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 section
of this Annual Report on Form 10-K captioned “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
ended December 31, 2021, refer to Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 22,
2022.
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 capabilities, home
energy management, grid services and virtual power plants, as well as products in our non-solar businesses which address e-Mobility
("e-Mobility"), automation machines ("Automation Machines") and lithium-ion batteries ("Storage").
Further
information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.
In the year ended December 31,
2022, one customer accounted for 18.5% of our
revenues and our top three customers (all distributors) together represented 34.8% of our revenues.
Our revenues were $3,110.3
million and $1,963.9 million for fiscal 2022 and fiscal
2021, respectively. Gross margins were 27.2% and 32.0%
for fiscal 2022 and fiscal 2021, respectively. Net income was $93.8
million and $169.2 million for fiscal 2022 and fiscal 2021,
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 shipments of inverters, power optimizers and megawatts to evaluate our
sales performance and to track market acceptance of our products. We use metrics relating to monitoring (systems monitored) to evaluate
market acceptance of our products and usage of our solution.
We
provide the “megawatts shipped” and "megawatts hour shipped" metrics, which are calculated based on inverter or battery nameplate
capacity shipped respectively, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the
maximum rated power output capacity of an inverter or battery, and corresponds to our financial results in that higher total nameplate
capacities shipped are generally associated with higher total revenues. However, revenues may increase in a non-correlated manner to the
"megawatt shipped" metric since other products such as Power Optimizers, are not accounted for in this metric.
40
Year ended December 31,
Megawatts hour shipped - residential batteries 889 53
1
Excluding residential batteries, based on the aggregate nameplate capacity of inverters shipped during the applicable period. Nameplate
capacity is the maximum rated power output capacity of an inverter as specified by the manufacturer.
Global Circumstances
Influencing our Business and Operations
Covid-19
Impact & Response
Covid-19 continued
to present challenges to our operations and business in 2022, primarily, operational challenges, which we reported on continuously in
our quarterly reports throughout the year, but to a lesser extent than in 2021. Due to the worldwide growing trend in availability and
administration of vaccines against Covid-19, many restrictions that were placed during the pandemic were gradually lifted by governments
across the globe. However, the future impact of the Covid-19 pandemic remains highly uncertain. Resurgences of Covid-19 cases and the
emergence of new variants may adversely impact our results of operations. For example, in the second quarter of 2022, the mandatory government
shutdowns resulting from the increase in Covid-19 cases in Shanghai, that were eased in the beginning of the third quarter of 2022, led
to delays in our scheduled shipments from the Shanghai port. 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.
While we have not experienced any new disruptions resulting
directly from Covid-19 in the fourth quarter of 2022, the pandemic and general global economic conditions continue to present challenges
to our operations and business. In the fourth quarter of 2022, we began to witness a decrease in shipment prices and transit times, both
however are still not at their pre-Covid-19 levels. In fiscal 2022 as a whole and the fourth quarter of 2022 specifically, the industry-wide
component shortages which originated from Covid-19 and amplified by the increase in demand for our products, as well as other manufacturers
who are competing for the same components, continued to impact our ability to accurately plan and forecast the delivery of our products
to customers and have also increased cost of ocean and air freight for components and finished goods. To mitigate the impact of these
disruptions on our supply chain, we extended shipment terms that differ from our standard terms in certain transactions including Free-Carrier
and Ex-works (INCOTERMS, 2020) delivery from our manufacturing facilities. This change was implemented as part of our ongoing efforts
to expedite shipments to our customers and improve visibility throughout our supply chain. Moreover, industry-wide component shortages
require our R&D teams to focus their attention on manufacturing and production design workarounds solutions, which can impact our
ability to meet our plans to roll out new innovative products and services. Our operation team is working tirelessly to mitigate the impact
of the disruptions described above.
