FISCAL YEAR FORM 10-K
TABLE OF CONTENTS
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17 |
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37 |
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39 |
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Item 6. |
Reserved |
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40 |
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58 |
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F - 1 |
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60 |
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60 |
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61 |
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61 |
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62 |
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62 |
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62 |
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62 |
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62 |
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63 |
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64 |
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65 |
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated
herein by reference contain forward-looking statements that are based on our management’s expectations, estimates, projections,
beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally
in “Item 1. Business,” “Item 1A. Risk Factors” “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”. This
discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include information concerning our possible
or assumed future results of operations, business strategies, technology developments, new products and services, financing and investment
plans, competitive position, industry and regulatory environment, effects of acquisitions, growth opportunities, and the effects of competition.
Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,”
“believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,”
“plan,” “potential,” “predict,” “project,” “should,” “will,” “would,”
or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not
place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions
only as of the date of this filing. Important factors that could cause actual results to differ materially from our expectations include
those discussed in Item 1A, Risk Factors, as well as those discussed elsewhere in this Annual
Report on Form 10-K, including:
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future demand for renewable energy including solar energy solutions; |
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changes to net metering policies or the reduction, elimination or expiration of government subsidies and economic incentives for
on-grid solar energy applications; |
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changes in the U.S. trade environment, including the recent imposition of import tariffs; |
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federal, state, and local regulations governing the electric utility industry with respect to solar energy; |
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changes in tax laws, tax treaties, and regulations or the interpretation of them, including the Inflation Reduction Act; |
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the retail price of electricity derived from the utility grid or alternative energy sources; |
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interest rates and supply of capital in the global financial markets in general and in the solar market specifically; |
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competition, including introductions of power optimizer, inverter and solar photovoltaic (“PV”) system monitoring products
by our competitors; |
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developments in alternative technologies or improvements in distributed solar energy generation; |
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historic cyclicality of the solar industry and periodic downturns; |
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product quality or performance problems in our products; |
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our ability to forecast demand for our products accurately and to match production with demand; |
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our dependence on ocean transportation to timely deliver our products in a cost-effective manner; |
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our dependence upon a small number of outside contract manufacturers and limited or single source suppliers; |
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capacity constraints, delivery schedules, manufacturing yields, and costs of our contract manufacturers and availability of components;
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delays, disruptions, and quality control problems in manufacturing; |
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shortages, delays, price changes, or cessation of operations or production affecting our suppliers of key components; |
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existing and future responses to and effects of Covid-19; |
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business practices and regulatory compliance of our raw material suppliers; |
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performance of distributors and large installers in selling our products; |
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our customers’ financial stability, creditworthiness and debt leverage ratio; |
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our ability to retain key personnel and attract additional qualified personnel; |
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our ability to effectively design, launch, market, and sell new generations of our products and services; |
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our ability to maintain our brand and to protect and defend our intellectual property; |
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our ability to retain, and events affecting, our major customers; |
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our ability to manage effectively the growth of our organization and expansion into new
markets; |
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our ability to integrate acquired businesses; |
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fluctuations in global currency exchange rates; |
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unrest, terrorism, or armed conflict in Israel; |
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macroeconomic conditions in our domestic and international markets, as well as inflation concerns, rising interest rates and recessionary
concerns; |
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consolidation in the solar industry among our customers and distributors; |
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our ability to service our debt; and |
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the other factors set forth under “Item 1A. Risk Factors.” |
The preceding list is not intended to be an exhaustive list of
all of our forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we
believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels
of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except
as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could
differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
PART I
ITEM 1.
Business
Introduction
We
are a leading provider of an optimized inverter solution that changed the way power is harvested and managed in photovoltaic (also known
as PV) systems. Our direct current, or DC, optimized inverter system maximizes power generation while lowering the cost of energy produced
by the PV system for improved return on investment, or ROI. Additional benefits of the DC optimized inverter system include: comprehensive
and advanced safety features, improved design flexibility, efficient integration (DC coupled) with SolarEdge storage solutions, and improved
operation and maintenance, or O&M, with remote monitoring at the module-level. The typical SolarEdge optimized inverter system consists
of inverters, Power Optimizers, a communication device which enables access to a cloud-based monitoring platform and, in many cases, a
battery and additional smart energy management solutions. Our solutions address a broad range of solar market segments, from residential
to commercial and small utility scale solar installations. Since we began commercial shipments in 2010, we have shipped approximately
40.0 gigawatts (“GW”) of our DC optimized inverter systems and our products have
been installed in solar PV systems in 133 countries.
Since introducing the optimized inverter solution
in 2010, SolarEdge has expanded its activity to other areas of smart energy technology, both through organic growth and through acquisitions.
By leveraging world-class engineering capabilities and with a relentless focus on innovation, SolarEdge now offers energy solutions which
also include energy storage systems, or ESS, home backup systems, electric vehicle, or EV, components and charging capabilities,
home energy management, grid services and virtual power plants, or VPPs, and lithium-ion batteries.
We primarily sell our products indirectly
to thousands of solar installers through large distributors and electrical equipment wholesalers and directly to large solar installers
and engineering, procurement, and construction firms, or EPCs. Our customers include leading providers of solar PV systems to residential
and commercial end users, key solar distributors, and electrical equipment wholesalers, as well as several PV module manufacturers that
offer PV modules integrated with our Power Optimizers referred to as "smart modules".
The PV industry is surveyed by IHS Markit
(S&P Global), an analytics company that ranked SolarEdge as the top PV inverter supplier world-wide by revenues, as of their published
“IHS PV Inverter Market Tracker - Fourth Quarter 2022”. As of December 31, 2022,
we have shipped in the aggregate approximately 107.6 million power optimizers and 4.5
million inverters. More than 3.1 million PV installations, many of which may include multiple inverters, are currently connected
to and monitored through our cloud-based monitoring platform.
The
SolarEdge Solution. Our DC optimized inverter system maximizes power generation
at the individual PV module level while lowering the cost of energy produced by the solar PV system, providing module-level visibility,
and enabling advanced, multilayer safety features. Our solution consists of inverters, Power Optimizers, a communication device
which enables access to our cloud-based monitoring platform to address a broad range of solar market segments, from residential solar
to commercial and small utility-scale solar installations. Additional smart energy features and hardware that can be added to our solution
include a battery pack for energy storage and a home energy automation system, which enables greater savings for the system owner.
The key advantages of our solution over a
traditional string inverter PV system include:
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Maximized
PV module power output. Our Power Optimizers provide module-level
Maximum Power Point Tracking or MPPT, and real-time adjustments of current and voltage to the optimal performance level of each individual
PV module. This enables each PV module to continuously produce its maximum power potential independent of other modules in the same string,
minimizing module mismatch and partial shading losses. By performing these adjustments at a very high rate, our Power Optimizers also
solve the dynamic power losses associated with traditional inverters. |
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Optimized
architecture with economies of scale. Our system shifts certain functions
of the traditional inverter to our Power Optimizers while keeping the DC to AC function and grid interaction in our inverter. As a result,
our inverter is smaller, more efficient, more reliable and less expensive than inverters used in traditional PV systems. The cost savings
that we have achieved on the inverter enable our system to be priced at a cost per watt that is comparable with traditional inverter systems
of other leading manufacturers. As a PV system grows in size, our inverter benefits from economies of scale, making our technology viable
for large commercial and utility-scale applications. |
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Enhanced
system design flexibility. Unlike a traditional inverter system that
requires each string to be the same length, use the same type of PV modules and be positioned at the same angle toward the sun, our system
allows significant design flexibility by enabling the installer to place PV modules in uneven string lengths and on multiple roof facets.
This design flexibility: |
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Increases the amount of the available roof that can be utilized for power production. As a result, our system is significantly less
prone to wasted roof space resulting from rooftop asymmetries and obstructions. |
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Reduces the number of field change orders. For example, some installers use remote tools to estimate the size and configuration of
an installation in connection with the customer acquisition process. This is especially common for high-volume residential arrays, where
an exhaustive survey of rooftop obstructions would be uneconomical. In some cases, installers discover that their preliminary design,
based on remote tools, cannot be implemented due to unexpected shading or other obstructions. With traditional inverter system designs,
an obstructed module may require a significant system redesign and a modification of the customer contract to accommodate the changed
system design. Our DC optimized inverter solution enables an installer to compensate or adjust for most obstructions without materially
changing the original design or requiring a modification to the customer contract. |
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Reduced
balance of system costs. Our DC optimized inverter system allows significantly
longer strings to be connected to the same inverter (as compared to a traditional inverter system). This minimizes the cost of cabling,
fuse boxes and other ancillary electric components. These factors result in easier installations with shorter design times and a lower
initial cost per watt, while enabling larger installations per rooftop. |
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Continuous
monitoring and control to reduce operation and maintenance costs. Our
cloud-based monitoring platform provides full data visibility at the module, string, inverter and system level. The data can be accessed
remotely by any web-enabled device, allowing comprehensive analysis, immediate fault detection and alerts. These monitoring features reduce
O&M costs for the system owner by identifying and locating faults, enabling remote testing and reducing field visits.
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Enhanced
safety. We have incorporated module-level safety mechanisms in our
system to protect installers, electricians and firefighters. Each Power Optimizer is configured to reduce output to 1 volt unless the
Power Optimizer receives a fail-safe signal from a functioning inverter. As a result, if the inverter is shut down (e.g., for system
maintenance, due to malfunction, in the event of a fire or otherwise), the DC voltage throughout the system is reduced to a safe level.
Our DC optimized inverters comply with the applicable safety requirements of the regions in which they are sold, providing incremental
cost savings to installers by eliminating the need for additional hardware such as DC breakers, switches or fire-proof ducts required
by traditional inverter systems. In the U.S., the SolarEdge SafeDC feature is compliant with NEC 2014 & NEC 2017 Rapid Shutdown functionality,
section 690.12. SolarEdge inverters also have a built-in safety feature designed to mitigate the effects of some arcing faults that may
pose a risk of fire, in compliance with the UL1699B arc detection standard. |
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High
reliability. Solar PV systems are typically expected to operate for
at least 25 years under harsh outdoor conditions. High reliability is critical and is facilitated by systems and components that
have low heat generation, solid and stable materials, and an absence of moving parts. We have designed our system to meet these stringent
requirements. Our Power Optimizers dissipate much less heat than microinverters because no DC-AC
inversion occurs at the module level. As a result, less heat is dissipated beneath the PV module, which improves lifetime expectancy and
the reliability of our power optimizers. Our Power Optimizers’ high switching frequency allows the use of ceramic capacitors with
a low, fixed rate of aging and a proven life expectancy in excess of 25 years. Furthermore, we use automotive-grade, application-specific
integrated circuits (“ASICs”) that embed many of the required electronics. This reduces the number of components and consequently
the potential points of failure. |
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Energy
Storage. Our DC optimized inverter system allows solar energy to be directly
stored in batteries without any conversion, thereby eliminating energy losses that are associated with such conversions and improving
the ROI of PV battery systems. |
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Energy
Management. Strategically located at the intersection between PV modules,
home usage, and the grid, inverters are well positioned to act as smart energy managers. Our smart inverters incorporate the management
of PV energy, battery storage, smart devices, and grid interaction. By leveraging the smart energy management in our inverter, system
owners can not only store solar energy but also optimize their PV energy consumption in order to increase their energy independence, take
advantage of lower time-of-use rates, reduce electricity bills, and improve overall system ROI. |
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Distributed
Energy Generation. As the electric grid transitions
from centralized power stations to a network of distributed, renewable energy sources, our inverter acts as a local control system that
can manage the energy resources underlying such a distributed network. Our inverters are therefore a key part of developing a distributed
and interactive grid that can help support grid stability. One such example is inverter-enabled charging and discharging of batteries
as part of a virtual power plant to help manage the load on the grid and support grid stability. |
Our PV Solar Products
Offering
SolarEdge began its commercial sales with
a product offering of simplified inverters, Power Optimizers, and cloud-based monitoring platform. As the solar energy industry has evolved,
SolarEdge has developed innovative solutions to further enhance smart energy technology, including inverters that include compatibility
with batteries for increased self-consumption and storage, inverters that support EV charging, smart meters, smart energy devices (sockets,
water heater controllers, load controllers, wireless relay) and smart PV modules. This product expansion has enabled us to increase average
revenue per installation, or ARPI.
SolarEdge
Power Optimizer. Our DC Power Optimizer is a highly reliable and efficient
DC-to-DC converter which is either connected by installers to each PV module or embedded by PV module manufacturers into their modules
as part of the manufacturing process of Smart Modules. Our Power Optimizer increases energy output from the PV module to which it is connected
by continuously tracking the Maximum Power Point or MPP of each module and controlling its output voltage enabling the inverter’s
input voltage to remain fixed under a large variety of string configurations. This feature enhances flexibility in PV system design, enabling
use of different string lengths in a single PV system connected to the same inverter, use of PV modules situated on multiple orientations
connected to the same inverter and mixing different PV module types and brands in the same string. In addition, our Power Optimizers monitor
the performance of each PV module and communicate this data to our inverter using our proprietary power line communication. In turn, the
inverter transmits this information to our monitoring server.
Our Power Optimizers are designed to withstand
high temperatures and harsh environmental conditions and contain multiple bypass features that localize faults and enable continued system
operation in the vast majority of cases of Power Optimizer failure. Our Power Optimizers are compatible with the vast majority of modules
on the market today and carry a 25-year product warranty. Our Power Optimizers are designed to be used with our inverters to provide power
optimization. Monitoring and safety features can also be achieved with third party inverters by adding supplemental communications hardware.
During the year ended December 31, 2022, the year ended December 31,
2021 and the year ended December 31, 2020, revenues derived from the sale of power
optimizers represented 36.5%, 42.2% and 42.9% of total revenues, respectively.
SolarEdge
Inverter. Our DC-to-AC inverters contain sophisticated digital control
technology with efficient power conversion architecture resulting in superior solar power harvesting and high reliability, and are designed
to work exclusively with our DC Power Optimizers. A proprietary power line communication receiver is integrated into each inverter, receiving
data from our power optimizers, storing this data and transmitting it to our monitoring server when an internet connection exists. Since
each string which is equipped with our power optimizers provides fixed input voltage to our inverter, the inverter is able to operate
at its highest efficiency at all times and therefore is more cost effective, energy efficient and reliable.
Like our power optimizers, our inverters are
designed to withstand harsh environmental conditions. Since the power rating of an inverter determines how many PV modules it can serve,
larger installations require inverters with higher power ratings. We currently offer a single-phase inverter designed to address the residential
market (1 kilowatt (“kW”) to 11.4 kW) which is based on our HD-Wave technology and a three-phase inverter designed to address
the residential market in certain European countries and Australia, as well as the commercial market (4 kW to 120 kW). Our single-phase
inverters support a range of smart energy capabilities. In 2020, we launched the SolarEdge Energy Hub inverter and home backup solution
for the U.S. residential market. The SolarEdge Energy Hub inverter contains built-in consumption monitoring, embedded revenue-grade production metering,
integrated arc fault protection, rapid shutdown and is battery ready. In 2021, we launched the new SolarEdge Energy Hub inverter models
ranging from 7.6 kW up to 11.4 kW PV power and 10.3 kW backup power. Both the SolarEdge Energy Hub inverter and the SolarEdge Home Battery,
described below, are part of the new SolarEdge full residential solution, the “SolarEdge Home”, an intelligent smart energy
management system that allows homeowners to better manage and monitor solar energy production, consumption and backup storage in real
time.
Our product offering also includes our commercial
three-phase up to 120kw inverter with Synergy technology and enhanced power capabilities, which is designed to enable quick and easy installation
and inventory management for the commercial market.
The vast majority of our inverters are sold
with a 12 year warranty that is extendable to 20 or 25 years for an additional cost. During the year ended December 31,
2022, the year ended December 31, 2021 and the year ended December 31,
2020 revenues derived from the sale of inverters represented 36.6%, 42.2% and 44.0% of
total revenues, respectively.
