ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 forward‐looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward‐looking statements as a result of many factors, including those discussed under the sections of this Annual Report captioned “Special Note Regarding Forward‐Looking Statements” and “Risk Factors”. For discussion related to changes in financial condition and the results of operations for the year December 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 ended December 31, 2019, filed with the Securities and Exchange Commission on February 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, and UPS solutions.
Further information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.
In the year ended December 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 in Israel, 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 in Korea, Italy and Israel, as well as our contract manufacturers facilities in China, Vietnam and Hungary 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 as the United States and Italy beginning with the COVID-19 outbreak in March 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.
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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 the U.S and rest of world, which were slightly decreased in Europe due to typical seasonality experienced in Europe 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 our U.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 cloud‐based 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, end‐user 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 of UPS 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 ended December 31, 2020, 42.9% of our revenues were generated from Europe, 42.0% of our revenues were generated from the United States and 15.1% of our revenues are generated from ROW. In the year ended December 31, 2019, 38.2% of our revenues were generated from Europe, 47.6% of our revenues are generated from the 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 cloud‐based 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 third‐party 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 the U.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 reducing U.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 the U.S., Europe, Australia, and Japan. 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 the United States of optimizers and inverters from Sella 1, which is expected to reach full manufacturing capabilities in the second quarter of 2021.
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 full‐time employee headcount in our operations, production and support departments has grown from 1,031 as of December 31, 2019 to 1,549 as of December 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. Personnel‐related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions and stock‐based compensation. Our full‐time employee headcount in our research and development, sales and marketing, and general and administrative departments has grown from 1,400 as of December 31, 2019 to 1,625 as of December 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 personnel‐related expenses such as salaries, benefits, stock‐based 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 third‐party 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 personnel‐related expenses such as salaries, sales commissions, benefits, payroll taxes, and stock‐based 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 stock‐based 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 a SolarEdge Automation Machines (formerly named SMRE) subsidiary originally acquired as part of that acquisition, stock‐based 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 on August 25, 2019, modification of PSU terms originally granted as part of the acquisition of SolarEdge 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 and SolarEdge 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 the U.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 the U.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 ended December 31, 2019, we recorded net income tax expenses of $6.7 million for federal and state tax in the U.S., which consists of $10.1 million current income tax expenses and $3.4 million deferred tax benefit. In the year ended December 31, 2020, we recorded net income tax expenses of $4.6 million for federal and state tax in the 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.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to U.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 of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, 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 of December 31, 2018.
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The Tax Act required us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.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.
SolarEdge Technologies Ltd., our Israeli subsidiary, is taxed under Israeli law. Income not eligible for benefits under the Investments Law is taxed at the corporate tax rate. The Israeli corporate tax rate is 23%.
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 on December 31, 2016, and was granted an approval by the Israeli Tax Authorities (“ITA”) in this regard, the two-year tax exemption has ended on December 31, 2018.
The Investment Law was amended in 2005 and was further amended as of January 1, 2011 and in August 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 in Israel that are designated as Development Zone A and 16% elsewhere in Israel 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.
In December 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 the Israeli Ministry of Finance. A Technological Preferred Enterprise, as defined in the 2017 Amendment, that is located in the central region of Israel, 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 in Israel, located in a Development Zone A.
On June 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 of January 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 in Israel, 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. An Industrial 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 an Industrial 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 an Industrial 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.
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Results of Operations
The following tables set forth our consolidated statements of income for the years ended December 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 December 31, 2020 and year ended December 31, 2019
(In thousands)
Operating expenses:
Net loss attributable to Non-controlling interests - 1,592 (1,592 ) (100.0 )%
Revenues
(In thousands)
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Revenues increased by $33.6 million, or 2.4%, in the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to (i) an increase of $99.1 million in sales generated from Europe and the rest of world;(ii) an increased proportion of solar related products and services; (iii) price increases on products sold in the United States intended to offset the increase in tariffs on China made products imposed in June 2019. This increase was partially offset by $65.5 million less sales in the United States compared to 2019 which we attribute principally to the negative impact of the COVID-19 pandemic on the economy in the United States. Revenues from outside of the U.S. comprised 58.0% of our revenues in the year ended December 31, 2020 as compared to 52.4% in the year ended December 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 the U.S, that are characterized with lower ASP per watt, as well as a change in our customer mix in the 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 in Europe that are characterized with higher ASP per watt, as well as the strengthening of the Euro against the U.S. dollar.