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Impact
of Ukraine’s Conflict on the Energy Landscape
The conflict between
Ukraine and Russia, which started in early 2022, and the sanctions and other measures imposed in response to this conflict, have increased
the level of economic and political uncertainty. While we do not have any meaningful business in Russia or Ukraine and we do not have
physical assets in these countries, this conflict has, and is likely to continue to have, a multidimensional impact on the global economy,
the energy landscape in general and the global supply chain. On one hand, in 2022, rising global interest in becoming less dependent on
gas and oil led to higher demand for our products. On the other hand, the conflict further adversely affected the prices of raw materials
arriving from Eastern Asia and resulted in an increase in gas and oil prices. Furthermore, various shipment routes were adversely impacted
by the conflict resulting in increased shipment lead times and shipping costs for our products. While the impact of this conflict cannot
be predicted at this time, the circumstances described above may have an adverse effect on our business and results of operations.
Inflation Reduction Act
In August 2022, the U.S.
government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes several incentives intended to promote
clean energy, battery and energy storage, electrical vehicles, and other solar products and is expected to impact our business and operations.
As part of such incentives, the IRA, will among other things, extend the investment tax credit (“ITC”)
through 2034 and is therefore expected to increase the demand for solar products. The IRA is expected to further incentivize residential
and commercial solar customers and developers due to the inclusion of a tax credit for qualifying energy projects of up to 30%. Since
these regulations are new and are still pending administrative guidance from the Internal Revenue Service and U.S. Treasury Department,
we will be examining the benefits that may be available to us, such as the availability of tax credits for domestic manufacturers, in
the coming months. To the extent that tax benefits or credits may be available to competing technology and not to our technology, our
business could be adversely disadvantaged.
42
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, storage and backup
solutions, 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, 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 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,
2022, 54.3% of our revenues were generated from Europe, 36.5%
of our revenues were generated from the United States and 9.2% of our revenues were generated
from ROW. In the year ended December 31, 2021, 45.4%
of our revenues were generated from Europe, 40.0% of our revenues were from the United States
and 14.6% 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 testing and manufacturing equipment, provision for
losses related to slow moving and dead inventory, 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 testing and manufacturing equipment, are not directly affected by sales volume.
With
respect to ESS, Automation Machines and e-Mobility products ("Non-Solar") 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, amortization of intangible assets and other fixed costs.
Except for the manufacturing
and assembly activities related to our Non-Solar businesses and the manufacturing of solar products
at Sella 1, our manufacturing facility in the North of Israel, we outsource our manufacturing to third-party manufacturers and negotiate
product pricing on a quarterly basis.
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During 2022,
supply chain and operational challenges coupled with an increase in demand for our products, resulted in increased use of expedited ocean
freight as well as air freight to deliver our products to our customers in a timely manner. At the beginning of 2022, a high portion of
our products manufactured in non-tariff countries imported into the U.S. resulted in lower custom tariff charges. As a result of the operational
challenges we faced during 2022, the levels of our finished goods inventories required to support our growth were reduced. While we are
seeing an improvement in supply chain disruptions and component constraints towards the end of 2022, we expect to continue to deliver
our products through expedited ocean freight and air freight. To the extent that production in
our Mexican manufacturing facility ramps and production in Sella 1 is expanded as anticipated, we expect inventory levels to return to
those required to support our growing business, the reduction in expedited shipments and air freight usage during the third quarter of
2023.
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 magnetic, and own large amounts of equipment in connection with such
manufacturing activities. In 2022, we developed and commenced manufacturing from our first partially automated inverter assembly line
which began production in our Sella 1 manufacturing site. 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 current cash
and cash equivalents, available-for-sale marketable securities and cash flows generation. Additionally, we continue to develop our
own manufacturing capabilities in Sella 2, our Li-Ion battery factory in Korea. We expect Sella 2 to continue to incur costs and expenses
as it ramps. We also intend to expand the manufacturing capabilities of Sella 2 in fiscal years 2023 and 2024 which will result in
additional expenses. We intend to use our available cash balances for this expansion.
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.
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 employees headcount
in our operations, production and support departments has grown from 2,052
as of December 31, 2021 to 2,383 as of December 31,
2022.
Gross
profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up
costs, product mix, customer mix, geographical mix, shipping method, warranty costs, exchange rates and seasonality.