EV
Charging Inverter. SolarEdge’s EV charging inverter offers homeowners
the ability to charge electric vehicles up to six times faster than a standard Level 1 charger through an innovative solar boost mode
that utilizes grid and PV charging simultaneously. This inverter is the world’s first EV charger with an integrated PV inverter. Reducing the
burden of installing separately a standalone EV charger and a PV inverter, the EV charging inverter eliminates the need for additional
wiring, conduit and a breaker installation. By installing an inverter that has an integrated EV charge, no additional dedicated circuit
breaker is needed, saving space and eliminating the need for a potential upgrade to the main distribution panel.
Storage
Solutions. In 2021, we launched our residential battery, the SolarEdge Home
Battery a 10 kW single phase battery and, in 2022, we launched the 5 kW, three phase Home Battery. Both batteries integrate with our SolarEdge
Home Hub family of inverters. The SolarEdge Home Battery gives homeowners the ability to power their homes even when the grid is off.
The battery also works in tandem with the SolarEdge energy management system to optimize the use of solar energy in places where the feed-in
tariffs are less favorable, maximizing self-consumption. The SolarEdge Home Battery connects with the SolarEdge inverter through DC-coupling,
which minimizes the number of DC to AC conversions which are typical in competing technologies, saving energy and enabling higher efficiency.
The solution is based on a single inverter for both solar PV and storage. To optimize self-consumption, the battery is charged and discharged
to meet consumption needs and reduce the amount of power acquired from the grid. Also, with the SolarEdge backup solution, unused solar
PV power is stored in a battery and used during a power outage, powering essential sources such as refrigerators and freezers, communication
devices, lighting, and AC outlets. Our proprietary monitoring platform provides visibility into the battery's status, solar PV production,
and self-consumption, while offering easy maintenance with remote access to inverter and battery software. Multiple batteries can be connected
to a single SolarEdge Home Hub inverter, adding more available power to backup additional significant loads, such as air-conditioners,
water heaters and EV chargers. In addition, SolarEdge inverters can be connected to third party batteries via the SolarEdge StorEdge solution,
where batteries can perform both maximum self- consumption and backup functions.
Some existing SolarEdge systems can be upgraded
with a storage solution for both backup or on-grid maximum self-consumption use.
SolarEdge
Software. We offer a variety of professional software tools to support the
complete PV planning, installation, monitoring and maintenance processes:
Our Designer platform is a free web-based
tool that helps solar professionals plan, build and validate our residential and commercial systems from inception to installation.
Our “Mapper app” provides SolarEdge
installers with an efficient, streamlined process for registering the physical layout of new PV sites in the SolarEdge monitoring platform.
Installers use the Mapper app to scan SolarEdge Power Optimizer and inverter barcodes, creating a virtual map of the PV site in the monitoring
platform to help facilitate remote diagnostics.
Making installations quick and simple, our
“SetApp” is used to activate and configure SolarEdge inverters during commissioning directly through a smartphone.
In 2021, we launched
the mySolarEdge application version 2.0 which enables system owners to easily track their real-time system production and household energy
consumption, view their inverter and battery status for quick troubleshooting, and control the battery's back-up capabilities, all from
the convenience of their mobile phones.
Our cloud-based monitoring platform collects
power, voltage, current and system data sent from our inverters and Power Optimizers and allows users to view the data at the module level,
string level, inverter level and system level from most browsers or from most smart phones and tablets. The monitoring software continuously
analyzes data and flags potential problems. The monitoring software includes features which are used on a routine basis by integrators,
installers, maintenance staff, and system owners to improve a solar PV system’s performance by maximizing solar power harvesting
and reducing O&M costs by increasing system up-time and detecting PV module performance issues more effectively. Connection to the
monitoring server is completed during installation by the installer. The installer then receives full access to system data through the
monitoring software and can select the amount of data to be shared with the system owner.
Smart
Energy Management. There
are two separate energy technology industries that exist today: solar energy production and automation technology. Inverters are taking
on an expanded role in energy management and automation and to address these market needs, we are developing and providing automation
products. This line of products, when used with the SolarEdge PV solution, is designed to allow system owners to increase self-consumption
by shifting energy usage to match peak solar PV production as well as offer a convenient, wireless control option over various building
and/or home devices. An example of this solution would be using excess solar PV energy to heat water or the ability to remotely turn on/off
certain power sources such as lighting or electrical appliances. The introduction of these products is dependent upon certification and
region-specific needs and as such, these products are not yet available in all of the regions in which SolarEdge operates.
Grid
Services. As the use of PV and storage continues to proliferate around the
world, energy production is transitioning from a centralized system to a distributed network model, where energy is produced close to
the location in which it is consumed and stored. This model creates an opportunity for new interconnected and decentralized energy networks
offering improved grid reliability and stability, new energy services, and the reduction of grid infrastructure costs. SolarEdge grid
services deliver near real-time aggregative control and data reporting, enabling the pooling of distributed energy resources — PV
systems, battery storage, electric vehicle chargers, and loads — in the cloud for the creation of virtual power plants ("VPP").
SolarEdge grid services and VPP solution provide sophisticated management platforms to enable real-time, aggregated control of available
energy resources to meet ever-changing supply needs and demand. Our distributed energy resources management system or DERMS application
and application program interfaces ("APIs") are used by utilities for countering peak demand events. In 2022, SolarEdge continued to generate
revenues from selling grid services in the U.S., Europe and Australia, including services provided to independent system operators, energy
retailers, national installers and others.
Product Roadmap
Our products reflect the innovation focus
and capabilities of our technology departments as well as the importance we place on creating value for our customers. Our core solar
product roadmap is divided into five categories: Power Optimizers, inverters, software, energy storage, and smart energy management.
Power
Optimizers. We currently sell our third and fourth generations of
Power Optimizers (P-Series and S-Series, respectively) which were designed for fully automated assembly and are based on our third and
fourth generation ASICs, respectively. A key element of our reliability strategy and a significant differentiator relative to our competitors,
is our use of proprietary ASICs to control, among other things, our Power Optimizer’s power conversion, safety features, and PV
module monitoring. Instead of using large numbers of discrete components, our Power Optimizers uses a single proprietary ASIC, reducing
the total number of components in an electrical circuit and improving reliability. In 2021, we launched our fourth generation Power Optimizers
which uses fourth generation ASIC that provides higher efficiency and incorporates a new safety mechanism for PV systems called "the SolarEdge
Sense Connect", that provides connector level fault detection. In 2022, we announced the launch of our next generation Commercial
S-series Power Optimizers. Each new ASIC generation reduces the number of components required for any given functionality, adds more functions
to the Power Optimizers, and meaningfully improves its efficiency. The efficiency improvement reduces the energy losses which in turn
reduces the amount of heat dissipation. This enables design of a more cost-effective and usually smaller enclosure and also keeps the
electronics cooler, thereby improving the Power Optimizer’s reliability. Our research and development teams continuously work to
further improve our ASICs and release new generations of this innovative technology.
Inverters.
Our inverter roadmap includes both new products as well as additional capabilities for existing inverters. Our inverter roadmap is intended
to serve four purposes: (i) expand addressable markets by developing new and larger inverters designed specifically for larger commercial
installations and utility-scale projects; (ii) improve the electronics to increase the total power throughput while minimally changing
the existing enclosure, thereby reducing the actual cost per watt and increasing economies of scale; (iii) improve ease of installation
by integrating additional functionality required in certain installations in order to reduce costs of additional hardware and subcontractors’
labor costs; and (iv) improve the inverter's functionality to serve as a hub for home energy management, integrating, controlling and
optimizing the main home energy sources and loads.
Software.
We continue to expand our software offering by introducing new tools and features. This includes both professional web-based software
and system owner applications such as the fleet management platform, the site designer tool, the mySolarEdge consumer app, and installer
applications.
Our cloud-based monitoring platform is continuously
growing by the amount of data aggregated. We are continuously developing tools to accommodate our growth and further enhance our service
offering. We plan to continue developing algorithms that detect and pinpoint problems that can impact power production in installed systems.
We further plan to add more capabilities through our public API to allow users to integrate our system into their own systems and build
and share useful applications based on monitoring data gathered by our software.
Energy
Storage. Our residential storage solution, launched in 2021, is designed
to integrate with our single-phase and three-phase inverters to provide optimal energy management, maximum efficiency, longer backup times
and ease of use for the homeowners. Our DC-coupled SolarEdge Home Battery are currently available in North America, Europe and Australia
and are expected to be introduced to additional global markets. We expect to continue to expand our
storage solutions to cover more applications, improve battery management, efficiency and integration with energy management systems.
Smart
Energy Management. Our smart energy management offering manages and controls
PV production, home consumption, storage, and home generator and grid interaction. It is designed to automatically use excess PV power
to increase self-consumption of solar energy, and reduce energy bills and carbon footprints. The offering controls electrical loads such
as, pool pumps, fans, lighting and other home appliances by using our smart energy devices such as smart sockets, smart switch relays
and more, and is able to divert excess solar energy to heat water. We are developing new features and capabilities for the smart energy
suite which is constantly evolving. Specifically, we have current plans to add the ability to control additional energy loads and are
developing capabilities for the commercial segment. We also plan on expanding the availability of our smart energy products, including
smart energy management devices, to new geographies and use cases.
Products from Non-Solar
Businesses
Since introducing our DC optimized inverter
solution in 2010, we have expanded our activity to other areas of smart energy solutions, both through organic growth and through acquisitions.
These include product offerings in the areas of energy storage systems or ESS and backup including our own lithium-ion cells and electric
vehicle also knows as EV components. More specifically, in 2022, we continued to supply
full electrical powertrain units and batteries for the production of the "E-Ducato" light commercial vehicle in Europe. In addition, we
began producing and shipping cells from Sella 2, our own Li-Ion cell and battery factory in Korea in the end of 2022. The factory is expected
to reach full manufacturing capacity during 2023. Our non-solar businesses allow us to offer a variety of products and solutions in addition
to the SolarEdge solution, in adjacent markets.
New
Products or Product Categories
We
continuously evaluate opportunities to expand our product offerings and services to our customers. We may from time to time develop new
products or services that are a natural extension of our existing business, or may engage in acquisitions of businesses or product lines
with the potential to strengthen our market position, enable us to enter attractive markets, expand our technological capabilities, or
provide synergistic opportunities.
Sales and Marketing Strategy
Our solar business strategy is to focus on
penetrating new geographic regions and increasing our market share. More specifically, we focus on markets where electricity prices, irradiance
and government policies make solar PV installations economically viable. Our solar products have been installed in 133
countries.
We target our sales and marketing efforts
to the largest distributors, electrical equipment wholesalers, EPC contractors and installers in each of the countries where we operate.
We anticipate that an increasing percentage of solar PV equipment sales will also occur through electrical equipment wholesalers who sell
to a broad range of electrical contractors, and we are focused on cultivating these global relationships. As of December 31,
2022, based on the number of installer accounts on our monitoring portal, over 53,000 installers around the world have installed
SolarEdge solar PV systems. We also sell our Power Optimizers pre-installed onto several PV modules
for manufacturers that offer Smart Modules to ease and accelerate installation.
Additionally, as further detailed below, we
have a number of programs focused on educating installers and other industry professionals about our technology, and we use a combination
of road shows, webinars, and partner trainings to educate them how best to design, sell, and implement our technology in their projects.
Most of these activities were converted to online platforms since the start of the Covid-19 pandemic
to enable continued training, education and marketing.
Our battery business
strategy focuses on utilizing our storage division's ’s battery technology in our residential and commercial solar products and
using any remaining manufacturing capacity for generating revenues from the sale of battery cells, modules and systems to other applications
including ESS, UPS, marine and other applications. In the future we intend to further integrate our batteries into other applications.
Our Customers
We derive a significant portion of our revenues
from key solar distributors, electrical equipment wholesalers and large installers in the U.S. and worldwide. In 2022,
one of our customers, Consolidated Electrical Distributors Inc. (CED)
represented 18.5% of our revenues. None of our other customers accounted for more than ten percent
of our revenues in the year ended December 31, 2022.
Training and Customer Support
We offer our installer base a comprehensive
package of customer support and training services which include pre-sales support, ongoing trainings, and technical support before, during,
and after installation. We also provide customized support programs to PV module manufacturers, large installers and distributors to help
prioritize and track support issues, thereby enabling short cycle times for issue resolution.
In 2022 we launched our new online customer
training platform, Edge Academy. The platform is an advanced Learning Management System, capable of hosting thousands of online training
sessions each month, allowing a self-paced, training approach. During 2022, the Edge Academy hosted over 124,000 learners.
In 2022, we also enhanced our installer certification
by allowing more installers to access the certification program on the new Edge Academy platform, as well as increasing accessibility
by adding more languages for the content such that installers in more regions in which we operate can benefit from the content. During
2022, over 13,000 installers completed our certification program. We also launched the SolarEdge battery
certification program which was completed by more than 2,900 installers world-wide.
In addition to the above, we support our commercial
system customers with design consulting throughout their sales process and installation.
Our technical support organization includes
local expert teams, tech centers, an online service portal and live chat service. Our toll-free call and live chat centers are open Monday
through Friday at least from 9:00 a.m. to 6:00 p.m. in every region in which we sell our products. In addition, customers can
open and track support cases 24/7 utilizing our online portal. All support cases are monitored via a customer relationship management
system in order to provide service, track closure of all customer issues and further improve our customer service. Our call centers have
access to our cloud-based monitoring platform database, which enables real-time remote diagnostics.
Customer
service and satisfaction continues to be a key component of our business offering and we consider it integral to our continued success.
We maintain high levels of customer engagement through our call centers in California, Australia, Japan, Israel, India and Bulgaria. During
2022, we added additional call centers in Brazil, Taiwan, Thailand and
South Africa. In
addition to our call centers, we have field service engineers located in the geographies where we are active, and support our customers
with commissioning of large projects, introduction of new technologies and features and on-the-job training of new installers. As of December 31,
2022, our customer support and training organization consisted
of 609
employees worldwide.
Our Technology
We have drawn on our expertise in the fields
of power electronics, magnetic design, mechanical and heat dissipation, control loops and algorithms, power line communications and lithium-ion
battery technology to design and develop what we believe to be the most advanced commercial solutions for harvesting power from solar
PV, storage and energy management solutions for residential and commercial applications. These technologies are explained in more detail
below.
As part of our growth strategy, we have acquired
companies that have technologies that can leverage our expertise in power electronics and power optimization. By combining acquired resources
with our current research and development teams, we are expanding our activities into other areas such as e-Mobility, and energy storage
systems.
Power
Optimizers
Our Power Optimizers are DC/DC step up/step
down (buck boost) converters designed and developed to operate in harsh outdoor environments at very high conversion efficiency. Our Power
Optimizers include proprietary power electronics customized to efficiently convert power from the PV module to the inverter.
A key factor in the performance of our Power
Optimizer is determined by the digital control algorithms and closed-loop control mechanism. The Power Optimizer’s control is built
into our advanced ASIC which is responsible for all critical digital control functions of the power optimizer, including detailed power
analysis, digital control of the power conversion subsystem, power line communications and networking. Since each Power Optimizer handles
the power and voltage of either a single or two modules, we are able to reach a high degree of semiconductor integration by leveraging
low cost silicon in standard semiconductor packages. As a result, much of the of our Power Optimizer functionality can be integrated into
a standard ASIC instead of requiring discrete electronic components, resulting in lower costs and higher reliability.
The ASIC performs the critical power analysis
and power conversion control functions of the Power Optimizer. The power analysis functions process the state and working parameters at
the Power Optimizer’s input and output and, together with advanced digital control and state machine logic, control the power conversion
function. In addition, our digital control system uses technology that allows the solar PV installation to anticipate and adapt to changing
operating conditions, and to protect itself against system anomalies. In 2021, we incorporated our fourth generation ASIC in our new generation
of Power Optimizers (S-series). In addition, we added cable temperature monitoring functionality, called the Sense Connect, to this new
generation to improve their safety capabilities.
Each Power Optimizer in the array is connected
to the inverter by a power line communications networking link. Our power line communications link uses a proprietary networking technology
that we developed, utilizing the existing DC wiring between the Power Optimizers and the inverter to transmit and receive data between
these devices.
Inverters
Most of our inverters are designed for single-stage DC/AC
conversion. Using our inverter in combination with the Power Optimizers allows the inverter control loop to maintain a regulated DC voltage
level at its input, thereby enabling the inclusion of long, uneven, and multi-faceted strings of solar modules while also enabling custom,
cost efficient, and reliable inverter design and component selection. All of the power components, as well as the main magnetic components
for our inverters, can then be optimized for DC/AC inversion at high efficiency.