In our solar business, we expect that revenues in the first quarter of 2021, will increase in the United States. This increase is expected to be slightly offset by decrease in revenues in Europe due to seasonality which is typically experienced in Europe 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
(In thousands)
Cost of revenues increased by $51.6 million, or 5.5%, in 2020 as compared to 2019, primarily due to:
•
an increase in warranty expenses and warranty accruals of $8.6 million associated primarily with an increase of products in our install base; this increase was partially offset by various cost reductions on the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses;
•
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 $12.0 million, mainly attributed to a decrease in air shipment costs resulted from higher inventory levels.
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
(In thousands)
Research and development costs increased by $41.8 million, or 34.4%, in 2020 compared to 2019, primarily due to:
•
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 sub‐contractors in an amount of $8.5 million;
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
(In thousands)
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 $3.2 million.
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
(In thousands)
General and administrative expenses increased by $13.8 million, or 27.9%, in 2020 compared to 2019, primarily due to:
•
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 $4.1 million in connection with legal claims.
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
(in thousands)
Other operating income was $3.4 million in 2020, compared to other operating expenses of $30.7 million in 2019, primarily due to:
•
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 of SolarEdge 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 the SolarEdge Automation Machines acquisition; and
•
a decrease in expenses in the amount of $4.9 million incurred in the fourth quarter of 2019 related to an acquired legal claim as part of the Kokam acquisition of which was settled in arbitration for $4.9 million in the first quarter of 2020.
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
(In thousands)
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 the U.S. Dollar.
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The increase in this income was partially offset by:
•
an increase of $4.0 million in costs related to hedging transactions in 2020;
•
a decrease of $3.7 million in interest income and accretion (amortization) of discount (premium) on marketable securities; and
•
an increase of $3.2 million related to the accretion of the debt discount and amortization of debt issuance cost associated with our Notes due 2025.
Taxes on Income
(In thousands)
Taxes on income decreased by $10.3 million, or 30.6%, in 2020 as compared to 2019, primarily due to:
•
a decrease of $10.6 million of current tax expenses mainly attributed to a decrease in taxable income and GILTI taxes, both due to higher deductible expenses in 2020 compared to 2019; and
•
a decrease in previous years taxes of $2.3 million.
This decrease was partially offset by a decrease of $2.6 million in deferred tax assets, net.
Net Income
(In thousands)
As a result of the factors discussed above, net income decreased by $4.6 million, or 3.2%, in 2020 as compared to 2019.
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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,
(In thousands)
Net cash provided by operating activities $ 259,000 $ 222,655
Net cash provided by (used in) financing activities (73,021 ) 640,484
As of December 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 of December 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.
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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 of SolarEdge 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 a SolarEdge Automation Machines subsidiary originally acquired as part of the acquisition of SolarEdge 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 of SolarEdge 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
On September 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 through June 30, 2021, with monthly interest rate of 1.54%. As of December 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 in September 2030, with a monthly interest rate of 2.5%. As of December 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 of December 31, 2019:
Payment Due By Period
Total Less Than 1 Year 1 – 3 Years 4 – 5 Years More Than 5 Years
(In thousands)
Off‐Balance Sheet Arrangements
We did not have any off-balance sheet arrangements in the year ended December 31, 2018, the year ended December 31, 2019 or the year ended December 31, 2020.
Critical Accounting Policies and Significant Management Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.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.
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Revenue Recognition
Effective January 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 of January 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 cloud‐based 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 some UPS 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 web‐based 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 for Critical 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 per‐unit 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 non‐systematic failures such as failures caused by workmanship or manufacturing or design‐related 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 of December 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 ended December 31, 2019 and 2020, respectively.
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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 write‐downs are equal to the difference between the cost of inventories and their estimated fair market value. Inventory write‐downs are recorded as cost of revenues in the accompanying statements of income and were $4.5 million and $8.9 million, in the year ended December 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 ended December 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
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.
