automated assembly lines, manufacturing tools and leasehold improvements,$26.1 million was invested in restricted bank deposits and$3.3 million was decreased in relation to the sale of aSolarEdge Automation Machines subsidiary originally acquired as part of the acquisition ofSolarEdge Automation Machines . This was offset by$142.7 million from sales and maturities of available-for-sale marketable securities and$4.9 million decrease in short-term bank deposits.
Financing Activities
During 2020, net cash provided by financing activities was$640.5 million , of which$632.5 million were proceeds from the issuance of the Notes, net of$14.6 million of issuance costs,$16.9 million related to proceeds from new bank loans and$21.5 million attributed to cash received from the exercise of employee and non-employee stock-based awards including withholding taxes effect. This was offset by$15.8 million used for repayment of loans we acquired as part of the Kokam acquisition. During 2019, net cash used in financing activities was$73.0 million , of which$71.5 million was related to the purchase of non-controlling interests,$9.2 million was used for repayment of loans we acquired as part of the acquisition of Kokam and the acquisition ofSolarEdge Automation Machines and$1.4 million related to the purchase of land and building formerly leased under a financial lease. This was offset by$9.1 million attributed to cash received from the exercise of employee and non-employee stock-base awards.
Convertible Senior Note
OnSeptember 25, 2020 , we issued$632.5 million aggregate principal amount of our Convertible Senior Notes or Notes in a transaction exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from the offering, after underwriters' discount and commissions and offering expenses, was$617.9 million . We intend to use the proceeds of the Notes for general corporate purposes. See Note 11 to our annual financial statements for more information. Debt Obligations During 2020, we redeemed all outstanding loans, including the bank loan obligations acquired as part of the acquisition of Kokam and entered into new bank loans in an aggregate amount of$15.2 million . The new bank loans mature in two installments throughJune 30, 2021 , with monthly interest rate of 1.54%. As ofDecember 31, 2020 , the aggregate outstanding amount of the new bank loans was$16.8 million . In addition, during 2020, we entered into a second new bank loan in an aggregate amount of$1.4 million . The second bank loan matures inSeptember 2030 , with a monthly interest rate of 2.5%. As ofDecember 31, 2020 , the aggregate outstanding amount of the second bank loan was$1.5 million .
Inflation
We do not believe that inflation had a material effect on our business,
financial condition, or results of operations in the last three years. If our
costs were to become subject to significant inflationary pressures, we may not
be able to fully offset such higher costs through price increases. Our inability
or failure to do so could harm our business, financial condition, and results of
operations.
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Contractual Obligations
The following table summarizes our outstanding contractual obligations as ofDecember 31, 2019 : Payment Due By Period Less Than More Than Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years (In thousands) Operating and finance leases(1)$ 83,324 12,998 28,019 3,908 38,284 Purchase commitments under agreements(2)$ 380,100 380,100 - - - Capital expenditures(3)$ 79,447 79,447 - - - 0.00% Convertible Senior Notes due 2025(4)$ 632,500 - - - - Total$ 1,175,371 $ 472,545 $ 28,019 $ 3,908 $ 38,284
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(1) Represents future minimum lease commitments under non-cancellable operating
lease agreements through which we lease our operating facilities.
(2) Represents non-cancelable amounts associated with our manufacturing
contracts. Such purchase commitments are based on our forecastedmanufacturing requirements and typically provide for fulfillment within
agreed-upon or commercially standard lead-times for the particular part or
product. The timing and amounts of payments represent our best estimates and
may change due to business needs and other factors.
(3) Represents non-cancelable amounts associated with purchases of automated
assembly lines and other machinery related to our manufacturing.
(4) For additional information, see Note 12 to our consolidated financial
statements included elsewhere in this annual report.
OffBalance Sheet Arrangements
We did not have any off-balance sheet arrangements in the year ended
Critical Accounting Policies and Significant Management Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in theU.S. ("GAAP"). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. See Note 2 to our annual financial statements for more information. 45
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Revenue Recognition
EffectiveJanuary 1, 2018 , we adopted the Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method applied to those contracts which were not substantially completed as ofJanuary 1, 2018 . As a result of this adoption, we revised our accounting policy for revenue recognition as detailed below. We generate revenues from the sale of DC optimized inverter systems for solar PV installations which include our power optimizers, inverters, and cloudbased monitoring platform as well as other solar related products,UPS systems, Lithium-ion cells, batteries, energy storage solutions, EV powertrain solutions and machinery. Our worldwide customer base includes large solar installers, distributors, EPCs, PV module manufacturers, utility companies and other customers. Our products are fully functional at the time of shipment to the customer and do not require production, modification, or customization with the exception of someUPS and ESS systems that require installation and commissioning. We recognize revenue under the core principle that transfer of control to the customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Provisions for rebates, sales incentives, and discounts to customers are accounted for as reductions in revenue in the same period that the related sales are recorded. We generally sell our products to our customers pursuant to a customer's standard purchase order and our customary terms and conditions. We do not offer rights to return our products other than for normal warranty conditions, and as such, revenue is recorded upon shipment of products to customers and transfer of title and risk of loss under standard commercial terms. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance and shipment of an order.
We provide our full webbased monitoring platform for our solar products free of charge and revenues associated with the service since that date are being recognized ratably over 25 years. In the absence of third party comparable pricing for such service, management determines the revenue levels of this service based on the costs associated with providing the service plus appropriate margins that reflect management's best estimate of the selling price. These revenues are minimal and we do not expect this to become a significant source of revenue in the near future.