Our inverters’ digital control algorithms
are implemented using programmable digital signal processors which allow for flexibility and adaptation of control loops for various grids
and for the requirements and standards of different grid operators across geographies. We have already implemented the control mechanisms
necessary to support advanced grid codes and standards that are required to support high penetration of solar energy into utility grids.
We continue to develop and manufacture our own DSP (ASIC) in our inverters which enables us to improve our control loops, increase our
cost savings and be less dependent on third party suppliers in our manufacturing process. The DSP (ASIC) performs the critical power analysis
and power conversion control functions of the inverter. The power analysis functions process the state and working parameters at the power
inverter’s input and output, and together with advanced digital control and state machine logic controls the power conversion function.
In addition, our digital control system uses technology that allows the inverter to anticipate and adapt to changing operating conditions,
and to protect itself against system anomalies as well as comply with applicable regulations in the different regions in which we operate.
Our DSP (ASIC) is also in charge of the power
line communications ("PLC") networking link. Our PLC uses a proprietary networking technology that we developed, utilizing the existing
DC wiring between the Power Optimizers and the inverter to transmit and receive data between these devices.
We have developed and continue to develop
in-house design and manufacturing capabilities for magnetic components in order to decrease dependence on suppliers, reduce costs and
have better control over our production processes.
Batteries
In 2021, we released our first lithium-ion residential batteries for sale in the U.S. and Europe through our solar distribution channels.
Our batteries are composed of lithium cells, a battery management system ("BMS"), bi-directional DC/DC high efficiency converter that
allows charge and discharge of the battery, as well as user interface. Our DC/DC converter uses digital control algorithms, which are
implemented using a programmable digital signal processor. Therefore, both the battery and Power Optimizers are connected to the
same DC bus, allowing the battery to be directly charged by the DC current generated by the Power Optimizers and bypassing the AC conversion.
Our efficient DC-coupled battery is designed
to connect with our inverters (up to three batteries per inverter). Our batteries can be connected to our cloud‑based monitoring
platform, reporting information on the battery status, solar production, and self-consumption data.
In 2022, we launched the 5 kW three phase
Home Battery for the European market.
Manufacturing
We have designed our manufacturing processes
to produce high quality products at competitive costs. The strategy is threefold: outsource, automate, and localize. We currently contract
to have our solar products manufactured by two of the world’s leading global electronics manufacturing service providers, Jabil
Circuit, Inc. (“Jabil”) and Flex Ltd. (“Flex”). By using contract manufacturers, we are able to access advanced
manufacturing equipment, processes, skills and capacity on a relatively “capital light”
budget. Our contract manufacturers are responsible for funding the capital expenses incurred in connection with the manufacture of our
products, except with regard to end-of-line testing equipment and other specific manufacturing equipment utilized in assembling our products
or sub-components which are financed and owned by the Company. We expect to continue this funding arrangement in the future, with respect
to any expansions to such existing lines save for circumstances where the direct purchase by us of non-specific manufacturing equipment
will result in a substantial reduction in costs in which case we will consider financing such non-specific manufacturing equipment ourselves.
Further, contracting with global providers, such as Jabil and Flex, gives us added flexibility to manufacture certain products in China
and Vietnam, closer to target markets in Asia and the North American west coast, as well as other products in Hungary, closer to target
markets in Europe and the North American east coast, in each case, potentially increasing responsiveness to customers while reducing costs
and delivery times. In addition, as part of our manufacturing regionalization efforts, we are expanding our manufacturing capabilities
with a new manufacturing site in Mexico, which is expected to finalize its ramp-up phase in the first half of 2023. Once ramped, we believe
this site will significantly increase our capacity and give us further flexibility to manage growing demand.
In light of recent Inflation Reduction Act legislation in the United States which incentivizes the local manufacturing of
renewable energy products by providing benefits to installers for the purchase and installation of US-manufactured products, as well as
by incentivizing manufacturers of such products domestically, we are planning to establish manufacturing capabilities in the United
States either by using contract manufacturers or by establishing our own manufacturing facility or a combination of both.
During 2021, we reached full manufacturing
capacity in our manufacturing facility located in the North of Israel “Sella 1”, from which we began commercial shipments
to the U.S. of optimizers and inverters in 2020. The proximity of Sella 1 to our R&D team and labs enables us to accelerate new product
development cycles as well as define equipment and manufacturing processes of newly developed products which can then be adopted by our
contract manufacturers worldwide.
During 2023, we plan to expand the manufacturing capacity of
Sella 1 to add an additional inverter line.
We have developed propriety automated assembly
lines for the manufacturing of our power optimizers. These assembly lines, currently operating in all of our manufacturing facilities,
enable the manufacturing of more than 6,000 optimizers per manufacturing line per day. We invest
resources in additional automated assembly lines as well as in automated machinery for subassembly and self-manufacturing of certain components
used in our products, and we own and are responsible for funding all of the capital expenses related thereto. The current and expected
capital expenses associated with these automated assembly lines and other machinery is funded out of our cash flows.
We source our raw materials through various
component manufacturers and invest resources in continued cost-reduction efforts as well as verifying second and third sources so as to
limit dependence on sole suppliers.
Our Korean subsidiary (formerly Kokam), has
a manufacturing facility for lithium-ion cells and batteries that has the capacity to manufacture up
to 150 MWh per annum. In 2020, we began construction of “Sella 2”, a 2GWh Li-Ion battery factory in Korea. The new
factory was constructed to meet the growing global demand for Li-Ion batteries, specifically in the energy storage system (ESS)
market. Sella 2 began producing and shipping cells in the end of 2022 and is expected to reach full
manufacturing capacity during 2023.
SolarEdge e-Mobility has a manufacturing and
assembly facility in Umbertide, Italy, for our e-Mobility division.
Reliability and Quality Control
Our power optimizers are either connected
to each PV module by installers, or embedded in each PV module by PV module manufacturers. Our power optimizers are designed to be as
reliable as the PV module itself and capable of withstanding the same operating and environmental conditions.
Our reliability methodology includes a multi-level
plan with design analysis, sub-system testing of critical components by Accelerated Life Testing, and integrative testing of design prototypes
by Highly Accelerated Life Testing and large sample groups. As part of our reliability efforts, we subject components to industry standard
conditions and tests including in accelerated life chambers that simulate burn-in, thermal cycling, damp-heat, and other stresses. We
also conduct out of box audits (OBA) on our finished products. In addition, online reliability tests (ORT) are conducted on our optimizers
and we test complete products in stress tests and in the field. Our rigorous testing processes have helped us to develop highly reliable
products.
In order to verify the quality of each of
our products when it leaves the manufacturing plant, each component, sub-assembly, and final product are tested multiple times during
production. These tests include Automatic Optical Inspection, In-Circuit Testing, Board- Functional Testing, Safety Testing, and Integrative
Stress Testing. We employ a serial number-driven manufacturing process auditing and traceability system that allows us to control production
line activities, verify correct manufacturing processes and to achieve item-specific traceability.
As a part of our quality and reliability approach,
failed products from the field are returned and subjected to root cause analysis, the results of which are used to improve our product
and manufacturing processes and design and further reduce our field failure rate.
Certifications
Our products and systems comply with the applicable
regulatory requirements of the jurisdictions in which they are sold as well as all other major markets around the world. These include
safety regulations, electromagnetic compatibility standards and grid compliance.
Research and Development
We devote substantial resources to research
and development with the objective of developing new products and systems, adding new features and reducing unit costs of our products
and systems. Our development strategy is to identify software and hardware features, products, and systems that reduce the cost and improve
the effectiveness of our solutions for our customers. We measure the effectiveness of our research and development by metrics including
product unit cost, efficiency, reliability, power output, and ease of use.
We have a strong research and development
team with wide ranging experience in power electronics, semiconductors, power line communications and networking, chemical, mechanical
and software engineering. In addition, many members of our research and development team have expertise in solar technologies. As of December 31,
2022 our research and development organization had a headcount of 1,428 employees.
Intellectual Property
The success of our business depends, in part,
on our ability to maintain and protect our proprietary technologies, information, processes, and know-how. We rely primarily on patent,
trademark, copyright and trade secrets laws in the U.S. and similar laws in other countries, confidentiality agreements and procedures
and other contractual arrangements to protect our technology. As of December 31, 2022, SolarEdge
had 444 issued patents worldwide and 462 patent applications pending for examination. A majority of our patents relate to DC power optimization
and DC to AC conversion for alternative energy power systems, power system monitoring and control, battery technology and management systems.
Our issued patents are scheduled to expire between 2023 and 2041.
We continually assess opportunities to seek
patent protection for those aspects of our technology, designs, and methodologies and processes that we believe provide significant competitive
advantages.
We rely on trade secret protection and confidentiality
agreements to safeguard our interests with respect to proprietary know-how that is not patentable and processes for which patents are
difficult to enforce. We believe that many elements of our manufacturing processes involve proprietary know-how, technology, or data that
are not covered by patents or patent applications, including technical processes, test equipment designs, algorithms, and procedures.
All of our research and development personnel
are required to enter into confidentiality and proprietary information agreements with us. These agreements address intellectual property
protection issues and require our employees to assign to us all of the inventions, designs, and technologies they develop during the course
of employment with us.
Our customers and business partners are required
to enter into confidentiality agreements before we disclose any sensitive aspects of our technology or business plans.
Competition
The markets for our solar products are competitive,
and we compete with manufacturers of traditional inverters, as well as manufacturers of other MLPE systems. The principal areas in which
we compete with other companies include:
|
• |
product and system performance and features; |
|
• |
total cost of ownership; |
|
• |
reliability and duration of product warranty; |
|
• |
customer service and support; |
|
• |
breadth of product line; |
|
• |
local sales and distribution capabilities; |
|
• |
compliance with applicable certifications and grid codes; |
|
• |
size and financial stability of operations; and |
|
• |
size of installed base. |
Recent market trends show an increased focus on
safety features in rooftop installations, and the emergence of standards that are evolving to address such concerns. In particular, the
arc fault detection and interruption (AFDI) and rapid shutdown (RSD) standards in the US market, have led to the introduction of module-level
rapid-shutdown devices from our competitors. We believe the existence of rapid shutdown capabilities built into our Power Optimizers positions
us well in this regard, and could serve as a competitive advantage. Additionally, in 2020 we have seen PV module manufacturers introduce
larger PV modules with higher power levels reaching over 600W. This market trend, which comes as a result of PV cell manufacturers introducing
larger cell sizes such as M10 and M12 as well as different module build configurations, leads to market interest in higher power rating
Power Optimizers, micro inverters, and other MLPE devices. The increasing demand for storage and battery solutions is an additional
noteworthy market trend which is expected to increase the attachment rate of storage to PV installations in the coming years.
Our DC optimized inverter system competes
principally with products from traditional inverter manufacturers, such as SMA Solar Technology AG, ABB Ltd. and Huawei Technologies
Co. Ltd. as well as from other Chinese inverter manufacturers. In the North American residential market, we compete with traditional inverter
manufacturers, as well as microinverter manufacturers such as Enphase Energy, Inc. In addition, several new entrants to the MLPE
market, including low-cost Asian manufacturers, have recently announced plans to ship or have already shipped similar products. We believe
that our DC optimized inverter system offers significant technology and cost advantages that reflect a competitive differentiation over
traditional inverter systems and microinverter technologies.
The markets for our energy storage division
products are competitive as well, and we compete with global cell and battery manufacturers in the ESS market. Our energy storage solutions
compete with products from global manufactures such as LG Energy Solutions, Samsung SDI, CATL, BYD and Panasonic.
Our residential lithium-ion batteries compete
with global manufacturers of both lithium-ion and other residential battery storage solutions such as Tesla, LG Energy solutions, BYD
and Enphase Energy.
The vehicle e-Mobility
component market is dominated primarily by manufacturers such as Robert Bosch GmbH, ZF Friedrichshafen AG, Dana Incorporated and Magna
International. As the global e-Mobility market expands, major automotive manufacturers, such as Toyota, Honda, Tesla, General
Motors, and Ford, have increased their investments in the electric and hybrid vehicle components in order to increase their market
share.
Government Incentives
U.S. federal, state,
and local government bodies as well as non-U.S. government bodies, provide incentives to owners, end users, distributors, and manufacturers
of solar PV systems to promote solar electricity in the form of rebates, tax credits, lower VAT rate and other financial incentives such
as system performance payments, payments for renewable energy credits associated with renewable energy generation, and exclusion of solar
PV systems from property tax assessments. The market for on grid applications, where solar power is used to supplement a customer’s
electricity purchased from the utility network or sold to a utility under tariff, often depends in large part on the availability and
size of these government subsidies and economic incentives, which vary from time to time by geographic market.
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 their implementation is 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. We have also announced our plans to establish manufacturing capabilities in the United States during 2023. 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.
Import Tariffs
Escalating trade tensions between the United
States and China have led to increased tariffs and trade restrictions, including tariffs applicable to some of our products. As of June
2019, the U.S. trade representative (“USTR”) imposed import tariffs of 25% on a long list of products imported from China,
including inverters and power optimizers. On January 15, 2020, the United States and China entered into an initial trade deal, which preserves
the initial tariffs from 2018 and indicates additional sanctions may be imposed if China breaches the terms of the deal.
In order to mitigate
the negative effect of increased tariffs, we increased our manufacturing capabilities at our Vietnam manufacturing
facility. We reached full manufacturing capacity in our manufacturing facility in Israel, Sella 1, and are manufacturing in Mexico
where achievement of full manufacturing capacity is expected in the first half of 2023. In addition, as mentioned above, we are
planning to establish manufacturing capabilities in the United States. For the year ended December 31,
2022, the majority of our products being imported to the U.S. were manufactured in Mexico, Vietnam, Israel and Hungary and were therefore
not subject to the aforementioned tariffs.
Seasonality
The solar energy market is subject to seasonal
and quarterly fluctuations affected by weather. For example, during the winter months in Europe and the northeastern U.S. where the climate
is particularly cold and snowy, it is typical to see a decline in PV installations and this decline can impact the timing of orders for
our products.
Sustainable, Responsible
and Transparent Business Practices
During
2022, we continued making progress in our Environmental, Social and Governance ("ESG") performance and disclosure. Our
ESG practices are guided by our social purpose: “To power the future of energy so we can all enjoy
better living and a cleaner, greener future” and our social mission: “Shaping the future of sustainable energy production,
energy storage and e-mobility through innovation”. We have crafted a comprehensive sustainability strategy with 2025 targets in
several areas. Our fourth annual Sustainability Report, published in 2022, meets the requirements of leading global sustainability disclosure
standards, GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) aligning our disclosure with leading
corporations around the world and with the expectations of investors and other stakeholders. Our sustainability strategy, includes the
following pillars:
• |
Powering Clean Energy: Accelerating the uptake
of clean energy, delivering new smart energy, innovative solutions and improving the lifecycle impacts of our products. As a business
founded upon the acceleration of clean energy, we strive to reduce our climate impact by minimizing GHG (greenhouse gas) emissions and
transitioning to renewable electricity usage in our facilities. We have completed a lifecycle analysis for three of our key products,
examining the carbon footprint of all product life stages and following the examination of the results of such analysis were able to highlight
possible reduction opportunities. Furthermore, we have set a target of reducing 30% of our Scope 1+2 GHG emissions per revenue, by
2025 (compared with the 2020 basis). We have set another target of achieving near-zero e-waste to landfill by 2025. In
2021, a total of 71% of all waste at our owned and operated sites, was either recycled or recovered to energy. |
• |
Powering
People: Maintaining leading responsible employment
practices, upholding human rights and investing in communities. In 2022, we continued to expand our workforce to support SolarEdge’s
business growth, and maintained responsible employment practices, including an enhanced focus on safety and on employee growth and development.