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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 on October 1 of each year and accordingly, determines whether goodwill should be impaired. As of December 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.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates, customer concentrations, and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk
Approximately 41.2% 48.7% and 52.2% of our revenues for the year ended December 31, 2018, the year ended December 31, 2019 and the year ended December 31, 2020, respectively, were earned in non‐U.S. dollar denominated currencies, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. dollar and New Israeli Shekel, Euro, and to a lesser extent, the Korean Won. Our New Israeli Shekel‐denominated expenses consist primarily of personnel and overhead costs. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. A hypothetical 10% change in foreign currency exchange rates between the Euro and the U.S. dollar would increase or decrease our net income by $51.1 million for the year ended December 31, 2020. A hypothetical 10% change in foreign currency exchange rates between the New Israeli Shekel and the U.S. dollar would increase or decrease our net income by $14.9 million for the year ended December 31, 2020. A hypothetical 10% change in foreign currency exchange rates during the year ended December 31, 2020, between the Korean Won and the U.S. Dollar would increase or decrease our net income by $10.0 million for the year ended December 31, 2020.
For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate as of the date of the transaction or at the average exchange rate to the U.S. dollar during the reporting period.
To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks by hedging portions of the anticipated payroll payments denominated in New Israeli Shekels (“NIS”). Our foreign currency forward contracts are expected to mitigate exchange rate changes related to the hedged assets. Those hedging contracts are designated as cash flow hedges.
In addition, we also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar, mainly put and call options to sell Euro for U.S. dollars, put and call options to sell Australian dollars (“AUD”) for U.S. dollars and forward contracts to sell AUD for U.S. dollars, forward contracts to sell Euro for U.S. dollars and forward contracts to sell U.S. dollars for South Korean Won (“KRW”). These derivative instruments are not designated as cash flow hedges.
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We had cash, cash equivalents and restricted cash of $223.8 million and $827.1 at the end of the year ending December 31, 2019 and the year ended December 31, 2020, respectively, which was held for working capital purposes. We had available-for-sale marketable securities with an estimated fair value of $211.0 million and $291.1 million on December 31, 2019 and December 31, 2020, respectively. In addition, we had bank deposits of $5.0 million and $60.1 million as of December 31, 2019 and December 31, 2020, respectively. We had restricted bank deposits of $27.6 million and $2.6 million as of December 31, 2019 December 31, 2020, respectively.
Additionally, our hedging activities may also contribute to increased losses as a result of volatility in foreign currency markets. If foreign exchange currency markets continue to be volatile, such fluctuations in foreign currency exchange rates could materially and adversely affect our profit margins and results of operations in future periods. Also, the volatility in the foreign currency markets may make it difficult to hedge our foreign currency exposures effectively.
Concentrations of Major Customers
Our trade accounts receivables potentially expose us to a concentration of credit risk with our major customers. For the year ended December 31, 2020, one major customer accounted for 14.8% of our total revenues, and as of December 31, 2020, two major customers accounted for approximately 34.6% of our consolidated trade receivables balance. For the year ended December 31, 2019, one major customer accounted for 20.4% of total revenues, and as of December 31, 2019, one major customer accounted for approximately 32.1% of our consolidated trade receivables balance. We currently do not foresee a credit risk associated with these receivables.
Commodity Price Risk
We are subject to risk from fluctuating market prices of certain commodity raw materials, including copper, which are used in our products. Prices of these raw materials may be affected by supply restrictions or other market factors from time to time, and we do not enter into hedging arrangements to mitigate commodity risk. Significant price changes for these raw materials could reduce our operating margins if we are unable to recover such increases from our customers, and could harm our business, financial condition, and results of operations.
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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-5
Notes to Consolidated Financial Statements F-13
Unaudited Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the fiscal years covered by the financial statements provided with this filing. The data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
Operating expenses
Subsequent Events
None.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2020. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management assessed our internal control over financial reporting as of December 31, 2020. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Our independent registered public accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst & Young, independently assessed the effectiveness of the company’s internal control over financial reporting, as stated in the firm’s attestation report, which is incorporated by reference into Part II, Item 8 of this Form 10-K.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None.
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PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be included under the captions “Directors and Corporate Governance”, “The Board’s Role in Risk Oversight”, “Board Committees”, “Director Compensation”, “Compensation Committee Report”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ending December 31, 2020 (the "2021 Proxy Statement") and is incorporated herein by reference.