Operating
Expenses
Operating expenses consist
of research and development, sales and marketing, general and administrative, goodwill impairment and other operating expenses, net. 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 employees headcount in our research and development, sales and marketing and general and administrative
departments, has grown from 1,912 as of December 31,
2021 to 2,543 as of December 31, 2022. 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.
44
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 and amortization expenses, 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.
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. 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 expenses related to legal claims and allowance
for doubtful accounts in the event of uncollectible account receivables balances.
Goodwill
impairment and other operating expenses, net
Goodwill
impairment and other operating expenses, net, consist primarily of impairment
of goodwill, impairment of long-lived assets and certain other nonrecurring items.
Non
Operating Expenses
Financial
income (expense), net
Financial income (expense),
net, 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, deposits and accretion of discounts related to our investment
in available for sale marketable securities.
Interest expense consists
of interest related to bank loans, 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), amortization of premium related to our investment in available for sale marketable
securities 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)
income, net, also consists of gains or losses from foreign currency fluctuations primarily of the effect of foreign exchange differences
between the U.S. dollar and the New Israeli Shekel, the Euro, the South Korean Won and other currencies related to our monetary assets
and liabilities, the fair value remeasurement of hedging contracts not designated as cash flow hedge and bank charges.
45
Other
income
Other income consists
primarily of realized and unrealized gains and losses on investments in privately-held companies.
Income
taxes
We are subject to income
taxes in the countries where we operate.
In the year ended December 31,
2022, we recorded a net income tax expense of $83.4 million, which consists of a $94.4
million current income tax expense and $11.0 million of deferred tax income. In the year ended
December 31, 2021, we recorded a net income tax expense of $18.1 million, which consists of a $29.7 million current income tax expense
and a $11.6 million deferred tax income. The increase in net income tax expense was mainly attributed to impairments that did not
have a corresponding tax effect and the change to Section 174 of the U.S Internal Revenue Code, which became effective on January 1, 2022.
The change eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over
five years (if generated from a US entity) and fifteen years (if generated from non-U.S. entities).This change to Section 174, as well
as lower tax benefits relating to stock-based compensation, resulted in an increase in the Company’s taxable income and Global Intangible
Low Taxed Income (“GILTI”) tax.
On
December 22, 2017, the Tax Cuts and Jobs Act (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 and created
new taxes on certain foreign-sourced earnings (including GILTI, as explained above) and certain related-party payments.
Furthermore,
the Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiaries 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
total tax liability will be paid over the eight-year period provided in the Tax Act (ending 2024).
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, 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. 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 starting in the year 2017 and thereafter.
Our Israeli subsidiary has established its own manufacturing facility in Israel, located in a Development Zone A, therefore income from
manufacturing attributed to that facility is subject to a 7.5% tax rate.
46
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 Preferred Technological
Enterprise (PTE), as defined in the 2017 Amendment, that is located in the central region of Israel, will be subject to a tax at a rate
of 12% on profits deriving from intellectual property, or 6% if its annual revenues exceed New Israeli Shekel 10 billion.
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. 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 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. Our PTE income was subject to a 12% tax rate in Israel in the years
2019-2021, and in 2022 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel revenues threshold.
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, amortization over an eight-year period of the cost of purchased know-how, patents and accelerated
depreciation rates on equipment and buildings.
Results of Operations
The
following tables set forth our consolidated statements of income for the years ended December 31,
2022 and 2021. 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 Annual Report. The results of historical periods are not necessarily indicative of the results of operations
for any future period.
47
Comparison
of year ended December 31, 2022 and year ended December 31,
2021
(In thousands)
Operating expenses:
Revenues
(In thousands)
Revenues
increased by $1,146.4 million, or 58.4%, in the year ended December 31, 2022, as compared to the year ended December 31, 2021,
primarily due to (i) an increase of $615.5 million related to the number of inverters and power optimizers sold, with significant
growth in revenues coming from Europe and the U.S.; and (ii) an increase of $409.6 million related to the number of residential batteries
sold mainly in Europe and in the U.S.