We set quantitative targets and formulated multi-year programs to enhance gender equality within our workforce and to strengthen its inclusiveness
(see further details in "Human Capital" below). Also in 2022, we enhanced
our community engagement program. Our updated program focuses on the advancement of renewable energy for environmental community value,
encouraging STEM education and youth innovation and strengthening diverse populations. |
• |
Powering
Business: Maintaining and reinforcing ethical conduct
throughout our value chain, advancing climate resilience, improving the efficiency of our resource consumption and ethical sourcing of
raw materials and components. |
Our
supplier code of conduct ("SCoC"), which includes provisions regarding, among others, ethics, safety, environmental protection, human
rights, and fair employment. As of December 31, 2022, over 175 key suppliers
have signed their acknowledgment of the SCoC terms. To date, we also conducted on-site audits of four contract manufacturers and
two major raw material suppliers in connection with their compliance with the SCoC requirements, and are aiming to expand these efforts
in 2023. In addition, our conflict-minerals practices involve engaging our suppliers to evaluate the traceability of their upstream sources.
We believe that our sustainability
strategy aligns directly with 10 United Nations Sustainable Development Goals (SDGs), and our products and activities are most critical
to achievement of SDG #7, Affordable Clean Energy.
Human Capital
We believe our success depends on our ability
to attract and retain outstanding employees at all levels of our business. As of December 31, 2022,
we had 4,926 employees (full time and part time). Of these employees, 1,428
were engaged in research and development, 649 in sales and marketing, 2,383
in operations, production, Q&R, and support, and 466 in general and administrative capacities.
Of our employees, 2,702 were based in Israel, 699 were based in Europe, 591 were based in Korea,
318 were based in the U.S and 616 were based in the remaining countries in which we operate including China, Vietnam, Mexico and others.
Except for our SolarEdge Automation Machines
employees and the employees of SolarEdge e-Mobility, none of our employees are represented by a labor union. We have not experienced any
employment-related work stoppages, and we consider relations with our employees to be good.
Recruitment:
As a rapidly growing business, we rely on the success of our recruitment efforts to attract and retain technically skilled people who
can support our ongoing innovation and expansion. We aim to be inclusive in our hiring practices, focusing on the best talent for the
role, welcoming all genders, nationalities, ethnicities, abilities and other dimensions of diversity.
Employee
benefits: We aim to provide our employees with competitive salary and benefits
that enable them to achieve a good quality of life and plan for the future. Our benefits differ according to local norms and market preferences,
but typically include all salary and social benefits required by local law (including retirement saving programs, paid vacation and sick
leave) and many additional benefits that go beyond legal requirements in local markets.
Leadership,
Training and Development: We aim to provide our employees with advanced
professional and development skills, so that they can perform effectively in their roles and build their capabilities and career prospects
for the future. We maintain a leadership program for managers and team leaders and deliver advanced professional training for sales, research
and development and other functional teams as part of our extensive training program each year. Furthermore, we partner with local educational
resources to offer formal learning programs on a variety of subjects for the personal development and advancement of our workforce.
Diversity,
Equity and Inclusion: During the past three years,
we have increased the total number of women in our organization by over 75%.
We are striving to increase the presence of women in executive and management positions as part of our 2025 target to promote gender parity
and equal pay.
We are taking active steps to increase the
diversity of our workforce and inclusiveness of our employee base. For example, we engaged in several partnerships with social organizations
in Israel, designed to increase our recruitment of candidates from the Arab-Israeli population, ultra-orthodox women, and individuals
with disabilities. Additionally, as part of our commitment to enhance gender equality within our workforce, we created designated development
programs for female managers and women in tech roles. Over 50 female participants have successfully completed these programs in 2022.
Workplace
safety and health: We believe that all accidents and injuries at work are
preventable and we strive to achieve a zero-injury culture across our offices and operations. We comply with applicable occupational health
and safety regulations and are certified to Occupational Health and Safety Quality Management Standard ISO 45001:2018. Our safety practices
include: nominated safety officers at each of our manufacturing or R&D sites, mandatory annual safety training for all employees,
mandatory job-specific training for all employees in relevant roles (e.g., for those working in high-voltage labs), comprehensive safety,
fire, and emergency drill programs to ensure our employees are well-versed with emergency procedures and root-cause assessments of incidents
and corrective actions.
Corporate Information
We were incorporated in Delaware in 2006.
Our principal executive offices are located at 1 HaMada Street, Herziliya Pituach 4673335, Israel and our telephone number at this address
is 972 (9) 957-6620. Our website is www.solaredge.com.
We file annual, quarterly and current reports,
proxy statements and other documents with the Securities and Exchange Commission (the “SEC”), pursuant to the Securities Exchange
Act of 1934 (the “Exchange Act”). Our reports, proxy statements and other documents filed electronically with the SEC are
available at the website maintained by the SEC at www.sec.gov.
We use the Investor Relations portion of our
website at www.solaredge.com, as a routine channel of distribution of important
information such as press releases, analyst presentations, corporate governance practices and corporate responsibility information, financial
information including our annual, quarterly, and current reports, our proxy statements, and, if applicable, amendments to those reports,
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically
file such reports with, or furnish them to, the SEC. All such postings and filings are available
on our Investor Relations website free of charge.
Information contained on our website is not
incorporated by reference into this Annual Report, and you should not consider information contained on our website as part of this Annual
Report.
ITEM 1A.
Risk Factors
Risk Factors Summary
The following summarizes the principal factors
that make an investment in our company speculative or risky, all of which are more fully described in the Risk Factors section below.
This summary should be read in conjunction with the Risk Factors section and should not be relied upon as an exhaustive summary of the
material risks facing our business. The order of presentation is not necessarily indicative of the level of risk that each factor poses
to us.
We
face risks related to our business and our industry, including those related to:
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• |
Our ability to maintain our current level of profitability. |
|
• |
The rapidly evolving and competitive nature of the solar industry. |
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• |
Demand for solar energy solutions. |
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• |
The dependence of our e-Mobility business on orders from a leading automotive manufacturer.
|
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• |
The impact of declines in the retail price of electricity derived from the utility grid or from alternative
energy sources. |
|
• |
The impact of increases in interest rates or tightening of the supply of capital on the ability of end-users
to finance the cost of a solar PV system. |
|
• |
The impact of increased competition as new and existing competitors introduce power optimizers, inverters,
solar PV system monitoring and other smart energy products. |
|
• |
Developments in alternative technologies or improvements in distributed solar energy generation.
|
|
• |
The cyclicality of the solar industry. |
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• |
Defects or performance problems in our products. |
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• |
Our dependence on a small number of outside contract manufacturers. |
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• |
Any delays, disruptions, or quality control problems in our manufacturing operations. |
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• |
Our dependence on a limited number of suppliers for key components and raw materials in our products to
adequately meet anticipated demand. |
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• |
Disruptions to our global supply chain and rising prices of oil and raw materials due to the conflict between
Russia and Ukraine. |
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• |
Our reliance on distributors and large installers to assist in selling our products. |
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• |
Mergers in the solar industry among our current or potential customers. |
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• |
Our planned expansion into new geographic markets or new product lines or services.
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• |
Our ability to build our non-solar businesses and manage future growth effectively.
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• |
Our ability to raise the funds necessary to settle conversion of our Convertible Senior Notes or Notes
in cash or to repurchase the Notes upon a fundamental change. |
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• |
Any unauthorized access to, disclosure, or theft of personal information we gather, store, or use.
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• |
Attempts by third parties, our employees, or our vendors mighty to gain unauthorized access to our network
or seek to compromise our products and services. |
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• |
Our entry into business engagements with military bodies as our customers. |
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• |
Our ability to successfully execute future acquisitions or be effective in integrating such acquisitions.
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• |
Any damage or injury caused by Lithium-Ion used in our battery cells and packs. |
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• |
Conditions in Israel that may affect our operations. |
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• |
Difficulties in enforcing a judgment of a U.S. court against our officers and directors, to assert U.S.
securities laws claims in Israel, or to serve process on our officers and directors. |
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The ongoing Covid-19 pandemic. |
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• |
Our dependence on ocean transportation to deliver our products in a timely and cost efficient manner.
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Fluctuations in currency exchange rates. |
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• |
Issues related to corporate social responsibility. |
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• |
Complications with the design or implementation of our new ERP system could adversely impact our business.
|
We face risks related to legal, compliance
and regulatory matters, including those related to:
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• |
Any reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar
electricity. |
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• |
Any unfavorable regulatory treatment, or guidance related to the Inflation Reduction Act of 2022.
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• |
Changes to net metering policies. |
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• |
Technical and economic barriers to the purchase and use of solar PV systems resulting from current or future
regulations. |
We face risks related to intellectual property,
including those related to:
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• |
Our ability to protect our intellectual property and other proprietary rights. |
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• |
Any claims by third parties that we are infringing upon their intellectual property rights. |
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• |
Any claims for remuneration or royalties for assigned service invention rights by our employees. |
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• |
The impairment
of our goodwill or other intangible assets. |
We face risks related to the ownership of
our common stock, including those related to:
|
• |
Volatility of our stock price. |
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• |
Provisions in our certificate of incorporation and by-laws that may have the effect of delaying or preventing a change of control
or changes in our management. |
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• |
The forum selection clause contained in our certificate of incorporation. |
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Our lack of plans to pay any cash dividends on our common stock in the foreseeable future. |
The summary risk factors described above should
be read together with the text of the full risk factors in the Risk Factors sections and the other information set forth in this Annual
Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file
with the SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties
not precisely known to us, or that we currently deem to be immaterial may also materially adversely affect our business, financial condition,
results of operations and future growth prospects.
Risk Factors
You
should carefully consider the risks described below together with the other information set forth in this report, which could materially
affect our business, financial condition and future results. The risks described below are not the only risks facing our company. Risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and operating results.
Risks related to Our Business and Our Industry
We
cannot be certain that we will sustain our current level of profitability in the future.
We achieved a
net profit of $93.8 million and $169.2 million for the
years ended December 31, 2022 and 2021 respectively. A high growth rate in profitability may not be sustainable over time. For example,
our revenue and profitability for the year ended December 31, 2020 did not grow as we previously anticipated
mainly due to the adverse effects of Covid-19 on demands for our products, and on the global economy in general. In 2021, we experienced
an increase in revenues and profitability when compared to the same period in 2020 and in 2022 our revenues grew when compared to the
same period in 2021 while our net profit decreased due to reasons detailed in the Management's Discussion and Analysis Section of this
report. In the future, our revenues from both solar and non-solar business may not grow at the pace we anticipate, or may decline
for a number of reasons, many of which are outside our control, including a decline in demand for our products, increased competition,
a decrease in the growth of the solar industry, the short term and long term effects of Covid-19 on
our industry and business and industry trends including component shortages and supply chain disruptions due to ocean freight capacity,
shipping times and port congestions as well as other macroeconomic conditions in our domestic and international markets, inflation concerns,
rising interest rates and recessionary concerns , or our failure to continue to capitalize on growth opportunities. If we fail to maintain
sufficient revenue to support our operations, we may not be able to sustain profitability.
In addition, we expect to incur additional
costs and expenses related to the continued development and expansion of our business, including in connection with recent or future acquisitions
as well as ongoing marketing and developing our products, development of our own manufacturing facilities, expanding into new product
markets and geographies, maintaining and enhancing our research and development operations and hiring additional personnel. We do not
know whether our revenues will grow rapidly enough to absorb these costs, or the extent of these expenses or their impact on our results
of operations.
The
rapidly evolving and competitive nature of the solar industry makes it difficult to evaluate our future prospects. Our entry into other
adjacent markets through recent acquisitions is new and highly competitive and it is difficult to evaluate our future in these new markets
as well.
The rapidly evolving and competitive
nature of the solar industry makes it difficult to evaluate our current business and future prospects. In addition, we have limited insight
into emerging trends that may adversely affect our business, financial condition, results of operations and prospects. Our non-solar businesses
in adjacent markets, such as storage and e-Mobility are highly competitive markets in which we will need to compete. We have encountered
and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including
unpredictable and volatile revenues and increased expenses as our business continues to grow. The viability and demand for our products
may be affected by many factors beyond our control, including:
|
• |
cost competitiveness, reliability and performance of solar PV systems compared to conventional and non-solar renewable energy sources
and products; |
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• |
competing new technologies at more competitive prices than those we offer for our products; |
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• |
availability and amount of government subsidies and incentives to support the development and deployment of solar energy solutions;
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• |
the extent of deregulation in the electric power industry and broader energy industries to permit broader adoption of solar electricity
generation; |
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prices of traditional carbon-based energy sources; |
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• |
levels of investment by end-users of solar energy products, which tend to decrease when economic growth slows; and |
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• |
the emergence, continuance or success of, or increased government support for, other alternative energy generation technologies and
products. |
If
demand for solar energy solutions does not continue to grow or grows at a slower rate than anticipated, our business and results of operations
will suffer.
Our revenues are primarily derived from products
utilized in solar PV installations. Thus, our future success depends on continued demand for solar energy solutions and the ability of
vendors to meet this demand. The solar industry is an evolving industry that has experienced substantial changes in recent years, and
we cannot be certain that consumers, businesses, or utilities will adopt solar PV systems as an alternative energy source at levels sufficient
to grow our business. If demand for solar energy solutions fails to continue to develop sufficiently, demand for our products will decrease,
resulting in an adverse impact on our ability to increase our revenue and grow our business.
The
current revenues generated from our e-Mobility business are dependent on orders from a leading automotive manufacturer. The automotive
industry is facing significant shortages of components for their assembly and their slowdown in manufacturing could delay orders of our
powertrain kits.
Shortages in components in the automotive
industry, including semiconductors, due in large part to strong cross-industry demand, have presented challenges and global production
disruptions. Many leading automotive manufacturers have announced that these shortages will remain constrained and could extend into 2023.
As a result, during 2021, our leading customer announced temporary suspensions of its manufacturing due to component shortages. These
suspensions occurred again in 2022 and caused delays of orders for our powertrain units. Additional delays or suspensions may have
an adverse effect on our revenues, profitability and other financial results from this business.
Additionally,
projects in the automotive industry are long term and involve a long qualification process. Our e-Mobility business currently does not
have additional substantial projects in the pipeline beyond the project with Stellantis, which was announced in February 2021. Our inability
to enter into additional projects may have an adverse effect on our revenues, profitability and other financial results from the e-Mobility
business. In 2022, we impaired goodwill and intangible assets related to our e-Mobility business (see Notes 8 and 9 of the financial statements
for additional information).
A drop in the retail price
of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of
operations, and prospects.
Decreases in the retail prices of electricity
from the utility grid, or other renewable energy resources, would make the purchase of solar PV systems less economically attractive and
would likely lower sales of our products. The price of electricity derived from the utility grid could decrease as a result of:
• |
construction of a significant number of new power generation plants, including plants utilizing natural gas, nuclear, coal, renewable
energy, or other generation technologies; |
• |
relief of transmission constraints that enable local centers to generate energy less expensively; |
• |
reductions in the price of natural gas, or alternative energy resources other than solar; |
• |
utility rate adjustment and customer class cost reallocation; |
• |
energy conservation technologies and public initiatives to reduce electricity consumption; |
• |
development of smart-grid technologies that lower the peak energy requirements of a utility generation facility; |
• |
development of new or lower-cost energy storage technologies that have the ability to reduce a customer’s average cost of electricity
by shifting load to off-peak times; and |
• |
development of new energy generation technologies that provide less expensive energy. |
Moreover, technological developments in the
solar components industry could allow our competitors and their customers to offer electricity at costs lower than those that can be offered
by us to our customers, which could result in reduced demand for our products. If the cost of electricity generated by solar PV installations
incorporating our systems is high relative to the cost of electricity from other sources, our business, financial condition, and results
of operations may be harmed.
An
increase in interest rates or tightening of the supply of capital in the global financial markets could make it difficult for end-users
to finance the cost of a solar PV system and could reduce the demand for smart energy products and thus demand for our products.
Many end-users depend on financing to fund
the initial capital expenditure required to develop, build, or purchase a solar PV system. As a result, an increase in interest rates
or a reduction in the supply of project debt financing or tax equity investments, could reduce the number of solar projects that receive
financing or otherwise make it difficult for our customers or the end-users to secure the financing necessary to develop, build, purchase,
or install a solar PV system on favorable terms, or at all, and thus lower demand for our products which could limit our growth or reduce
our net sales. In addition, we believe that a significant percentage of end-users install solar PV systems as an investment, funding the
initial capital expenditure through financing. An increase in interest rates could lower such end-user’s return on investment on
a solar PV system, increase equity return requirements or make alternative investments more attractive relative to solar PV systems, and,
in each case, could cause such end-users to seek alternative investments.