ITEM 11.EXECUTIVE COMPENSATION
The information required by Item 11 will be included under the captions “Executive Compensation” in our 2021 Proxy Statement and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as set forth below, the information required by Item 12 will be included under the captions “Security Ownership of Certain Beneficial Owners and Management” in our 2021 Proxy Statement and is incorporated herein by reference.
Equity Compensation Plan Information
The following table summarizes information as of December 31, 2020, about shares of common stock that may be issued under our equity compensation plans.
Equity compensation plans not approved by security holders — — —
Employee Stock Purchase Plan
We have adopted an employee stock purchase plan (“ESPP”), pursuant to which our eligible employees and eligible employees of our subsidiaries may elect to have payroll deductions made during the offering period in an amount not exceeding 10% of the compensation which the employees receive on each pay day during the offering period. In the second quarter of calendar 2016, we started granting eligible employees the right to purchase our common stock under the ESPP. As of December 31, 2020, a total of 2,687,451 shares were reserved for issuance under the ESPP. The number of shares of common stock reserved for issuance under the ESPP will increase annually on January 1st, for ten years, by the lesser of 1% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year or 487,643 shares. Our board of directors may reduce the number of shares to be added to the share reserve for the ESPP in any particular year at their discretion.
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ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be included under the captions “Transactions with Related Persons” in our 2021 Proxy Statement and is incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be included under the captions “Audit and Related Fees” in our 2021 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Our Consolidated Financial Statements and Notes thereto are included in ITEM 8 of this Annual Report on Form 10-K. See Index to ITEM 8 for more detail.
All financial schedules have been omitted either because they are not applicable or because the required information is provided in our Consolidated Financial Statements and Notes thereto, included in ITEM 8 of this Annual Report on Form 10-K.
Index to Exhibits
Exhibit No. Description Incorporation by Reference
3.3 Description of Common Stock Filed with this report.
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Exhibit No. Description Incorporation by Reference
21.1 List of Subsidiaries of the Registrant Filed with this report.
24.1 Power of Attorney (included in signature page) Filed with this report.
101.SCH XBRL Taxonomy Extension Schema Document Filed with this report.
101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed with this report.
† Management contract or compensatory plan or arrangement.
ITEM 16.FORM 10–K SUMMARY
None.
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SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
AUDITED
INDEX
Page
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-5
Notes to Consolidated Financial Statements F-13
- - - - - - - - - - - - - - - - - - - - -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
SOLAREDGE TECHNOLOGIES, INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SolarEdge Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involve our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F - 2
Valuation of Warranty Obligations
Valuation of and Accounting for Convertible Notes at Issuance
/s/ Kost Forer Gabbay & Kasierer
A Member of Ernst & Young Global
We have served as the Company's auditor since 2007.
Tel-Aviv, Israel
February 19, 2021
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
SOLAREDGE TECHNOLOGIES, INC.
Opinion on Internal Control over Financial Reporting
We have audited SolarEdge Technologies, Inc. and subsidiaries internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, SolarEdge Technologies, Inc. and subsidiaries (the "Company") maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020, and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 23, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Kost Forer Gabbay & Kasierer
A Member of Ernst & Young Global
Tel-Aviv, Israel
February 19, 2021
F - 4
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
December 31,
ASSETS
CURRENT ASSETS:
LONG-TERM ASSETS:
Operating lease right-of-use assets, net 41,600 35,858
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont.)
U.S. dollars in thousands (except share and per share data)
December 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of bank loans and accrued interest 16,894 15,673
Deferred revenues and customers advances 24,648 70,815
Accrued expenses and other current liabilities 106,154 80,576
LONG-TERM LIABILITIES:
Convertible senior notes, net 573,350 -
Deferred tax liabilities, net 8,593 4,461
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS’ EQUITY:
Accumulated other comprehensive income (loss) 3,857 (1,809 )
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
Operating expenses:
Other operating expenses (income), net (3,429 ) 30,696 -
Net loss attributable to Non-controlling interests - 1,592 787
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
Other comprehensive income:
Available-for-sale securities:
Changes in unrealized gains (losses), net of tax (24 ) 829 (360 )
Reclassification adjustments for losses included in net income - 91 137
Cash flow hedges:
Changes in unrealized gains, net of tax 966 - 31
Net change - - -
Foreign currency translation adjustments, net 5,690 (2,205 ) 310
Total other comprehensive income (loss) 5,666 (1,285 ) 87
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
U.S. dollars in thousands (except share and per share data)
SolarEdge Technologies, Inc. Stockholders’ Equity
Number Amount
Other comprehensive income adjustments - - - 87 - 87 150 237
Treasury Stock (183,395 ) * - (2 ) - - (2 ) - (2 )
Change in non-controlling interests - - (20 ) - - (20 ) (73,479 ) (73,499 )
Other comprehensive loss adjustments - - - (1,285 ) - (1,285 ) (981 ) (2,266 )
* Represents an amount less than $1.
