SolarEdge Technologies, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Unless stated otherwise, amounts are U.S. dollars.
Business context
SolarEdge designs and sells solar power optimizers, inverters and monitoring services, and expanded into UPS, battery storage and e-mobility through acquisitions. Solar products remained the core business, generating $1.337 billion of FY2019 revenue. Acquisitions contributed $89.0 million of revenue, compared with $23.0 million in 2018. SolarEdge reported shipments of 665,520 inverters and 15.8 million power optimizers, and said its products were installed in 133 countries.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,425.7 million | $937.2 million | +52.1% |
| Gross profit / gross margin | $479.3 million / 33.6% | $319.2 million / 34.1% | +50.2% gross profit |
| Operating income | $189.9 million | $139.4 million | +36.2% |
| Net income | $145.0 million | $128.0 million | +13.2% |
| Net income attributable to SolarEdge | $146.5 million | $128.8 million | +13.8% |
| Diluted EPS attributable to SolarEdge | $2.90 | $2.69 | +7.8% |
| Operating cash flow | $259.0 million | $189.1 million | +37.0% |
Gross margin declined 0.5 percentage point. Operating expenses increased 60.9% to $289.4 million, including $30.7 million of unusual other operating expenses. Income taxes rose to $33.6 million from $9.1 million. Net income attributable to SolarEdge exceeds consolidated net income because of losses attributable to non-controlling interests.
Fourth-quarter 2019 revenue was $418.2 million, gross profit $143.2 million, operating income $50.5 million and net income attributable to SolarEdge $52.8 million. Compared with Q3 2019, revenue and gross profit increased, while operating income decreased from $66.0 million; Q4 included $22.4 million of other operating expenses.
Cash and cash equivalents were $223.9 million at year-end; available-for-sale marketable securities totaled $211.0 million, and restricted bank deposits were $27.6 million. Operating cash flow less $72.6 million of purchases of property and equipment was approximately $186.4 million. Total debt was $15.8 million, primarily acquired bank loans, versus $20.1 million at year-end 2018. Current assets were $932.8 million and current liabilities $436.7 million. Management said cash, cash flows and equivalents were expected to cover anticipated needs for at least 12 months and capital expenditure commitments.
Material changes versus FY2018
- Growth reflected higher solar product volumes, sales-price increases in the U.S. intended to offset tariffs, and acquired businesses. Inverter shipments rose about 46% and optimizer shipments about 38%.
- Gross margin pressure came from U.S. tariffs, expedited air freight and logistics, warranty costs, acquired businesses’ lower margins and underused Kokam manufacturing capacity. Tariffs, shipping and logistics costs increased by $67.7 million.
- Warranty obligations rose to $172.6 million from $121.8 million; warranty additions and adjustments to cost of revenue were $94.0 million.
- Operating cash flow increased, but trade receivables rose $124.1 million and prepaid expenses and other assets rose $67.3 million. Investing cash use was $152.9 million and financing cash use was $73.0 million, largely reflecting purchases of non-controlling interests.
- SolarEdge acquired a majority stake in SMRE in January 2019 and increased its ownership to 99.9% by year-end. Goodwill increased to $129.7 million from $34.9 million.
Outlook, risks and unusual items
No specific FY2020 revenue or earnings guidance is provided. Management expected expanded manufacturing capacity, including Vietnam production, to reduce air-freight reliance and help meet demand. It also described long-term margin improvement as an objective, while noting that adjacent businesses would require significant investment before becoming profitable.
FY2019 other operating expenses included $12.2 million related to modified equity awards for a former SMRE executive, $8.3 million related to the death of founder and former CEO Guy Sella, a $5.3 million loss on the sale of an SMRE subsidiary and a $4.9 million settlement of a pre-acquisition Kokam legal claim. The filing also reports a German court ruling in favor of SMA on one patent infringement claim, which SolarEdge appealed; a separate claim was stayed. Other disclosed disputes include patent litigation involving Huawei and a claim by former SMRE shareholders.
Key risks include reliance on two principal contract manufacturers and limited-source components; customer concentration (CED represented 20.4% of FY2019 revenue); tariffs and subsidy or net-metering changes; competition and solar-market cyclicality; product failures and long-duration warranty exposure; foreign-exchange sensitivity; acquisition integration; and business disruption from the then-emerging coronavirus outbreak. Purchase commitments under manufacturing agreements were $472.1 million, with $60.6 million of capital expenditure commitments. The company disclosed guarantees, including $51.5 million relating to customer projects.
Important facts for investors to verify
- Whether 2020 manufacturing expansion and reduced air freight improve gross margin despite tariffs and component constraints.
- Warranty claim trends, the assumptions behind the $172.6 million warranty reserve, and the effect of inverter failures reported during 2019.
- CED’s concentration and collection exposure, including its share of year-end receivables.
- Progress, profitability and integration of Kokam, SMRE and UPS operations, including goodwill and acquisition-related risks.
- Developments in SMA and Huawei litigation, other claims, and any potential financial or operational consequences.
- The impact of currency movements, evolving solar incentives and net-metering policies, and coronavirus-related supply-chain or demand disruption.