The
market for our products is highly competitive and we expect to face increased competition as new and existing competitors introduce power
optimizers, inverters, solar PV system monitoring and other smart energy products, which could negatively affect our results of operations
and market share.
The market for solar PV solutions is highly
competitive. We principally compete with traditional inverter manufacturers as well as microinverter manufacturers. Currently, our DC
optimized inverter system competes with products from traditional inverter manufacturers, microinverter manufacturers, as well as emerging
technology companies offering alternative MLPE products. Over the past few years, several new entrants to the inverter and MLPE market,
including low-cost Asian manufacturers, have announced plans to ship or have already shipped products in markets in which we sell our
products, including, with respect to sales in the United States, Australia and in Europe. We expect competition to intensify as new and
existing competitors enter the market. In addition, there are several new entrants that are proposing solution to the rapid shutdown functionality
which has become a regulatory requirement for PV rooftop solar systems in the United States. If these new technologies are successful
in offering a price competitive and technological attractive solution to the residential solar PV market, this could make it more difficult
for us to maintain market share.
Several of our existing and potential competitors
have the financial resources to offer competitive products at aggressive or below-market pricing levels, which could cause us to lose
sales or market share or require us to lower prices for our products in order to compete effectively. If we have to reduce our prices
by more than we anticipated, or if we are unable to offset any future reductions in our average selling prices by increasing our sales
volume, reducing our costs and expenses or introducing new products, our revenues and gross profit would suffer.
In addition, competitors may be able to develop
new products more quickly than us, may partner with other competitors to provide combined technologies and competing solutions and may
be able to develop products that are more reliable or that provide more functionality than ours.
Developments
in alternative technologies or improvements in distributed solar energy generation may have a material adverse effect on demand for our
offerings.
Significant developments in alternative technologies,
such as advances in other forms of distributed solar PV power generation, storage solutions, such as batteries, the widespread use or
adoption of fuel cells for residential or commercial properties or improvements in other forms of centralized power production, may have
a material adverse effect on our business and prospects. Any failure by us to adopt new or enhanced technologies or processes, or to react
to changes in existing technologies, could result in product obsolescence, the loss of competitiveness of our products, decreased revenue
and a loss of market share to competitors.
The
solar industry has historically been cyclical and experienced periodic downturns.
Our future success partly depends on continued
demand for solar PV systems in the end-markets we serve, including the residential and commercial sectors in the United States and Europe.
The solar industry has historically been cyclical and has experienced periodic downturns which may affect demand for our products. The
solar industry has undergone challenging business conditions in past years, including downward pricing pressure for PV modules, mainly
as a result of overproduction, and reductions in applicable governmental subsidies, contributing to demand decreases. Therefore, there
is no assurance that the solar industry will not suffer significant downturns in the future, which will adversely affect demand for our
solar products and our results of operations.
Defects
or performance problems in our products could result in loss of customers, reputational damage, and decreased revenue, and we may face
warranty, indemnity, and product liability claims arising from defective products.
Although our products meet our stringent quality
requirements, they may contain undetected errors or defects, especially when first introduced or when new generations are released. Errors,
defects, or poor performance can arise due to design flaws, defects in raw materials or components or manufacturing difficulties, which
can affect both the quality and the yield of the product. Any actual or perceived errors, defects, or poor performance in our products
could result in the replacement or recall of our products or components thereof, shipment delays, rejection of our products, damage to
our reputation, lost revenue, diversion of our personnel from our product development efforts, and increases in customer service and support
costs, all of which could have a material adverse effect on our business, financial condition, and results of operations.
Furthermore,
defective components may give rise to warranty, indemnity, or product liability claims against us that exceed any revenue or profit we
receive from the affected products. In most cases, we offer a minimum 12-year limited warranty for our inverters, extendable to twenty-five
years for an additional cost, a 25-year limited warranty for our power optimizers and a 10-year limited warranty for our residential energy
bank battery. Our limited warranties cover defects in materials and workmanship of our products under normal use and service conditions;
therefore, we bear the risk of warranty claims long after we have sold products and recognized revenue. While we do have accrued reserves
for warranty claims, our estimated warranty costs for previously sold products may change to the extent future products are not compatible
with earlier generation products under warranty. Our warranty accruals are based on our assumptions and we do not have a long history
of making such assumptions. As a result, these assumptions could prove to be materially different from the actual performance of our systems,
causing us to incur substantial unanticipated expenses to repair or replace defective products in the future or to compensate customers
for defective products. Our failure to accurately predict future claims could result in unexpected volatility in, and have a material
adverse effect on, our financial condition. In particular, our residential energy hub battery is new on the market and we do not have
the experience in servicing this product yet.
If
one of our products were to cause injury to someone or cause property damage, or in the event that a claim is made alleging false or misleading
advertisement, unfair competition or other consumer related claims, we could potentially be exposed to product liability claims and lawsuits
which could result in significant costs and liabilities if damages are awarded against us. Further, any product liability claim we face
could be expensive to defend and could divert management’s attention. Even in litigation where we believe our liability is remote,
there is a risk that a negative finding or decision in a matter involving multiple plaintiffs or a purported class action could have a
material adverse effect on our competitive position, results of operations or financial condition.
For example, we provide warranty for the products
sold by our e-Mobility division that are installed in vehicles. If such products contain design or manufacturing defects that cause them
not to perform as expected, they may cause injury or damage to property and we may experience
product recalls, product liability and significant warranty and other expenses. The successful assertion of a product liability claim
against us could result in potentially significant monetary damages, penalties or fines, subject us to adverse publicity, damage our reputation
and competitive position, and adversely affect sales of our products. In addition, product liability claims, injuries, defects, or other
problems experienced by other companies in the residential solar industry could lead to unfavorable market conditions for the industry
as a whole.
We
depend upon a small number of outside contract manufacturers. Our operations could be disrupted if we encounter problems with these contract
manufacturers.
While we are manufacturing a portion of our products in Israel, we still heavily
rely upon our contract manufacturers to manufacture most of our products. We mainly rely on two contract manufacturers. Any change in
our relationship or contractual terms with our contract manufacturers, or changes in our contract manufacturers’ ability to comply
with their contractual obligations could adversely affect our financial condition and results of operations. Our reliance on a small number
of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery
schedules, manufacturing yields and costs. Even though we have commenced manufacturing in our facility in Israel, the expected production
volumes will not be sufficient to relieve our significant dependence on our contract manufacturers. In addition, we remain heavily dependent
on suppliers of the components needed for our manufacturing.
The revenues that our contract manufacturers
generate from our orders represent a relatively small percentage of their overall revenues. Therefore, fulfilling our orders may not be
considered a priority in the event of constrained ability to fulfill all of their customer obligations in a timely manner. In addition,
the facilities in which our products are manufactured are located outside of the U.S., currently in China, Vietnam, Israel, Hungary and
Mexico, where the ramping up process is expected to be completed in the first half of 2023. The location of our facilities outside
of key markets such as the U.S. increases shipping time, thereby causing a long lead time between manufacturing and delivery.
If either of our contract manufacturers were
unable or unwilling to manufacture our products in required volumes and at high quality levels or continue to supply under existing terms,
we would have to identify, qualify, and select acceptable alternative contract manufacturers, which may not be available to us when needed
or may be unable to satisfy our quality or production requirements on commercially reasonable terms. Any significant interruption in manufacturing
would require us to reduce our supply of products to our customers or increase our shipping costs to make up for delays in manufacturing,
which in turn could reduce our revenues, harm our relationships with our customers, subject us to liquidated damages for late deliveries,
and damage our reputation with local installers and potential end-users, all of which will cause us to forego potential revenue opportunities.
Further, the ramp of a new contract manufacturer is time consuming and draining on the resources of our operations team.
We may experience delays,
disruptions, or quality control problems in our manufacturing operations.
Our product development, manufacturing, and
testing processes are complex and require significant technological and production process expertise involving several precise steps from
design to production. Any change in our processes could cause one or more production errors, requiring a temporary suspension or delay
in our production line until the errors can be identified and properly rectified. This may occur particularly as we introduce new products,
modify our engineering and production techniques, and/or expand our capacity. In addition, our failure to maintain appropriate quality
assurance processes could result in increased product failures, loss of customers, increased warranty reserve, increased costs and delays,
all of which could have a material adverse effect on our business, financial condition, and results of operations.
We
depend on a limited number of suppliers for key components and raw materials in our products to adequately meet anticipated demand. Due
to the limited number of such suppliers, any changes or shortages in raw materials or key components we use could result in sales delays,
higher costs associated with air shipments, cancellations, and loss of market share.
We depend on limited or single source suppliers
for certain key components and raw materials used to manufacture our products, making us susceptible to quality issues, shortages and
price changes. Any of these limited or single source suppliers could stop supplying, or offering at commercially reasonable prices, our
components or raw materials, cease operations or be acquired by, or enter into exclusive arrangements with our competitors. Because there
are a few suppliers of raw materials used to manufacture our products, it may be difficult to timely identify and/or qualify alternate
suppliers on commercially reasonable terms; therefore, our ability to satisfy customer demand may be adversely affected. Transitioning
to a new supplier or redesigning a product to accommodate a new component manufacturer would result in additional costs and delays that
could harm our business or financial performance.
Managing our supplier and contractor relationships
is particularly difficult when we are introducing new products. For example, as we began to ramp assembly and production of powertrain
kits for the automotive industry, we became heavily reliant on new third-party suppliers that needed to be approved through rigorous testing
and validation processes for use in our supply chain. Once selected, it is time consuming and costly to replace such vendors. The same
is true for our residential Home Battery for which we rely on a single source for supply of the lithium ion cells. Any delay or
shortage of supply or inability to deliver the components to our manufacturing facilities could harm our business or financial performance.
Any interruption in the supply of limited
source components or raw materials for our products would adversely affect our ability to meet scheduled product deliveries to our customers
and could result in lost revenue or higher expenses associated with increased air shipments required to meet customer demand in a timely
manner and would harm our business. For example, we continue to experience raw material shortages due to increased lead time which may
affect our ability to timely receive certain components within the previously expected lead times. These shortages may result in a delay
in sales, higher costs associated with air shipments, cancellations of orders by customers, liquidated damages for late deliveries and
loss of market share.
Disruption
in our global supply chain and rising prices of oil and raw materials as a result of the conflict between Russia and Ukraine may adversely
affect our businesses and results of operations.
The conflict that began between Russia and
Ukraine in late February 2022, may significantly amplify already existing disruptions to our supply-chain and logistics. Specifically,
the conflict may disrupt the transit of goods by train from China to Europe, resulting in an increase in prices of certain raw materials
sourced in Russia (such as nickel and aluminum) that we use in the manufacture of our products as well as increase oil prices that will
in turn cause overall shipping costs to rise. In addition, the governments of the United States, the European Union, Japan and other jurisdictions
have announced sanctions on certain industry sectors and parties in Russia and the regions of Donetsk and Luhansk, as well as enhanced
export controls on certain products and industries. These and any additional sanctions, as well as any counter responses by the governments
of Russia or other jurisdictions, could adversely affect the global financial markets generally and levels of economic activity as well
as increase financial markets volatility. , and any additional measures or sanctions, as well as the resulting rise in prices of oil and
certain raw materials sourced in Russia may disrupt our business and results of operations and/or adversely affect the pricing of our
products.
We
rely on distributors and large installers to assist in selling our products, and the failure of these customers to perform as expected
could reduce our future revenues.
Our customers’ decisions to purchase
our products are influenced by several factors outside of our control. The agreements we have with some of our largest customers do not
have long-term purchase commitments and are generally cancellable by either party after a relatively short notice period. The loss of,
or events affecting, one or more of these customers could have a material adverse effect on our business, financial condition, and results
of operations (see Note 2aa to our consolidated financial statements).
In addition, we do not have exclusive arrangements
with our third-party distributors and large installers, many of which also market and sell products from our competitors. These distributors
and large installers may terminate their relationships with us at any time and with little or no notice. Further, these distributors and
large installers may fail to devote resources necessary to sell our products at the prices, in the volumes, and within the time frames
that we expect, or may focus their marketing and sales efforts on products of our competitors. Termination of agreements with current
distributors or large installers, failure by these distributors or large installers to perform as expected, or failure by us to cultivate
new distributor or large installer relationships, could hinder our ability to expand our operations and harm our revenue and results of
operations.
Mergers
in the solar industry among our current or potential customers may adversely affect our competitive position.
There has been an increase in consolidation
activities among distributors, large installers, and other strategic partners in the solar industry. For example, in October 2020, Sunrun,
a leading provider of residential solar, battery storage and energy services, acquired Vivint Solar. If this consolidation continues,
it will further increase our reliance on a small number of customers for a significant portion of our sales and may negatively impact
our competitive position in the solar market.
Our
planned expansion into new geographic markets or new product lines or services could subject us to additional business, financial, and
competitive risks.
We have in the past, and may in the future,
evaluate opportunities to expand into new geographic markets and introduce new product offerings and services. We also may from time to
time engage in acquisitions of businesses or product lines with the potential to strengthen and expand our market position, technological
capabilities, or provide synergy opportunities. For example, we intend to continue to introduce new products targeted at large commercial
and utility-scale installations and to continue to expand into other international markets.
Our successful operation in these new markets,
or any acquired business, will depend on a number of factors, including our ability to develop solutions to address the requirements of
the large commercial and utility-scale solar PV markets, timely certification of new products for large commercial and utility-scale solar
PV installations, acceptance of power optimizers in solar PV markets in which they have not traditionally been used, and our ability to
manage increased manufacturing capacity and production and to identify and integrate any acquired businesses.
Further, we expect these new solar PV markets
and additional markets we have entered, or may enter, into to have different characteristics from the markets in which we currently sell
our products. Our success will depend on our ability to properly adapt to these differences, which include differing regulatory requirements,
such as tax laws, trade laws, labor regulations, tariffs, export quotas, customs duties, or other trade restrictions, limited or unfavorable
intellectual property protection, international, political or economic conditions, restrictions on the repatriation of earnings, longer
sales cycles, warranty expectations, product return policies and cost, and performance and compatibility requirements. In addition, expanding
into new geographic markets will increase our exposure to existing risks, such as fluctuations in the value of foreign currencies and
increased expenses in complying with U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act
of 1977, as amended (the “FCPA”).
Failure to successfully develop and introduce
these new products, successfully integrate acquired businesses,
or to otherwise manage the risks and challenges associated with
our potential expansion into new product and geographic markets, could adversely affect our revenues and our ability to sustain profitability.
If
we fail to build our non-solar businesses and future growth effectively, we may be unable to execute our business plan, maintain high
levels of customer service, or adequately address competitive challenges.
We have experienced significant growth in
recent periods with our annual product sales growing rapidly from approximately 152,500 inverters and approximately 3.6 million power
optimizers in the fiscal year ending June 30, 2015, to annual product sales exceeding 1.0 million
inverters and 23.6 million power optimizers in the year ended December 31, 2022.
We intend to continue to expand our business significantly within existing and new markets. This growth has placed, and any future growth
may place, a significant strain on our management, operational, and financial infrastructure. In particular, we will be required to expand,
train, and manage our growing employee base and scale and otherwise improve our IT infrastructure in tandem with such headcount growth.
Our management will also be required to maintain and expand our relationships with customers, suppliers, and other third parties and attract
new customers and suppliers, as well as manage multiple geographic locations.
Our current and planned operations, personnel,
customer support, IT, information systems, and other systems and procedures might be inadequate to support our future growth and may require
us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend,
in part, on our ability to manage these changes in an efficient manner. If we cannot manage our growth, we may be unable to take advantage
of market opportunities, execute our business plans or strategies, or respond to competitive pressures. This could also result in declines
in quality or customer satisfaction, increased costs, difficulties in introducing new offerings, or other operational difficulties. Any
failure to effectively manage growth could adversely impact our business and reputation.
Conversely, the global pandemic and resulting
economic downturn in many regions require our ability to be flexible and decrease expenses where growth has slowed down. Our ability to
timely react to market conditions is not always in our control and any inability to do so could also adversely impact our business.