Revenues
from outside of the U.S. comprised 63.5% of our revenues in the year ended December 31, 2022 as compared to 60.0% in the year ended
December 31, 2021.
The
number of power optimizers recognized as revenues increased by approximately 5.1 million units, or 27.4%, from approximately 18.6 million
units in 2021 to approximately 23.7 million units in 2022. The number of inverters recognized as revenues, increased by approximately
226.2 thousand units, or 28.7%, from approximately 788.4 thousand
units in 2021 to approximately 1,014.6 thousand units in 2022.
Our blended Average Selling
Price or ASP per watt for solar products excluding residential batteries is calculated by dividing solar revenues, excluding revenues
from the sale of residential batteries, by the nameplate capacity of inverters shipped. Our blended ASP per watt for solar products shipped
decreased by 0.008, or 3.3%,
in 2022 as compared to 2021. The decrease in blended
ASP per watt is mainly attributed to the depreciation of the Euro and other currencies against the U.S. Dollar, which, coupled with our
increased sales in Europe, accelerated this effect, as well as the increase in the sale of commercial products in Europe and the U.S.,
out of our total solar product mix that is characterized with lower ASP per watt. This decrease in blended ASP per watt was partially
offset by price increases that went into effect gradually during the second half of 2021 and continued in 2022, as well as a relatively
higher number of other solar products shipped compared to the number of inverters shipped, which increased our total solar revenues, but
did not impact the watt amount used for calculating the ASP per watt.
Our
blended ASP per hour watt for residential batteries is calculated by dividing residential batteries revenues, by the nameplate capacity
of residential batteries shipped. Our blended ASP per watt for residential batteries in 2022 was 0.479.
48
Cost of Revenues and
Gross Profit
(In thousands)
Cost of revenues increased
by $931.1 million, or 69.8%, in 2022
as compared to 2021, primarily due to:
49
Gross profit as a percentage of revenue
decreased from 32.0% in 2021
to 27.2% in 2022, as a result of the above detailed
analysis.
Operating Expenses:
Research and Development
(In thousands)
Research and development
costs increased by $70.2 million or 32.0%,
in 2022 compared to 2021, primarily due to:
These
increases were partially offset by a decrease in expenses related to consultants and sub-contractors in the amount of $3.7 million.
Sales and Marketing
(In thousands)
Sales
and marketing expenses increased by $40.7 million, or
34.2%, in 2022 compared to 2021,
primarily due to:
• an increase in expenses related to marketing activities of $4.8 million; and
• an increase in expenses related to travel in the amount of $2.7 million.
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General and Administrative
(In thousands)
General and administrative expenses increased
by $30.3 million, or 36.9%, in 2022
compared to 2021, primarily due to:
These
increases were partially offset by a decrease of $5.6 million
related to a provision for legal claims.
Goodwill impairment
and other operating expenses, net
(In thousands)
Goodwill impairment
and other operating expenses, net were $116.5 million in 2022, compared to $1.4 million in 2021, primarily due to:
These
were partially offset by an increase of $2.6 million in income related to selling of Critical Power assets and property, plant and equipment.
51
Financial
income (expenses), net
(In thousands)
Financial income, net
was $3.3 million in 2022 compared to financial expenses, net of $19.9 million in 2021, primarily due to:
These
were partially offset by a decrease of $4.7 million in financial income related to hedging transactions.
Other income
(In thousands)
Other income increased by $7.7
million, or 100.0%, in 2022 compared to 2021 due
to the sale of our investment in a privately-held company.
Income
taxes
(In thousands)
Income taxes increased
by $65.3 million, or 361.8%, in 2022
as compared to 2021, primarily due to:
• an increase of $13.3 million in prior years taxes income; and
• a decrease of $0.6 million in deferred tax income.
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Net Income
(In thousands)
As a result of the factors discussed above, net
income decreased by $75.4 million, or 44.6%
in 2022 as compared to 2021.