F - 9
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)
U.S. dollars in thousands (except share and per share data)
SolarEdge Technologies, Inc. Stockholders’ Equity
Number Amount
Equity component of convertible senior notes, net - - 36,336 - - 36,336 - 36,336
Other comprehensive income adjustments - - - 5,666 - 5,666 - 5,666
* Represents an amount less than $1.
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
Cash flows provided by operating activities:
Amortization of debt discount and debt issuance costs 3,185 - -
Loss from sale of business - 5,269 -
Changes in assets and liabilities:
Cash flows from investing activities:
Withdrawal from (investment in) bank deposits, net (54,752 ) 4,860 (9,870 )
Business combinations, net of cash acquired - (38,435 ) (94,737 )
Other investing activities 1,504 (3,261 ) -
F - 11
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net $ 617,869 $ - $ -
Change in non-controlling interests - (71,468 ) (14,190 )
Other financing activities (234 ) (1,354 ) -
Net cash provided by (used in) financing activities 640,484 (73,021 ) (7,955 )
Supplemental disclosure of non-cash activities:
Issuance of common stock upon business combination $ - $ 34,601 $ -
Supplemental disclosure of cash flow information:
Cash paid for interest on bank loans $ 321 $ 1,096 $ 143
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-GENERAL
a.SolarEdge Technologies, Inc. (the “Company”) and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic (“PV”) module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. The Company’s products consist mainly of (i) power optimizers designed to maximize energy throughput from each and every module through constant tracking of Maximum Power Point individually per module, (ii) inverters which invert direct current (DC) from the PV module to alternating current (AC), (iii) a remote cloud-based monitoring platform, that collects and processes information from the power optimizers and inverters to enable customers and system owners, to monitor and manage the solar PV system (iv) a storage and backup solution that is used to increase energy independence and maximize self-consumption for homeowners by utilizing a battery that is sold separately by third party manufacturers, to store and supply power as needed, and (v) additional smart energy management solutions.
The Company and its subsidiaries sell products worldwide through large distributors, electrical equipment wholesalers, as well as directly to large solar installers and engineering, procurement and construction firms.
b.The Company has expanded its activity to other areas of smart energy technology organically and through acquisitions. The Company now offers variety of energy solutions, which include lithium-ion cells, batteries and energy storage systems (“Energy Storage”), full powertrain kits for electric vehicles, or EVs (“e-Mobility”), uninterrupted power supply solutions (“UPS”), as well as automated machines for industrial use (“Automation Machines”).
During 2018, the Company completed the acquisitions of substantially all of the assets and activities of Gamatronic Electronic Industries Ltd and all of the outstanding shares of its wholly owned subsidiary Gamatronic (UK) Limited, respectively. Together, this activity is referred to as Critical Power, which provides and manufactures UPS devices.
During 2018 and 2019, the Company completed the acquisition of Kokam Co., Ltd., a provider of lithium-ion cells, batteries and energy storage solutions (“Kokam”).
On January 24, 2019, the Company completed the acquisition of 56.8% of the outstanding common stock and voting rights of SolarEdge Automation Machines, formerly known as S.M.R.E S.p.A (“SolarEdge Automation Machines”) and its subsidiaries, providers of innovative integrated powertrain technology and electronics for electric vehicles as well as automated machines for industries. As of December 31, 2020, the Company increased its shareholdings in SolarEdge Automation Machines to 99.9%.
F - 13
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”).
a.Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances including profit from intercompany sales not yet realized outside the Company have been eliminated upon consolidation.
b.Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes.