We
may not have the ability to raise the funds necessary to settle conversion of our Convertible Senior Notes or Notes in cash or to repurchase
the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Notes
or to repurchase the Notes.
Holders of the Notes
have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (as defined in
the Indentures governing their respective Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased,
plus accrued and unpaid special interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares
of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required
to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to obtain financing
at the time we are required to make repurchases of Notes surrendered or Notes being converted. In addition, our ability to repurchase
the Notes or to pay cash upon conversions of the Notes may be limited by law, regulatory authority or agreements governing our future
indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing such Notes or to pay
cash upon conversion of the Notes as required by such indenture would constitute a default under such indenture. A default under the indenture
governing the Notes or the fundamental change itself could also lead to a default under agreements governing our future indebtedness.
If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient
funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversion of the Notes.
Any
unauthorized access to, disclosure, or theft of personal information we gather, store, or use could harm our reputation and subject us
to claims or litigation.
Our business and operations may be impacted
by data security breaches and cybersecurity attacks, including attempts to gain unauthorized access to confidential data. We receive,
store, and use certain personal information of our employees, customers, and the end-users of our customers’ solar PV systems. We
take steps to protect the security, integrity, and confidentiality of the personal information we process; however, we have been subject
to cybersecurity attacks and other information technology system disruptions in the past and there is no guarantee that inadvertent or
unauthorized access, use or disclosure will not occur despite our efforts. Because techniques used to obtain unauthorized access or sabotage
systems change frequently and generally are not identified until after they are launched against a target, we and our suppliers or vendors
may be unable to anticipate these techniques or to implement adequate preventative or mitigatory measures.
Unauthorized use or disclosure of, or access
to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers
or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could harm our business,
particularly in light of the European General Data Protection Regulation, the California Consumer Privacy Act, and China Personal Information
Protection Law (PIP) which came into effect November 1, 2021. If any such unauthorized use or disclosure of, or access to, such personal
information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private
parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in
notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state, and local laws and regulations
relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access
to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers,
and have an adverse impact on our business, financial condition and results of operations.
Third
parties, our employees, or our vendors might gain unauthorized access to our network or seek to compromise our products and services.
Occasionally, we face attempts by others,
including our own employees or vendors, to access our networks, to gain unauthorized access through the Internet, introduce malicious
software to our information technology (IT) systems, or corrupt the processes of hardware and software products that we manufacture and
services we provide. We or our products may be a target of computer hackers, organizations or malicious attackers who attempt to gain
access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products,
employees, and customers; or interrupt our systems or those of our customers or others. Occasionally, we encounter intrusions or attempts
at gaining unauthorized access to our network. To date, none have resulted in any material adverse impact to our business or operations,
although there can be no guarantee that such impacts will not be material in the future. While we seek to detect and investigate all unauthorized
attempts and attacks against our network and products, and to prevent their recurrence where practicable, we remain potentially vulnerable
to additional known or unknown threats. In addition to intentional third-party cyber-security breaches, the integrity and confidentiality
of Company and customer data may be compromised as a result of human error, product defects, or technological failures. Cyber-security
breaches, whether successful or unsuccessful, and other IT system interruptions, including those resulting from human error and technological
failures, could subject us to significant costs arising from, among others, rebuilding internal systems, reduced inventory value,
providing modifications to our products and services, defending against litigation, responding to official inquiries or actions, paying
damages, or taking other remedial steps with respect to third parties.
Our
entry into business engagements with military bodies as our customers in the lithium-ion battery and energy storage business embodies
a risk for potentially large-scale and uncapped liability.
As a result of the acquisition of our Korean
subsidiary (formerly Kokam), we sell a small portion of our products to customers who integrate our storage systems or cells and then
sell these products to military customers. Our sales to military customers often involve standard form contracts, which may not be subject
to negotiation. In particular, certain of these contracts involve unlimited damages provisions that could result in large-scale liabilities.
Our
business could be materially adversely affected as a result of the risks associated with acquisitions and investments. In particular,
we may not succeed in future acquisitions or be effective in integrating such acquisitions.
As part of our growth strategy, we have made
a number of acquisitions, and may continue to make acquisitions and investments in the future. We frequently evaluate the tactical or
strategic opportunities available related to complementary businesses, products or technologies. There can be no assurance that we will
be successful in making additional acquisitions. Even if we are successful in making additional acquisitions, integrating an acquired
company’s business into ours or investing in new technologies may result in unforeseen operating difficulties and large expenditures
and absorb significant management attention that would otherwise be available for the ongoing development of our business, both of which
may result in the loss of key customers or personnel and expose us to unanticipated liabilities. Further, we may not be able to retain
the key employees that may be necessary to operate the businesses we acquire and we may not be able to attract, in a timely manner, new
skilled employees and management to replace them.
We may not be able to consummate acquisitions
or investments that we have identified as crucial to the implementation of our strategy for other commercial or economic reasons. Further,
we may not be able to obtain the necessary regulatory approvals, including those of competition authorities and foreign investment authorities,
in countries where we seek to consummate acquisitions or make investments. For those and other reasons, we may ultimately fail to consummate
an acquisition, even if we announce the intended acquisition.
Lithium-Ion
used in our battery cells and packs can potentially catch fire or vent smoke and cause damage or injury.
The battery cells and packs produced by
our subsidiary, and the SolarEdge Home Battery, make use of lithium-ion cells. We regularly test our products and take safety measures
when manufacturing, selling and installing battery cells and packs. However, due to the high energy density of lithium-ion cells, mishandling,
inappropriate storage or delivery, non-compliance with safety instructions or field failures can potentially cause a battery cell to rapidly
release its stored energy, which may in turn cause a thermal event that can ignite nearby materials, including other lithium-ion cells.
As the use of lithium-ion batteries becomes more widespread, these events may occur more often, causing damage to property, injury, lawsuits
and adverse publicity, which may adversely affect our reputation, results of operations or financial condition.
Conditions
in Israel affect our operations and may limit our ability to develop, produce and sell our products.
Our headquarters and research and development
center are located in Israel. Accordingly, political, economic, and military conditions in Israel directly affect us. Israel has been
involved in a number of armed conflicts and is the target of terrorist activity, including threats from Hezbollah militants in Lebanon,
Iranian militia in Syria, and others. Ongoing state of hostility, varying in degree such as rocket fire from the Gaza Strip, has occurred
on an irregular basis, disrupting day-to-day civilian activity and negatively affecting business conditions. We cannot predict whether
or when such armed conflicts or attacks may occur or the extent to which such events may impact us. Any future armed conflict, political
instability or violence in the region may impede our ability to manage our business effectively, operate our manufacturing plant in northern
Israel, engage in research and development, or otherwise adversely affect our business or operations. In the event of war, we may be forced
to cease operations, which may cause delays in the distribution and sale of our products. Some of our directors, executive officers, and
employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for additional
active duty under emergency circumstances. In the event that our principal executive office is damaged as a result of hostile action,
or hostilities otherwise disrupting the ongoing operation of our offices, our ability to operate could be materially adversely affected.
Additionally, several countries principally
in the Middle East, restrict doing business with Israeli companies, and additional countries and groups may impose similar restrictions
if hostilities in Israel or political instability in the region continue or increase. If instability in neighboring states results in
the establishment of fundamentalist Islamic regimes or governments more hostile to Israel, or if Egypt, Turkey, or Jordan abrogates its
respective peace treaty with Israel, Israel could be subject to additional political, economic, and military confines, and our operations
and ability to sell our products to countries in the region could be materially adversely affected.
Any hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition
of Israel, could have a material adverse effect on our business, financial condition, and results of operations.
Additionally,
the newly elected Israeli government has announced plans to significantly reduce the Israeli Supreme Court's judicial oversight, including
reducing its ability to strike down legislation that it deems unreasonable, and plans to increase political influence over the selection
of judges. These plans have prompted protests of Israeli citizens and criticism of leading Israeli business leaders as well as some foreign
leaders. If such government plans are eventually enacted, they may cause operational challenges for us since we are headquartered
in Israel and approximately half of our employees are located in Israel. In addition, if foreign policy is negatively impacted with regard
to Israel, this could impact our business with suppliers and customers which could in turn adversely impact our reputation, results of
operations or financial condition.
The
tax benefits that are available to us under Israeli law require us to meet various conditions and may be terminated or reduced in the
future, which could increase our costs and taxes.
Our Israeli subsidiary was eligible for certain
tax benefits provided to “Benefited Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959
(the “Investments Law”). Beginning in January 2019, and with respect to its taxable results from 2019 onwards, our Israeli
subsidiary further elected to apply the terms of the Investments Law as per “Preferred Enterprise”
(“PE”) or “Preferred Technological Enterprise” (“PTE”). In order to remain eligible for the
tax benefits for “Benefited Enterprises” with respect to our Israeli subsidiary’s taxable results until 2018 and with
respect to its taxable results from 2019 for PE or PTE, we must continue to meet certain conditions
stipulated in the Investments Law and its regulations, as amended. If these tax benefits are reduced, cancelled, or discontinued, or if
we are held to have violated the conditions stipulated in the Law, our Israeli taxable income would be subject, in whole or in part, to
regular Israeli corporate tax rates and we may be required to refund any tax benefits that we have already received, plus interest and
penalties thereon. The statutory corporate tax rate for Israeli companies is 23% as of January 1, 2018 and onward. Additionally, if we
increase our activities outside of Israel through acquisitions or otherwise through our Israeli subsidiary, our existing or expanded activities
might not be eligible for inclusion in existing or future Israeli tax benefit programs. The Israeli government may furthermore independently
determine to reduce, phase out or eliminate entirely the benefit programs under the Investments Law, regardless of whether we then qualify
for benefits under those programs at the time, which would also adversely affect our global tax rate and our results of operations.
It
may be difficult to enforce a judgment of a U.S. court against our officers and directors, to assert U.S. securities laws claims in Israel,
or to serve process on our officers and directors.
Many of our directors and executive officers,
their assets, and most of our assets are located outside of the U.S. Consequently, a judgment obtained against any of these persons, including
a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. It also may
be difficult to effect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds of forum
non conveniens. In addition, even if an Israeli court hears a claim, it may determine that Israeli law and not U.S. law is applicable
to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses,
which can be a lengthy and costly process. Further, an Israeli court may not enforce a judgment awarded by a U.S. or other non-Israeli
court. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses these
matters. As a result of the difficulty associated with enforcing a judgment against any of these persons in Israel, judgment against many
of our directors and executive officers may be unachievable or unenforceable.
The
ongoing Covid-19 pandemic, and global measures taken in response thereto have adversely impacted, and may continue
to adversely impact, our operations and financial results.
The Covid-19 pandemic has had, and may continue
to have, a material adverse impact on our results of operations including its impact on our supply chain and inflationary pressures.
The full extent the effects Covid-19 will
have on our business depends on numerous evolving factors that we may not be able to currently accurately predict, including: the duration
and scope of the pandemic; governmental, business and individual responses to the pandemic; the effect on our customers and customer demand
for our products, disruptions or restrictions on our employees’ ability to work and travel and potential disruptions to our manufacturing
capacity, similar to the restrictions experienced by our manufacturing facility in Vietnam in
the third quarter of 2021, which would limit our ability to meet customer demand and impact our operating results.
More generally, the Covid-19 pandemic raises
the possibility of an extended global economic downturn and has caused volatility in financial markets, which may continue to adversely
affect demand for our products and could adversely affect our results and financial condition in subsequent quarters. For example, some
of our suppliers may experience delivery delays or financial difficulties, resulting in supply constraints and increased costs or delays
to our productions. Furthermore, we may experience delays in timely delivery of our products to our customers, exposing us to cancellations
of orders and/or potential liquidated damages resulting from our inability to timely delivery our products.
The
unprecedented and continuously evolving nature of Covid-19, other pandemics or epidemics, could also have the effect of amplifying many
of the other risks described in this Item 1A, Risk Factors.
We
are dependent on ocean transportation to deliver our products in a timely and cost efficient manner. If we are unable to use ocean transportation
to deliver our products, our business and financial condition could be materially and adversely impacted.
We rely on ocean transportation for the delivery
of most of our products to our customers, and when unavailable, incompatible with customer delivery time requirements, or when we are
unable to accommodate accelerated delivery times due to growing customer volume demands, we rely on alternative, more expensive air transportation.
Our ability to deliver our products via ocean transportation could be adversely impacted by shortages in available cargo capacity, changes
by carriers and transportation companies in policies and practices, such as scheduling, pricing, payment terms and frequency of service
or increases in the cost of fuel, taxes and labor, disruptions to ports and other shipping facilities as a result of the Covid-19 or other
epidemics and other factors not within our control. If we are unable to use ocean transportation and are required to substitute more expensive
air transportation, our financial condition and results of operations could be materially and adversely impacted.
While we have witnessed a reduction in shipment
rates in the fourth quarter of 2022, during the year ended December 31, 2022, we experienced an increase
in the cost of goods sold due to an increase in shipping rates that resulted from a reduction in ocean freight capacity and the reduction
in the availability of air freight that increased the demand for ocean freight. We also experienced disruptions to our logistics supply
chain caused by constraints in the global transportation system including limited availability of local ground transportation coupled
with congestion in ports and borders.
Fluctuations
in currency exchange rates may negatively impact our financial condition and results of operations.
Although our financial results are reported
in U.S. dollars, 60.1% of our revenues in the year ended December 31,
2022 were generated in currencies other than the U.S. Dollar. In addition, a significant portion of our operating expenses are
accrued in New Israeli Shekels (primarily related to payroll), the Euro and, to a lesser extent, the
South Korean Won (“KRW”) and other currencies. As detailed in the Foreign Currency Exchange Risk under Item 7A -Quantitative
and Qualitative Disclosures About Market Risk, our profitability is affected by movements of the U.S. dollar against the Euro, and, to
a lesser extent, the New Israeli Shekel, KRW and other currencies in which we generate revenues,
incur expenses and maintain cash balances. Foreign currency fluctuations may also affect the prices of our products which are denominated
primarily in U.S. dollars. If there is a devaluation of a particular currency, the prices of our products will increase relative to the
local currency and may be less competitive. Despite our efforts to minimize foreign currency risks, primarily by maintaining cash balances
in New Israeli Shekels, significant long-term fluctuations in relative currency values, in particular a significant change in the relative
values of the Euro and, New Israeli Shekel, KRW and other currencies, against the U.S. dollar
could have an adverse effect on our profitability and financial condition.
Occasionally, we may enter into derivative
financial instruments to hedge the exchange rates impacts on our assets and liabilities denominated in Israeli Shekels, Euro, KRW and
other currencies.
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, and may make it difficult to hedge our foreign currency exposures effectively.
We
are subject to risks related to corporate social responsibility.
We are facing increasing scrutiny related
to our environmental, social and governance (“ESG”) practices and requested disclosures by institutional and individual investors
who are increasingly using ESG screening criteria in making investment decisions. Our disclosures on these matters or a failure to satisfy
evolving stakeholder expectations for ESG practices and reporting may potentially harm our reputation and impact relationships with investors.
Certain market participants including major institutional investors use third-party benchmarks or scores to measure our ESG practices
in making investment decisions. Furthermore, some of our customers and suppliers evaluate our ESG practices or request that we adopt certain
ESG policies as a condition of awarding contracts. In addition, our failure or perceived failure to pursue or fulfill our goals, targets
and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could expose us to government enforced
actions and/or private litigation. As ESG best-practices, reporting standards and disclosure requirements continue to develop, we may
incur increasing costs related to ESG monitoring and reporting.
Complications with the
design or implementation of our new ERP system could adversely impact our business and operations.
We rely extensively on information systems
and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global
enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The
ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely
information to the Company’s management team related to the operation of the business. The ERP system implementation process has
required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully
implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design
and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted.
Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness
of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could
be delayed.
Risks
Related to Legal, Compliance and Regulations
The
reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar electricity applications could
reduce demand for solar PV systems and harm our business.
