SolarEdge Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. Dollar amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
SolarEdge sells solar power optimizers, inverters and monitoring solutions, primarily through distributors and large installers. In 2018 it expanded into adjacent markets through acquisitions of Gamatronic’s UPS business and Kokam, a lithium-ion battery and energy-storage provider. Acquired businesses contributed $23.0 million of revenue after acquisition during 2018. SolarEdge reported approximately 10.6 GW of cumulative systems shipped and installations in 133 countries.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $937.2 | $607.0 | +54.4% |
| Gross profit / margin | $319.2 / 34.1% | $214.8 / 35.4% | Margin down 1.3 percentage points |
| Operating income / margin | $139.4 / 14.9% | $91.1 / 15.0% | +53.1% operating income |
| Net income | $128.0 | $84.2 | +52.1% |
| Net income attributable to SolarEdge; diluted EPS | $128.8; $2.69 | $84.2; $1.85 | +53.1% attributable income |
| Cash provided by operating activities | $189.1 | $136.7 | +$52.4 |
Revenue growth reflected higher shipments: approximately 11.4 million optimizers and 456,000 inverters in 2018, up 54.1% and 43.7%, respectively. Solar-product blended average selling price per watt fell 6.8%. U.S. revenue was $505.5 million, or 53.9% of total revenue; non-U.S. revenue was 46.1%. Non-solar revenue was $23.0 million, or 2.4% of total.
Gross margin declined as warranty and support costs rose, price reductions exceeded cost reductions, and the acquired battery and UPS operations had lower margins, including underutilized capacity. Component shortages also drove more costly air freight. Warranty expense and accrual additions increased, and the year-end warranty obligation reached $121.8 million, versus $78.8 million a year earlier.
Fourth quarter: Revenue was $263.7 million, gross profit $79.7 million (30.2% margin), operating income $24.0 million and net income $12.1 million. Net income attributable to SolarEdge was $12.9 million. The quarter included $12.1 million of income-tax expense, following a $12.3 million tax benefit in Q3.
At December 31, 2018, cash and cash equivalents were $191.6 million, restricted cash $1.6 million, marketable securities $192.9 million and short-term bank deposits $6.0 million. Total debt was $20.1 million, principally Kokam loans, of which $16.6 million was current. Current assets were $678.1 million and current liabilities $225.7 million. Management said cash and operating cash flow were expected to meet anticipated needs for at least 12 months and fund committed capital expenditures.
Investing cash outflow was $152.6 million, including $94.7 million for acquisitions and $38.6 million for capital investment; financing cash outflow was $8.0 million. Commitments included $263.0 million of non-cancelable manufacturing purchases and $40.1 million of capital expenditures, all shown as due within one year, plus $21.4 million of operating lease commitments.
Material changes versus prior year
- Revenue increased 54.4%, while operating income rose 53.1% and net income rose 52.1%; gross margin contracted from 35.4% to 34.1%.
- SolarEdge acquired Gamatronic’s UPS business and 74.5% of Kokam in 2018, increasing its Kokam ownership to 91.6% by year-end. Purchase-price allocations were preliminary. The acquisitions added goodwill and intangible assets and introduced new operating and integration risks.
- Operating cash flow rose to $189.1 million, while trade receivables increased $60.5 million and inventories increased $20.2 million. Cash generation also benefited from higher warranty obligations, deferred revenue and trade payables.
- ASC 606 adoption reduced opening retained earnings by $3.9 million. As reported, the standard reduced 2018 net income by $2.4 million compared with the pre-adoption accounting presentation.
- SolarEdge announced an approximately 56% acquisition of SMRE for about $85 million in January 2019, funded with cash and shares; the filing describes this as a subsequent event.
Outlook, risks, contingencies and unusual items
Management provided no specific revenue or earnings guidance. It said it intended to invest in R&D, sales and marketing, new products and geographic expansion, and anticipated long-term margin improvement from operating leverage. Management expected component shortages to continue in coming quarters, while citing added safety stocks, supplier qualification and capacity, and automation as mitigation measures.
- Demand is exposed to changes in solar incentives, net-metering rules, electricity prices, interest rates, utility regulations and U.S. trade policy. A 10% change in the euro/U.S. dollar rate was estimated to change 2018 net income by $23.5 million; an equivalent shekel/U.S. dollar change by $9.0 million.
- SolarEdge relies on a small number of contract manufacturers and limited or single-source component suppliers. It was discontinuing activity with one contract manufacturer; its Celestica contract was to end May 1, 2019. Shortages in 2017–2018 had delayed cost reductions and increased air-freight expense.
- Customer concentration is significant: the largest customer, CED, generated 19.4% of 2018 revenue; the top three generated 33.4%. Two customers represented 41.3% of year-end trade receivables.
- Litigation includes SolarEdge’s patent action against Huawei and a German distributor; SMA Solar Technology’s patent-infringement claim against SolarEdge’s German subsidiary, seeking an injunction and damages (stated dispute value €5 million); and a former-customer bankruptcy trustee claim of approximately $2.5 million. SolarEdge said it would defend these claims and did not expect material effects from the identified litigation.
- Kokam faced an amended approximately $12 million claim relating to a fire at a customer facility involving a UPS containing Kokam batteries. SolarEdge disclosed indemnification of up to $5 million from Kokam’s major selling shareholder and product-liability insurance; no provision was recorded, and the claim had not become a lawsuit.
- U.S. Section 301 tariffs on certain Chinese imports, including inverters and optimizers, were 10% at filing; a planned increase to 25% had been delayed amid trade talks. SolarEdge said tariff effects on solar-system prices and demand were uncertain.
- Tax items included a $12.0 million GILTI provision and a $1.3 million reduction to the estimated transition tax in Q4. Further tax adjustments could follow as regulations were issued and returns filed. The filing also highlights Israeli geopolitical, tax, product-warranty, cybersecurity and acquisition-integration risks.
Most important facts for investors to verify
- Whether shipment growth can continue without further price erosion, component constraints or a decline in gross margin.
- Warranty claim experience and the adequacy of the $121.8 million warranty reserve relative to the expanding installed base.
- Integration progress, profitability and cash requirements for Kokam and Gamatronic; confirm final purchase-price allocations and acquired-business performance.
- Customer and supplier concentration, receivables collection, inventory levels and the timing and flexibility of purchase commitments.
- Developments in the SMA, Huawei and Kokam-related matters, and any change in the stated indemnification or insurance coverage.
- Tariff developments, U.S. solar-policy changes, foreign-exchange exposure and the final tax effects of GILTI and other tax rules.
- The independent auditor issued an unqualified opinion on the financial statements and internal control. The control assessment excluded acquired Gamatronic and Kokam operations, which represented 10.1% of assets, 10.8% of net assets and 2.4% of 2018 revenue.