The duration, scope and effects of the ongoing COVID-19 pandemic, government and other third party responses to it, and the related macroeconomic effects, including to the Company’s business and the business of the Company’s suppliers and customers are uncertain, rapidly changing and difficult to predict. As a result, the Company’s accounting estimates and assumptions may change over time in response to this evolving situation. Such changes could result in future impairments of goodwill, intangibles, long-lived assets, inventories, incremental credit losses on receivables and AFS debt securities, or an increase in the Company’s insurance liabilities as of the time of a relevant measurement event.
c.Financial statements in U.S. dollars:
A major part of the Company’s operations is carried out in the United States, Israel and certain other countries. The functional currency of these entities is the U.S. dollar.
Financing activities, including cash investments are primarily made in U.S. dollars.
Accordingly, monetary accounts maintained in currencies other than the U.S. dollar are translated into U.S. dollars in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 830 “Foreign Currency Matters”. All transaction gains and losses of the re-measurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate.
The financial statements of other Company’s subsidiaries whose functional currency is other than the U.S. dollar have been translated into U.S dollars. Assets and liabilities have been translated using the exchange rates in effect as of the balance sheet date. Statements of income amounts have been translated using the average exchange rate for the relevant periods.
The resulting translation adjustments are reported as a component of stockholders’ equity in accumulated other comprehensive income (loss).
Accumulated other comprehensive income (loss) related to foreign currency translation adjustments, net amounted to $3,617 and $(2,073) as of December 31, 2020 and 2019, respectively.
F - 14
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
d.Cash and cash equivalents:
Cash equivalents are short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less at the date acquired.
e.Short-term bank deposits:
Short-term bank deposits are deposits with an original maturity of more than three months and less than a year from the date of investment and which do not meet the definition of cash equivalents. The deposits are presented according to their term deposits.
f.Restricted bank deposits:
Restricted bank deposits are primarily invested in short-term bank deposits, with an original maturity of more than three months and less than a year from the date of investment and which are primarily used as collateral for a letter of credit for the Company’s customers and security for the Company’s office leases and credit cards.
g.Marketable Securities:
Marketable securities consist of corporate and governmental bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320 “Investments - Debt and Equity Securities”, the Company classifies marketable securities as available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial expenses (income), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial expenses (income), net.
The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term.
On each reporting period, the Company evaluates whether declines in fair value below carrying value are due to expected credit losses, as well as the ability and intent to hold the investment until a forecasted recovery occurs, in accordance with ASC 326. Allowance for credit losses on AFS debt securities are recognized as a charge in financial expenses (income), net, on the consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity.
The Company has not recorded credit losses for the year ended December 31, 2020.
There was no other-than-temporary-impairment charge for any unrealized losses in 2019 and 2018.
The Company determines realized gains or losses on sale of marketable securities on a specific identification method and records such gains or losses in financial expenses (income) on the consolidated statements of income.
F - 15
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h.Trade receivables:
Trade receivables are stated net of credit losses allowance. The Company is exposed to credit losses primarily through sales of products. The allowance against gross trade receivables reflects the current expected credit loss inherent in the receivables portfolio determined based on the Company’s methodology. The Company’s methodology is based on historical collection experience, customer creditworthiness, current and future economic condition and market condition. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company also considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. Trade receivables are written off after all reasonable means to collect the full amount have been exhausted.
The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of trade receivables to present the net amount expected to be collected:
Balance, at beginning of period $ 2,473
Provision for expected credit losses 956
Amounts written off charged against the allowance and others (543)
Balance, at end of period $ 2,886
i.Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost includes depreciation, labor, material and overhead costs. Inventory reserves are provided to cover risks arising from slow-moving items or technological obsolescence. The Company periodically evaluates the quantities on hand relative to historical, current, and projected sales volume. Based on this evaluation, an impairment charge is recorded when required to write-down inventory to its net realizable value.
Cost of finished goods and raw materials is determined using the moving average cost method.
j.Property, plant and equipment:
Property, plant and equipment are stated at cost, net of accumulated depreciation. Machinery and equipment in progress represent the construction or development stage of property and equipment that have not yet been placed in service for the Company's intended use. Depreciation is calculated by the straight-line method over the estimated useful live of the assets, at the following rates:
%
Buildings and plants 2.5 – 5 (mainly 2.5)
Computers and peripheral equipment 20 – 33 (mainly 33)
Office furniture and equipment 7 – 25 (mainly 7)
Machinery and equipment 10 – 25 (mainly 10)
Laboratory and testing equipment 7 – 20 (mainly 10)
F - 16
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k.Leases:
The Company determines if an arrangement is a lease at inception. Contracts containing a lease are further evaluated for classification as an operating or finance lease. In determining the leases classification the Company assesses among other criteria: (i) 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and long-term operating lease liabilities in the Company’s consolidated balance sheets. Finance leases are included in property, plant and equipment, net, other current liabilities, and long-term finance lease liabilities in the Company’s consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. For leases with terms greater than 12 months, the Company records the ROU asset and liability at commencement date based on the present value of lease payments according to their term.