Federal, state, local
and foreign government bodies provide incentives to promote solar electricity in the form of rebates, tax credits or exemptions and other
financial incentives. The market for on-grid applications, where solar power is used to supplement a customer’s electricity purchased
from the utility network or sold to a utility under tariff, often depends in large part on the availability and size of government and
economic incentives. Because our customers’ sales are typically into the on-grid market, the reduction, elimination or expiration
of government subsidies and incentives for on-grid solar electricity may negatively affect the desirability of solar electricity and could
harm or halt the growth of the solar electricity industry and our business. For example, in 2015 the U.S. congress passed a multi-year
extension to the solar Investment Tax Credit (ITC), and such extension helped grow the U.S. solar market. The Inflation Reduction Act
of 2022 extended the term of the ITC through 2034. However future reduction in the ITC could reduce the demand for solar energy
solutions in the U.S. which would have an adverse effect on our business, financial condition, and results of operations.
In general, subsidies and incentives may expire
on a particular date, end when the allocated funding is reduced or terminated due to, inter alia,
legal challenges, adoption of new statutes or regulations or the passage of time, they often occur without warning.
In addition, several jurisdictions have adopted
renewable portfolio standards, mandating that a certain portion of electricity delivered by utilities to customers come from a set of
eligible renewable energy resources, such as solar, by a certain compliance date. Under some programs, a utility can receive a “credit”
for renewable energy produced by a third party by either purchasing the electricity directly from the producer or paying a fee to obtain
the right to renewable energy generated but used or sold by the generator. A renewable energy credit allows the utility to add this electricity
to its renewable portfolio requirement without actually expending the capital for generating facilities. However, there can be no assurances
that such policies will continue. Reduction or elimination of renewable portfolio standards or successful efforts to meet current standards
could harm or halt the growth of the solar PV industry and our business.
Unfavorable regulatory
treatment under the Inflation Reduction Act of 2022 may harm our business.
On August 16, 2022, the
Inflation Reduction Act of 2022 (the “IRA”) was signed into federal law. The IRA provides for, among other things, certain
incentives, including certain tax credits, intended to promote clean energy. Given that the IRA is a complex new piece of legislation,
additional guidance on the regulatory treatment of the IRA is expected from the Internal Revenue Service and U.S. Treasury Department.
It is currently uncertain the extent to which all of our products will qualify for such incentives. Any unfavorable regulatory treatment,
or guidance, including any tax benefits being made available to competing technology and not to our technology, could adversely impact
our business and financial condition.
Changes
to net metering policies may reduce demand for electricity from solar PV systems and harm our business.
Our business benefits from favorable net metering
policies in most U.S. states and some European countries, that allow a solar PV system owner to pay his or her electric utility only for
power usage net of production from the solar PV system. System owners receive credit for the energy that the solar installation generates
to offset energy usage at times when the solar installation is not generating energy. Under a net metering program, the customer typically
pays for the net energy used or receives a credit against future bills if more energy is produced than consumed.
Most U.S. states have adopted some form of
net metering. Yet, net metering programs have recently come under regulatory scrutiny in some U.S. states due to allegations that net
metering policies inequitably shift costs onto non-solar ratepayers, by allowing solar ratepayers to sell electricity at rates that are
too high for utilities to recoup their fixed costs. For example, in 2019, Louisiana Public Service Commissions adopted net metering policies
aiming at lowering the solar customers’ savings. In December 2022, the California Public Utilities Commission voted to approve lowering
current net energy metering tariffs in addition to imposing a new grid-connection fee on new rooftop solar users the tariff cuts are intended
to become effective in April of 2023. We cannot assure you that these programs will not be significantly modified going forward.
If the value of the credit that customers
receive for net metering is reduced, end-users may be unable to recognize the current level of cost savings associated with net metering.
The absence of favorable net metering policies or of net metering entirely, or the imposition of new charges that only or disproportionately
affect end-users that use net metering would significantly limit demand for our products and could have a material adverse effect on our
business, financial condition, results of operations and future growth.
Existing
electric utility industry regulations and changes to regulations, may present technical, regulatory, and economic barriers to the purchase
and use of solar PV systems, that may significantly reduce demand for our products or harm our ability to compete.
In addition, determinations of various regulatory bodies regarding lack of compliance
with certifications or other regulatory requirements, could harm our ability to sell our products in certain countries.
Federal, state, local and foreign government
regulations and policies concerning the electric utility industry, and internal policies and regulations promulgated by electric utilities,
heavily influence the market for electricity generation products and services, and could deter purchases of solar PV systems sold by our
customers, significantly reducing the potential demand for our products. For example, utilities commonly charge fees to larger, industrial
customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes.
These fees could increase the cost to use solar PV systems sold by our customers and make them less desirable, thereby harming our business,
prospects, financial condition and results of operations. In addition, depending on the region, electricity generated by solar PV systems
competes most effectively with expensive peak-hour electricity from the electric grid, rather than the less expensive average price of
electricity. Modifications to the utilities’ peak hour pricing policies or rate design, such as to a flat rate, could require the
price of solar PV systems and their component parts to be lower in order to compete with the price of electricity from the electric grid.
Changes in current laws or regulations applicable
to us or the imposition of new laws and regulations in the U.S., Europe, or other jurisdictions in which we do business could have a material
adverse effect on our business, financial condition and results of operations. Any changes to government or internal utility regulations
and policies that favor electric utilities could reduce the competitiveness of solar PV systems sold by our customers, and causing a significant
reduction in demand for our products and services. In addition, changes in our products or changes in export and import laws and implementing
regulations may delay the introduction of new products in international markets, prevent our customers from deploying our products internationally
or, in some cases, prevent the export or import of our products to certain countries altogether, resulting in a material adverse effect
on our business, financial condition, and results of operations.
Compliance with various regulatory requirements
and standards is a prerequisite for placing our products on the market in most countries in which we do business. We have all such certifications
but there are at times, challenges by local administrative telecommunications, consumer board or other authorities that can place sales
bans on products. For example, in December 2021, the Swedish Electrical Safety Board announced that
certain models of our power optimizers are subject to a sales ban alleging that they do not meet the EMC Directive. While we disagree
with this finding and maintain our position that all current SolarEdge products are tested, approved and compliant with the EMC Directive
and other EU regulations, any such rulings can have a negative impact on our business and reputation. In this specific incident, we have
already begun transitioning into our next generation optimizers and do not expect any impact on our business in Sweden or elsewhere.
Risks Related To Intellectual Property
If
we fail to protect, or incur significant costs in defending our intellectual property and other proprietary rights, our business and results
of operations could be materially harmed.
Our success depends to a significant degree
on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patents, trademarks, copyrights,
trade secrets, and unfair competition laws, as well as confidentiality and license agreements and other contractual provisions with our
customers, suppliers, employees, and others, to establish and protect our intellectual property (IP) and other proprietary rights. Our
ability to enforce these rights is subject to litigation risks, as well as uncertainty as to the enforceability of our IP rights in various
countries, specifically claims that our IP rights are invalid or unenforceable. Our assertion of IP rights may result in another party
seeking to assert claims against us, which could harm our business. Our inability to enforce our IP rights under any of these circumstances
can harm our competitive position and business.
We have applied for patents in the U.S., Europe
China, some of which have been issued. We cannot guarantee that any of our pending applications will be approved or that our existing
and future intellectual property rights will be sufficiently broad to protect our proprietary technology. Any failure to obtain such approvals
or finding that our intellectual property rights are invalid or unenforceable could force us to, among other things, rebrand or re-design
our affected products. In countries where we have not applied for patent protection or where effective intellectual property protection
is not available to the same extent as in the U.S., we may be at greater risk that our proprietary rights will be misappropriated, infringed,
or otherwise violated.
Our intellectual property may be stolen or
infringed upon. In fact, as further detailed in Item 3 – “Legal Proceedings” we are engaged in several legal proceedings
related to intellectual property. Litigation proceedings are inherently uncertain, and adverse rulings may occur, including monetary damages,
injunction stopping us from manufacturing or selling certain products, or requiring other remedies. These lawsuits are intended to protect
our significant investment in our intellectual property but they also may consume management and financial resources for long periods
of time and may not result in favorable outcome for us, which may adversely affect our business, results of operations or financial condition.
Third
parties may assert that we are infringing upon their intellectual property rights, which could divert management’s attention, cause
us to incur significant costs, and prevent us from selling or using the technology to which such rights relate.
Our competitors and other third parties hold
numerous patents related to technology used in our industry. Occasionally, we may also be subject to claims of intellectual property right
infringement and related litigation, and, as we gain greater recognition in the market, we face a higher risk of being the subject to
claims of violation of others’ intellectual property rights. For example, in July, 2022, we were served with a complaint by Ampt
LLC filed with the International Trade Commission pursuant to Section 337 of the Tariff Act of 1930, as amended and the District
Court for the District of Delaware alleging patent infringement against the Company and its subsidiary SolarEdge Technologies Ltd.
Please see Item 3 - Legal Proceedings for additional information.
Responding to such claims can be time consuming,
divert management’s attention and resources and may cause us to incur significant expenses in litigation or settlement. While we
believe that our products and technology do not infringe in any material respect upon any valid third-party IP rights, we cannot be certain
of successfully defending against any such claims. If we do not successfully defend or settle an IP claim, we could be liable for significant
monetary damages and could be prohibited from continuing to use certain technology, business methods, content, or brands. To avoid a prohibition,
we could seek a license from the applicable third party, which could require us to pay significant royalties, increasing our operating
expenses. If a license is unavailable at all or unavailable on reasonable terms, we may be required to develop or license a non-violating
alternative, either of which could require significant effort and expense. If we cannot license or develop a non-violating alternative,
we could be forced to modify, limit or, in extreme cases, stop manufacturing and sales of our affected products in the relevant country
and may be unable to effectively compete. Any of these results could adversely affect our business, financial condition, and results of
operations.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result
in litigation and adversely affect our business.
We enter into agreements with our employees
pursuant to which they agree that any inventions created in the scope of their employment or engagement are assigned to us or owned exclusively
by us, depending on the jurisdiction, without the employee retaining any rights. A significant portion of our intellectual property has
been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967 (the “Patent Law”),
inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,”
which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights.
The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties
Committee (the “Committee”), a body constituted under the Patent Law, shall determine whether the employee is entitled to
remuneration for his or her inventions. Case law clarifies that the right to receive consideration for “service inventions”
can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will
examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli
contract laws. Further, the Committee has not yet determined the method for calculating this Committee-enforced remuneration, but
rather uses the criteria specified in the Patent Law. Although our employees have agreed that any rights related to their inventions are
owned exclusively by us, we may face claims demanding remuneration in consideration for such acknowledgement. As a consequence of such
claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate
such claims, which could negatively affect our business.
If
our goodwill or other intangible assets become impaired, our financial condition and results of operations could be negatively affected.
Due
to our latest acquisitions and following the impairment recorded during 2022, goodwill and other intangible assets totaled approximately
$51.1 million, or approximately 1.2% of our total assets, as of December 31, 2022.
We test our goodwill for impairment at least annually, or more frequently if an event occurs indicating the potential for impairment,
and we assess on an as-needed basis whether there have been impairments in our other intangible assets, which include complex, and often
subjective, assumptions and estimates. These assumptions and estimates can be affected by a variety of external factors such as industry
and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. To the extent that the factors
described above change, we could be required to record additional non-cash impairment charges in the future, which could negatively affect
our financial condition and results of operations (see Notes 8 and 9 of the financial statements for
additional information).
Risks Related to the
Ownership of Our Common Stock
We
cannot assure you that our stock price will not decline or not be subject to significant volatility.
Our common stock price during the year ended
December 31, 2022, ranged from $190.15 to
$375.90 per share. As further detailed in the Performance Graph in Item 5 below, the price of
our Common Stock in 2022 was highly volatile and may fluctuate in response to our results of operations in future periods or due to other
factors, including factors specific to companies in our industry, many of which are beyond our control. As a result, our share price may
experience significant volatility and may not necessarily reflect the value of our expected performance. Among other factors that could
affect our stock price are:
• |
the addition or loss of significant customers; |
• |
changes in laws or regulations applicable to our industry, products or services; |
• |
speculation about our business in the press or the investment community; |
• |
price and volume fluctuations including due to general macro-economic and geopolitical changes and developments in the overall stock
market; |
• |
volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable;
|
• |
share price and volume fluctuations attributable to inconsistent trading levels of our shares; |
• |
our ability to protect our intellectual property and other proprietary rights; |
• |
sales of our common stock by us or our significant stockholders, officers and directors; |
• |
the
expiration of contractual lock-up agreements; |
• |
success of competitive products or services; |
• |
the public’s response to press releases or other public announcements by us or others, including our filings with the Securities
and Exchange Commission (the “SEC”), announcements relating to litigation or significant changes to our key personnel;
|
• |
the effectiveness of our internal controls over financial reporting; |
• |
changes in our capital structure, such as future issuances of debt or equity securities; |
• |
our entry into new markets; |
• |
tax
developments in the U.S., Europe, or other markets; |
• |
conversion of all or portion of the Notes; |
• |
strategic actions by us or our competitors, such as acquisitions or restructurings; and |
• |
changes in accounting principles. |
Further,
the stock markets have experienced extreme price and volume fluctuations unrelated or disproportionate to the operating performance of
affected companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often
been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic,
political, and market conditions such as recessions, changes in U.S. regulations and policies with respect to renewable energy, interest
rate changes, or international currency fluctuations, may cause the market price of our common stock to decline. In the past, many companies
that have experienced volatility in the market price of their stock have been subject to securities class action litigation, of which
we may be the target in the future. Securities litigation against us could result in substantial cost and divert our management’s
attention from other business concerns, which could seriously harm our business.
Provisions
in our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management.
Our certificate of incorporation and by-laws
contain provisions that could depress the trading price of our common stock by discouraging, delaying, or preventing a change of control
of our Company or changes in our management that the stockholders of our Company may believe advantageous. These provisions include:
|
• |
authorizing “blank check” preferred stock that our board of directors could issue to increase the number of outstanding
shares to discourage a takeover attempt; |
|
• |
providing for a classified board of directors with staggered, three-year terms, which could delay the ability of stockholders to
change the membership of a majority of our board of directors; |
|
• |
not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director
candidates; |
|
• |
limiting the ability of stockholders to call a special stockholder meeting; |
|
• |
prohibiting stockholders from acting by written consent; |
|
• |
establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings; |
|
• |
the removal of directors only for cause and only upon the affirmative vote of the holders of at least 662/3%
in voting power of all the then-outstanding shares of common stock of the Company entitled to vote thereon, voting together as a single
class; |
|
• |
providing that our board of directors is expressly authorized to amend, alter, rescind or repeal our by-laws; and |
|
• |
requiring the affirmative vote of holders of at least 662/3%
of the voting power of all of the then outstanding shares of common stock, voting as a single class, to amend provisions of our certificate
of incorporation relating to the management of our business, our board of directors, stockholder action by written consent, advance notification
of stockholder nominations and proposals, calling special meetings of stockholders, forum selection and the liability of our directors,
or to amend, alter, rescind, or repeal our by-laws. |
In addition, we are governed by the provisions
of Section 203 of the Delaware General Corporation Law (“DGCL”), which generally prohibits a Delaware corporation from engaging
in a broad range of business combinations with any “interested” stockholder for a period of three years following the date
on which the stockholder becomes an “interested” stockholder.
Our
certificate of incorporation includes a forum selection clause, which could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us.
Our certificate of incorporation provides
that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including
any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach
of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, (iii) any action asserting a claim
arising pursuant to any provision of the DGCL or our certificate of incorporation or by-laws, or (iv) any action asserting a claim governed
by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the
State of Delaware has jurisdiction, the federal district court for the District of Delaware); in all cases subject to the court’s
having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring
any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection
provision may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that,
notwithstanding the forum selection clause that is included in our certificate of incorporation, a court outside of Delaware could rule
that such a provision is inapplicable or unenforceable.
We
do not intend to pay any cash dividends on our common stock in the foreseeable future.
We have never declared or paid any dividends
on our common stock and currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws
and organizational documents. As a result, capital appreciation in the price of our common stock, if any, may be your only source of gain
on an investment in our common stock.
ITEM 1B.
Unresolved Staff Comments.
Not applicable.
ITEM 2.
Properties
Our corporate headquarters are located in
Herziliya Pituach, Israel.
Leased Offices and R&D Laboratories
As of December 31,
2022, we lease office, testing, and product design facilities in Israel. In May, 2021, we signed a long-term lease agreement for
the development of a 38,000 square meter campus, to be built on 16.5 acres of land, in the central area of Israel. The campus, which is
scheduled to be completed in the first half of 2025, will replace our current headquarters in Herziliya, Israel.