Liquidity and Capital
Resources
The following table shows our cash flows from
operating activities, investing activities, and financing activities for the stated periods:
Year ended December 31,
(In thousands)
Net cash provided by operating activities $ 31,284 $ 214,129
Net cash provided by (used in) financing activities 654,607 (15,178 )
As of December 31, 2022, our cash and
cash equivalents were $783.1 million. This amount does not include $886.6 million invested in available for sale marketable securities,
$0.5 million invested in short-term restricted bank deposits and $1.4 million invested in long-term restricted bank deposits. Our principal
uses of cash are for funding our operations, capital expenditures, other working capital requirements and other investments. As of December 31,
2022, we have open commitments for capital expenditures in the amount of approximately $74.0 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 $1,590.2 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 and available for sale marketable securities, will be sufficient
to meet our anticipated cash needs for at least the next 12 months as well as in the longer term, including the self-funding of our capital
expenditure and operational commitments.
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Operating Activities
Cash provided by operating
activities consists of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating
activities decreased by $182.8 million in 2022
as compared to 2021, mainly due to unfavorable changes in working capital and lower net income
in 2022 compared to the prior year.
Investing Activities
Investing cash flows
consist primarily of capital expenditures, investment in, sales and maturities of available for sale marketable securities, investment
and withdrawal of bank deposits and restricted bank deposits, cash used for acquisitions and cash provided
by the sale of equity investments. Cash used for investing activities decreased by $67.2
million in 2022 as compared to 2021, primarily
driven by a $72.2 million decrease in purchases of available-for-sale debt investments, an increase
of $29.0 million in sales and maturities of available-for-sale debt investments, $16.6
million decrease in an investment in a privately-held company and $24.4 million increase
from sale of an investment in a privately-held company. This increase was partially offset by a $61.1 million
decrease in cash provided by bank deposits and restricted bank deposits and an increase of $20.1 million
in capital expenditures.
Financing Activities
Financing cash flows
consisted primarily of the issuance and repayment of short-term and long-term debt, proceeds
from the sale of shares of common stock in a public offering and employee equity incentive plans.
Cash provided by financing activities in 2022 was $654.6 million
compared to $15.2 million cash used in financing activities in 2021,
primarily due to a $650.5 million increase in cash provided by the issuance of common stock,
net through a secondary public offering, and a decrease of $15.9 million in repayment of bank
loans.
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 16 to our annual financial statements for more information).
Secondary
public offering
On March 17, 2022, we offered and sold 2,300,000 shares of the Company’s
common stock at a public offering price of $295.00 per share. The net proceeds to the Company after underwriters' discounts and commissions
and offering costs were $650,526. We intend to use the proceeds from the public offering for general corporate purposes, which may include
acquisitions (see Note 18b to our consolidated financial statements for more information).
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
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, 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 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 recognized based on the transfer of control, which includes but is
not limited to, the agreed International 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.
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. Such
performance obligations are those that include a financing component, specifically: (i) warranty extension services, (ii) cloud-based
monitoring, and (iii) communication services.
See Notes 2u
and 14 to the consolidated financial statements included in Part II, Item 8 of this Annual Report
on Form 10-K for additional information related to revenue recognition.
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, 10 years for our storage interface
and a 10-year limited warranty for our residential batteries. 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 our battery storage products that extend the standard warranty
period. In addition, customers can purchase extended warranties for inverters that extend the warranty period to up to 25 years.
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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 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 107.5 million power optimizers and approximately
4.5 million inverters as of December 31, 2022.
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 $385.1 million
and $265.2 million, in the year ended December 31, 2022
and 2021, respectively.
See Notes 2w
and 13 "Warranty obligations" to the consolidated financial statements included in Part II, Item
8 of this Annual Report on Form 10-K for additional information related to product warranty.
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 net realizable value, 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 net realizable value
of inventories. Inventory write-downs are equal to the difference between the cost of inventories and their estimated net realizable value.
Inventory write-downs are recorded as cost of revenues in the accompanying statements of income and were
$10.2 million and $7.1 million, in the year ended December 31, 2022 and 2021, respectively.
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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 net realizable
value. 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.
See Notes 2j
and Note 4 to the consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K for additional information related to inventory valuation.
Business
Combination