The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses are recognized on a straight-line basis over the lease term or the useful life of the leased asset.
In addition, the carrying amount of the ROU and lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
l.Business Combination:
The Company allocates the fair value of the purchase price to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair value. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require 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 discount rates. 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 does not exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the finalization of the measurement period, any subsequent adjustments are recorded to earnings.
m.Intangible Assets:
The Company evaluates 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.
F - 17
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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 group of assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the group of assets is 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. The Company has not recorded any impairment charges of finite-lived intangible assets during the years ended December 31, 2020 and 2019.
Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives of the assets. The basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. In case the Company reduces the estimated useful life for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life (see Note 9).
n.Goodwill:
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.
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 amount, 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.
The Company has not recorded any impairment charges of goodwill during the years ended December 31, 2020 and 2019.
o.Impairment of long-lived assets:
The Company’s long-lived assets, other than goodwill and intangible assets, including right-of-use assets, are reviewed for impairment in accordance with ASC 360 “Property, Plants and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset group) to the future undiscounted cash flows expected to be generated by the assets (or asset group).
If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value. For the years ended December 31, 2020, 2019 and 2018, no impairment losses have been identified.
F - 18
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p.Severance pay:
The employees of the Company’s Israeli subsidiary are included under Section 14 of the Severance Pay Law, 1963, under which these employees are entitled only to monthly deposits made in their name with insurance companies, at a rate of 8.33% of their monthly salary. These payments cause the Company to be released from any future obligation under the Israeli Severance Pay Law to make severance payments in respect of those employees; therefore, related assets and liabilities are not presented in the consolidated balance sheets.
For the years ended December 31, 2020, 2019 and 2018, the Company recorded $10,598, $7,285 and $4,331, in severance expenses related to its employees, respectively.
q.Derivatives and Hedging:
The Company accounts for derivatives and hedging based on ASC 815 (“Derivatives and Hedging”). ASC 815 requires the Company to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
To protect against the increase in value of forecasted foreign currency cash flows resulting from salary denominated in the Israeli currency, the New Israeli Shekels (“NIS”), during the year ended December 31, 2020, the Company instituted a foreign currency cash flow hedging program whereby portions of the anticipated payroll denominated in NIS for a period of one to six months with hedging contracts.
Accordingly, when the dollar strengthens against the NIS, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the hedging contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by gains in the fair value of the hedging contracts. These hedging contracts are designated as cash flow hedges, as defined by ASC 815 and are all effective hedges.
The Company also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar. These derivative instruments are not designated as cash flow hedges, as defined by ASC 815, and therefore all gains and losses, resulting from fair value remeasurement, were recorded immediately in the statement of income, as a financial expense (income), net.
r.Revenue recognition:
Revenues are recognized in accordance with ASC 606; revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers, in an amount that the Company expects in exchange for those goods or services.
The Company’s products consist mainly of (i) power optimizers, (ii) inverters, (iii) a related cloud-based monitoring platform, (iv) communication services, (v) a storage solution, (vi) UPS units, (vii) Lithium-ion cells, batteries and energy storage solutions, (viii) powertrain kits for the e-Mobility segment and (ix) automated machinery for manufacturing lines.
The Company recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an amount reflecting the consideration the Company expects to receive in revenue.
F - 19
SOLAREDGE TECHNOLOGIES, INC.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In order to achieve that core principle, the Company applies 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 the performance obligation is satisfied.
(1)Identify the contract with a customer
A contract is an agreement or purchase order between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the consideration.
The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term business relationship and a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments, the Company evaluates the customer’s financial position, the number of years the customer has been in business, the history of collection with the customer, and the customer’s ability to pay, and typically assigns a credit limit based on that review.
(2)Identify the performance obligations in the contract