The most significant impact of the standard on our financial statements relates to advance payments received for performance obligations that extend for a period greater than one year. Applying the standard, such performance obligations are those that include a financing component, specifically: (i) warranty extension services, (ii) cloud-based monitoring, and (iii) communication services.
We recognize financing component expenses in our consolidated statement of income in relation to advance payments for performance obligations that extend for a period greater than one year. These financing component expenses are reflected in our deferred revenues balance. The cumulative adjustments have decreased the retained earnings by$3.9 million while increasing the deferred revenues by the same amount.
Product Warranty
We provide a standard limited product warranty for our solar products against defects in materials and workmanship under normal use and service conditions. Our standard warranty period is 25 years for our power optimizers, 12 years for our inverters, and 10 years for our storage interface. Other products are sold with standard limited warranties that typically range in duration from one to ten years, and in some cases for a longer period. In certain cases, customers can purchase an extended warranty forCritical Power products and our battery storage products that exceed the standard warranty period. In addition, customers can purchase extended warranties for inverters that increase the warranty period to up to 25 years. Our products are designed to meet the warranty periods and our reliability procedures cover component selection, design, accelerated life cycle tests, and end-of-manufacturing line testing. However, since our history in selling power optimizers and inverters is substantially shorter than the warranty period, the calculation of warranty provisions is inherently uncertain. We accrue for estimated warranty costs at the time of sale based on anticipated warranty claims and actual historical warranty claims experience. Warranty provisions, computed on a perunit sold basis, are based on our best estimate of such costs and are included in our cost of revenues. The warranty obligation is determined based on actual and predicted failure rates of the products, cost of replacement and service and delivery costs incurred to correct a product failure. Our warranty obligation requires management to make assumptions regarding estimated failure rates and replacement costs. In order to predict the failure rate of each of our products, we have established a reliability model based on the estimated mean time between failures ("MTBF"). The MTBF represents the average elapsed time predicted for each product unit between failures during operation. Applying the MTBF failure rate over our install base for each product type and generation allows us to predict the number of failed units over the warranty period and estimates the costs associated with the product warranty. Predicted failure rates are updated periodically based on data returned from the field and new product versions, as are replacement costs which are updated to reflect changes in our actual production costs for our products, subcontractors' labor costs, and actual logistics costs. Since the MTBF model does not take into account additional nonsystematic failures such as failures caused by workmanship or manufacturing or designrelated issues, and since warranty claims are at times opened for cases in which the error has been triggered by an improper installation, we have developed a supplemental model to predict such cases and recognize the associated expenses ratably over the expected claim period. This model, which is based on actual root cause analysis of returned products, identification of the causes of claims and time until each identified problem is revealed, allows us to better predict actual warranty expenses and is updated periodically based on our experience, taking into account the installed base of approximately 61.6 million power optimizers and approximately 2.6 million inverters as ofDecember 31, 2020 . If actual warranty costs differ significantly from these estimates, adjustments may be required in the future, which could adversely affect our gross profit and results of operations. Warranty obligations are classified as short-term and long-term warranty obligations based on the period in which the warranty is expected to be claimed. The warranty provision (short and long-term) was$172.6 million and$205.0 million , in the year endedDecember 31, 2019 and 2020, respectively. 46
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Inventory Valuation
Our inventories comprise sellable finished goods, raw materials bought for own manufacturing or on behalf of our contract manufacturers, and faulty units returned under our warranty policy.
Sellable finished goods and raw material inventories are valued at the lower of cost or market, based on the moving average cost method. Certain factors could affect the realizable value of our inventories, including market and economic conditions, technological changes, existing product changes (mainly due to cost reduction activities), and new product introductions. We consider historic usage, expected demand, anticipated sales price, the effect of new product introductions, product obsolescence, product merchantability, and other factors when evaluating the value of inventories. Inventory writedowns are equal to the difference between the cost of inventories and their estimated fair market value. Inventory writedowns are recorded as cost of revenues in the accompanying statements of income and were$4.5 million and$8.9 million , in the year endedDecember 31, 2019 and 2020, respectively.
Faulty products returned under our warranty policy are often refurbished and used as replacement units. Such products are written off upon receipt.
We do not believe that there is a reasonable likelihood that there will be a material change in future estimates or assumptions that we use to record inventory at the lower of cost or market. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material. Business Combination We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair value. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology and other intangible assets, their useful lives and discount rates. Our management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Intangible and other long-lived assets
We evaluate the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the year endedDecember 31, 2020 . Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives of the assets. We believe the basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. We routinely review the remaining estimated useful lives of finite-lived intangible assets. In case we reduce the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any non-controlling interest in the acquiree, over the assigned fair values of the identifiable net assets acquired.Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis, in the fourth quarter of the fiscal year. 47
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The goodwill impairment test is performed according to the following principles:
(1) An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. (2)If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying mount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value is recognized. We complete the required annual testing of goodwill for impairment for the reporting unit onOctober 1 of each year and accordingly, determines whether goodwill should be impaired. As ofDecember 31, 2020 , no impairment of goodwill has been identified. Income taxes We account for income taxes in accordance with ASC 740, "Income Taxes." ASC 740, which prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. We account for uncertain tax positions in accordance with ASC 740. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement.
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