SolarEdge Technologies, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing covers the full year, not only the fourth quarter. Amounts are in U.S. dollars unless stated otherwise.
Business context
SolarEdge designs and sells solar power optimizers, inverters, monitoring software and related energy products. It has expanded into energy storage, UPS, e-mobility and automated machinery through acquisitions and internal development. Solar products remain the principal business: the Solar segment generated $1.36 billion of 2020 revenue, while “All other” segments generated $102.8 million and reported a $36.8 million segment loss. The company reported shipments of approximately 22.4 GW cumulatively since commercial shipments began in 2010.
Key financial results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,459.3 million | $1,425.7 million | +2.4% |
| Gross profit / gross margin | $461.4 million / 31.6% | $479.3 million / 33.6% | Margin down 2.0 percentage points |
| Operating income / operating margin | $142.6 million / 9.8% | $189.9 million / 13.3% | Operating income down 22.9% |
| Net income | $140.3 million | $145.0 million | Down 3.2% |
| Net income attributable to SolarEdge | $140.3 million | $146.5 million | Down 4.3% |
| Diluted EPS attributable to SolarEdge | $2.66 | $2.90 | Down 8.3% |
| Cash from operating activities | $222.7 million | $259.0 million | Down $36.3 million |
| Capital expenditures | $126.8 million | $72.6 million | Up $54.2 million |
Operating cash flow less capital expenditures was approximately $95.9 million in 2020, compared with $186.4 million in 2019; this is a simple calculation from the filing’s reported figures, not a company-defined measure. Fourth-quarter revenue was $358.1 million, versus $338.1 million in the third quarter; fourth-quarter net income was $17.7 million.
Revenue and operating trends
- Revenue growth reflected higher sales in Europe and the rest of the world, partly offset by a $65.5 million decline in U.S. sales, which management attributed principally to COVID-19 impacts.
- Europe accounted for 42.9% of revenue, the United States 42.0%, and the rest of the world 15.1% in 2020. Revenue from outside the U.S. rose to 58.0%, from 52.4% in 2019.
- Revenue from inverters was $641.8 million and from optimizers $625.5 million. Blended solar-product average selling price per watt fell 7.5%, affected by product and customer mix.
- Inverter and optimizer unit shipments were slightly lower year over year, while megawatts shipped increased from 5,618 to 6,106, reflecting higher capacity shipped.
- Gross margin contracted amid higher production costs, warranty expense, inventory valuation changes and ramp-up costs. Lower shipping and logistics costs partly offset these items.
- Research and development expense rose 34.4% to $163.1 million, and general and administrative expense increased 27.9% to $63.1 million. 2020 operating results also benefited from a $4.9 million indemnification related to a Kokam pre-acquisition legal claim; 2019 included $30.7 million of other operating expenses, including founder-related compensation, an executive separation, a subsidiary sale and the same Kokam claim.
Cash, debt and liquidity
- At December 31, 2020, cash and cash equivalents were $827.1 million, available-for-sale marketable securities totaled $291.1 million, and short-term bank deposits were $60.1 million. Restricted deposits were $2.6 million.
- Total assets were $2.44 billion and stockholders’ equity was $1.09 billion. Inventory rose to $331.7 million from $170.8 million, while net trade receivables declined to $218.7 million from $298.4 million.
- SolarEdge issued $632.5 million principal amount of 0.00% convertible senior notes due 2025, receiving $617.9 million net proceeds. The notes’ year-end carrying amount was $573.4 million; bank loans were $18.3 million. The company reported total debt of $591.6 million on its selected balance-sheet data.
- The notes are unsecured, have a 2025 maturity and an initial conversion price of approximately $277.80 per share. Holders may have repurchase rights after specified fundamental changes. The filing reports a year-end estimated fair value of $871.1 million.
- Operating cash flow was reduced by a $149.7 million inventory build, partly offset by lower receivables. Investing cash outflow was $236.6 million; financing cash inflow was $640.5 million, primarily from the convertible-note issuance.
- Outstanding commitments included $380.1 million of non-cancelable purchase obligations and $79.4 million of capital expenditure commitments. Management stated available cash and operating cash generation should cover anticipated needs for at least 12 months.
Outlook, risks and contingencies
- Outlook: The filing gives no numerical revenue or earnings guidance. For the first quarter of 2021, management expected higher U.S. solar revenue, partly offset by typical European seasonality; it also expected higher e-mobility revenue from powertrain kits and batteries. Management anticipated first-quarter gross margin would rise versus fourth-quarter 2020 and solar cost of revenue per unit would remain stable.
- COVID-19: The pandemic reduced installation activity and demand in certain markets, led some customers to delay or cancel orders, and constrained travel, training and marketing. Management cited improving U.S. and rest-of-world installation rates in Q4 but said the outlook remained uncertain.
- Supply and execution: The company depends heavily on two contract manufacturers and certain limited- or single-source suppliers, while warning of component shortages, longer lead times, shipping disruption and potentially higher air-freight costs. Sella 1 began commercial shipments in 2020; full manufacturing capability was expected in Q2 2021. Sella 2, a planned Korean battery factory, was expected to begin operations in the first half of 2022.
- Customer concentration: Consolidated Electrical Distributors represented 14.8% of 2020 revenue. The five next-largest customers together represented 30.7%; major customers may change suppliers and some customer arrangements lack long-term purchase commitments.
- Legal matters: Huawei obtained a first-instance Chinese judgment requiring approximately $1.6 million in damages, which SolarEdge appealed. In February 2021, a Chinese court issued a preliminary injunction concerning seven inverter models in a separate case; the company reported making software changes to comply and appealing. Other patent litigation includes disputes with Huawei in Germany and SMA in Germany. SolarEdge also disclosed a former consultant’s claim of approximately $7.9 million and $5.9 million accrued for legal claims overall. Outcomes are uncertain.
- Other risks: Exposure includes solar-market competition and policy changes, subsidy and net-metering reductions, foreign-exchange movements, product warranty and liability claims, cybersecurity, Israeli geopolitical conditions, acquisitions and integration, and possible impairment of goodwill or intangible assets. The company reported warranty obligations of $205.0 million at year-end and noted estimation uncertainty due to long warranty periods.
Most important facts for investors to verify
- Whether revenue growth can recover while gross margin and operating income stabilize, especially given pricing pressure and customer/product mix.
- Whether inventory converts to sales and cash, and whether operating cash flow remains adequate after elevated capital spending and purchase commitments.
- The notes’ potential dilution, conversion and repurchase provisions, and the distinction between principal, carrying value and market fair value.
- Developments in the Huawei and SMA disputes, including the scope and commercial effect of the seven-model injunction and related appeals.
- Customer concentration, component availability, manufacturing ramp execution and the company’s ability to deliver against demand without increased costs.
- Warranty claim experience and reserve assumptions, as well as the profitability and cash needs of the non-solar businesses.