In addition
to our leased properties in Israel, we lease offices and lab facilities in California, Nevada, Germany, Netherlands, Italy, France, Australia,
UK, Japan, Turkey, India, Bulgaria, Belgium, Taiwan, Korea, Brazil, Mexico and China as well as an R&D and call center in Bulgaria.
Manufacturing
We outsource most of our manufacturing to
our manufacturing partners. We have our own manufacturing facility, Sella 1, in the North of Israel. We also have a factory in which we
manufacture lithium-ion batteries for our storage business operations, through our Korean subsidiary (formerly Kokam), and have completed
the construction of Sella 2, our second lithium-ion cell and battery factory in Korea. For our e-Mobility and Automation Machines divisions,
we have manufacturing facilities in Umbria, Italy for the assembly of batteries and other components for light commercial vehicles.
Owned Properties
In addition to our leased properties, we also
own manufacturing facilities in Italy, manufacturing facilities in South Korea and an office space in
the U.K.
We believe that our existing properties are
in good condition and are sufficient and suitable for the conduct of our business for the foreseeable future. To the extent our needs
change as our business grows, we expect that additional space and facilities will be available on commercially reasonable terms.
ITEM 3.
Legal Proceedings
In September, 2018, our German subsidiary,
SolarEdge Technologies GmbH, received a complaint filed by a competitor, SMA Solar Technology AG (“SMA”). The complaint, filed
in the District Court Düsseldorf, Germany, alleges that SolarEdge's 12.5kW - 27.6kW inverters infringed on two of the plaintiff’s
patents. In its complaints, SMA requests, inter alia, an injunction, rendering account about past
sales, a recall of products and a determination for a claim for damages for sales in Germany. SMA asserted a value in dispute of 5.5 million
Euros (approximately $5.9 million) for both patents. We challenged the validity of both patents. In December 2019 the District Court of
Düsseldorf found one of the two patents to be infringed upon and we appealed this decision to the Appeals Court Düsseldorf.
In the parallel nullity proceedings regarding this patent, in October 2020, the German Patent Court rendered the SMA patent invalid; this
invalidity was appealed by SMA and in January 2023, the German Supreme Court upheld the finding of invalidity. With respect to the second
patent, in November 2019 the first instance court stayed the infringement proceedings since it considered it to be highly likely that
the patent would also be invalid. In August 2021, the German Patent Court rendered this patent invalid as well, and this invalidity has
been appealed by SMA. We believe that we have meritorious defenses to these claims and intend to vigorously defend against this lawsuit.
On July 28, 2022, we were served with a complaint
by Ampt LLC filed with the International Trade Commission (the “Commission”) pursuant to Section 337 of the Tariff Act of
1930, as amended in the District Court for the District of Delaware alleging patent infringement against the Company and its subsidiary
SolarEdge Technologies Ltd. On October 24, 2022, the complaint filed in the District Court of Delaware was administratively stayed until
the Commission's action is resolved. We believe that we have meritorious defenses to the complaints and intend to vigorously defend against
them.
On November 3, 2022, we received notice
that a class action lawsuit was filed in the U.S District Court of the Southern District of New York against us, our subsidiary SolarEdge
Technologies Ltd., our CEO and our CFO, by a purported stockholder of the Company, alleging violations of the Federal Securities Act in
connection with complaints filed against us by Ampt LLC, as described in the preceding paragraph. On February 14, 2023, the lawsuit was
voluntarily withdrawn by the plaintiffs and subsequently dismissed by the court.
In addition, in the normal course of business,
we may from time to time be named as a party to various legal claims, actions and complaints (including as a result of initiating such
legal claims, actions or complaints on behalf of the Company). It is impossible to predict with certainty whether any resulting liability
would have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Market Information
Our common stock, par value $0.0001 per share,
trades on the Nasdaq Global Select Market, where prices are quoted under the symbol “SEDG”.
Holders of Record
As of December 31,
2022, there were 10 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared
or paid any dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in
the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject
to applicable laws and organizational documents.
Performance Graph
The following graph compares the cumulative
total shareholder return on our common stock from January 1, 2018 to December 31, 2022 to
that of the total return of the S&P 500 Index and the Invesco Solar ETF. This graph is furnished
and not “filed” with the Securities and Exchange Commission or “soliciting material” under the Securities Exchange
Act of 1934 and shall not be incorporated by reference into any such filings, irrespective of any general incorporation contained
in such filing.
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.
|
|
Year ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Inverters shipped |
|
|
1,019,307 |
|
|
|
789,565 |
|
Power optimizers shipped |
|
|
23,736,368 |
|
|
|
18,568,297 |
|
Megawatts shipped1
|
|
|
10,491 |
|
|
|
7,159 |
|
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.
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.
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.
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.
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.
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.
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.
Comparison
of year ended December 31, 2022 and year ended December 31,
2021
|
|
Year ended December 31, |
|
|
2021
to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Revenues |
|
$
|
3,110,279 |
|
|
$ |
1,963,865 |
|
|
$ |
1,146,414 |
|
|
$ |
58.4 |
%
|
Cost of revenues |
|
|
2,265,631 |
|
|
|
1,334,547 |
|
|
|
931,084 |
|
|
|
69.8 |
%
|
Gross profit |
|
|
844,648 |
|
|
|
629,318 |
|
|
|
215,330 |
|
|
|
34.2 |
%
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
289,814 |
|
|
|
219,633 |
|
|
|
70,181 |
|
|
|
32.0 |
%
|
Sales and marketing |
|
|
159,680 |
|
|
|
119,000 |
|
|
|
40,680 |
|
|
|
34.2 |
%
|
General and administrative |
|
|
112,496 |
|
|
|
82,196 |
|
|
|
30,300 |
|
|
|
36.9 |
%
|
Goodwill impairment and other operating expenses, net |
|
|
116,538 |
|
|
|
1,350 |
|
|
|
115,188 |
|
|
|
8,532.4 |
% |
Total
operating expenses |
|
|
678,528 |
|
|
|
422,179 |
|
|
|
256,349 |
|
|
|
60.7 |
%
|
Operating income |
|
|
166,120 |
|
|
|
207,139 |
|
|
|
(41,019 |
) |
|
|
(19.8 |
)%
|
Financial income (expense), net |
|
|
3,316 |
|
|
|
(19,915 |
) |
|
|
23,231 |
|
|
|
(116.7 |
)% |
Other income |
|
|
7,719 |
|
|
|
— |
|
|
|
7,719 |
|
|
|
100.0 |
%
|
Income before income taxes |
|
|
177,155 |
|
|
|
187,224 |
|
|
|
(10,069 |
) |
|
|
(5.4 |
)%
|
Income taxes |
|
|
83,376 |
|
|
|
18,054 |
|
|
|
65,322 |
|
|
|
361.8 |
%
|
Net income |
|
$
|
93,779 |
|
|
$ |
169,170 |
|
|
$ |
(75,391 |
) |
|
$ |
(44.6 |
)%
|
Revenues
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Revenues
|
|
$
|
3,110,279 |
|
|
$ |
1,963,865 |
|
|
$
|
1,146,414 |
|
|
|
58.4 |
%
|
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.
Cost of Revenues and
Gross Profit
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Cost
of revenues
|
|
$
|
2,265,631 |
|
|
$ |
1,334,547 |
|
|
$
|
931,084 |
|
|
|
69.8 |
%
|
Gross
profit
|
|
$
|
844,648 |
|
|
$
|
629,318 |
|
|
$
|
215,330 |
|
|
|
34.2 |
%
|
Cost of revenues increased
by $931.1 million, or 69.8%, in 2022
as compared to 2021, primarily due to:
|
• |
an increase in the volume of products sold and the increase in the cost of components used in the manufacturing of our products;
|
|
• |
a significant increase in shipment and logistic costs in an aggregate amount of $124.0 million due to
(i) an increase in volume shipped; (ii) an increase in air and expedited shipments; and (iii) an increase in the shipment rates throughout
2022 that was partially offset by a decrease in shipment rates which began in the fourth quarter of 2022; |
|
• |
an increase
in other production costs of $89.0 million, which is mainly attributed to charges from our contract manufacturers, due to manufacturing
disruptions related to global supply constraints, increased logistics costs resulting from transportation disruptions, mobilization of
components between our different manufacturing sites in order to allow for continuous manufacturing, as well as ramp up costs associated
with our new contract manufacturing site in Mexico and Sella 2, our Li-Ion battery cell manufacturing facility located in South Korea;
|
|
• |
an increase
in warranty expenses and warranty accruals of $88.6
million. associated primarily with an increased number of products in our install base,
as well as an increase in costs related to the different elements of our warranty expenses, which include the cost of the products, shipment
and other related expenses; |
|
• |
an increase
in personnel-related costs of $22.4 million,
related to the expansion of our production, operations, and support headcount, which grew in parallel to our growing install base worldwide,
our new contract manufacturing site in Mexico and the completion of our lithium-ion cell and battery factory in Korea, known as "Sella
2"; and |
|
• |
an increase in customs duties of $17.2 million attributed to
the increase in volumes of products manufactured in China for the U.S. market. |
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
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Research and development
|
|
$
|
289,814 |
|
|
$ |
219,633 |
|
|
$
|
70,181 |
|
|
|
32.0 |
%
|
Research and development
costs increased by $70.2 million or 32.0%,
in 2022 compared to 2021, primarily due to:
|
• |
an increase
in personnel-related costs of $53.0 million resulting from an increase in our research and development
headcount, as well as salary expenses associated with annual merit increases and employee stock-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; |
|
• |
an increase
in expenses related to overhead costs in the amount of $6.6 million; |
|
• |
an increase
in depreciation expenses of property and equipment in the amount of $4.2 million;
|
|
• |
a decrease in
reimbursement of costs, in the amount of $4.2 million, related to the research and development
activities performed by SolarEdge e-Mobility; and |
|
• |
an increase
in expenses related to material consumption in the manufacturing of prototypes during our development process in the amount of $2.4
million. |
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
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Sales and marketing
|
|
$ |
159,680 |
|
|
$ |
119,000 |
|
|
$ |
40,680 |
|
|
|
34.2 |
%
|
Sales
and marketing expenses increased by $40.7 million, or
34.2%, in 2022 compared to 2021,
primarily due to:
|
• |
an increase in personnel-related costs of $28.6 million, as a result of an increase in headcount supporting
our growth in all geographies, as well as salary expenses associated with annual merit increases and employee stock-based compensation;
|
|
• |
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. |
General and Administrative
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
General and administrative
|
|
$
|
112,496 |
|
|
$ |
82,196 |
|
|
$
|
30,300 |
|
|
|
36.9 |
%
|
General and administrative expenses increased
by $30.3 million, or 36.9%, in 2022
compared to 2021, primarily due to:
|
• |
an increase in personnel-related costs of $22.7 million resulting from an increase in our general and
administrative headcount, as well as salary expenses associated with annual merit increases and employee stock-based compensation;
|
|
• |
an increase
in expenses related to consultants and sub-contractors in the amount of $7.3 million; and |
|
• |
an increase
in expenses related to overhead costs in the amount of $2.4 million. |
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
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Goodwill impairment and other operating
expenses, net |
|
$
|
116,538 |
|
|
$ |
1,350 |
|
|
$
|
115,188 |
|
|
|
8,532.4 |
% |
Goodwill impairment
and other operating expenses, net were $116.5 million in 2022, compared to $1.4 million in 2021, primarily due to:
|
• |
an increase in the amount of $90.1 million attributed to a goodwill impairment charge related
to three reporting units: e-Mobility, Automation Machines and Critical Power ; and |
|
• |
an increase
of $28.4 million attributed to the impairment of intangible assets,
mainly related to the technology of the e-Mobility asset group, as well as the impairment of the related
intangible assets of the Critical Power asset group, due to the discontinuation of its activities.
|
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.
Financial
income (expenses), net
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Financial income (expense), net
|
|
$
|
3,316 |
|
|
$ |
(19,915 |
) |
|
$
|
23,231 |
|
|
|
(116.7 |
)% |
Financial income, net
was $3.3 million in 2022 compared to financial expenses, net of $19.9 million in 2021, primarily due to:
|
• |
a decrease of $20.9 million in financial expenses resulted from foreign exchange fluctuations, mainly
between each of the Euro, the New Israeli Shekel and the South Korean Won against the U.S. dollar; and |
|
• |
an increase of $7.6 million in interest income and accretion (amortization) of discount (premium) on
marketable securities. |
These
were partially offset by a decrease of $4.7 million in financial income related to hedging transactions.
Other income
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Other income |
|
$ |
7,719 |
|
|
$ |
— |
|
|
$ |
7,719 |
|
|
|
100.0 |
%
|
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
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Income taxes |
|
$ |
83,376 |
|
|
$ |
18,054 |
|
|
$ |
65,322 |
|
|
|
361.8 |
%
|
Income taxes increased
by $65.3 million, or 361.8%, in 2022
as compared to 2021, primarily due to:
|
• |
an increase of $51.4 million of current tax expenses mainly
attributed to the change to Section 174 of the U.S Internal Revenue Code, as well as impairment of goodwill and intangible assets, higher
non-deductible expenses and lower tax benefits relating to stock-based compensation. The change to Section 174, which became effective
on January 1, 2022, eliminates the option to deduct research and development expenditures as expensed and requires taxpayers to amortize
them over five years (if generated from a U.S. entity) and fifteen years (if generated from non-U.S. entities). |
|
• |
an increase of $13.3 million in prior years taxes income; and |
|
• |
a decrease of $0.6 million in deferred tax income. |
Net Income
|
|
Year ended December 31, |
|
|
2021 to 2022 |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(In thousands) |
|
Net
income |
|
$
|
93,779 |
|
|
$
|
169,170 |
|
|
$
|
(75,391 |
) |
|
|
(44.6 |
)%
|
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, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities
|
|
$
|
31,284 |
|
|
$
|
214,129 |
|
Net cash used in investing activities
|
|
|
(417,044 |
) |
|
|
(484,211 |
) |
Net cash provided by (used in) financing activities |
|
|
654,607 |
|
|
|
(15,178 |
) |
Increase (decrease)
in cash, cash equivalents and restricted cash |
|
$
|
268,847 |
|
|
$
|
(285,260 |
) |
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.
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).
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.
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.
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
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.
See Note 2n
"Business Combination" to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to business combination.
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. During the year ended December 31,
2022, we recorded impairment charge of $28.4 million mainly related to technology within the e-Mobility asset group and intangible assets
within the Critical Power asset group.
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.
See Notes 2.o
and 8 to the consolidated financial statements included in Part II, Item 8 of this Annual Report
on Form 10-K for additional information related to intangible assets.
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.
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 impairment for the reporting units in the fourth quarter of each year and accordingly, determines whether goodwill
should be impaired. The Company recorded impairment charges of goodwill during the year 2022 in the amount of $90,104,
related to the e-Mobility, Automation Machines and Critical Power reporting units.
See Notes 2q
and 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report
on Form 10-K for additional information related to goodwill.
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 740-10 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.
See Note 2af
to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related
to income taxes.
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
60.1%, 54.3% and 52.2% of our revenues for the years ended December 31, 2022, 2021 and 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 ("NIS"), Euro, and to a lesser extent, the South Korean Won ("KRW"). Our
NIS 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 $152.0 million for the year ended December 31, 2022. A hypothetical 10% change in foreign
currency exchange rates between the NIS and the U.S. dollar would increase or decrease our net income by $36.4 million for the year
ended December 31, 2022.
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 and put and call options, to manage exposure to foreign
currency risks by hedging portions of the anticipated payroll payments denominated in 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, 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 KRW.
These derivative instruments are not designated as cash flow hedges.
We had cash and cash
equivalents of 783.1 million and 530.1 million as of
December 31, 2022 and 2021, respectively, which
was held for working capital purposes. We had available-for-sale marketable securities with an estimated fair value of 886.6
million and 650.0 million as of December 31, 2022
and 2021, respectively. In addition, we had restricted bank deposits of 1.9
million as of December 31, 2022 and 2021.
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,
2022, one major customer accounted for 18.5%
of our total revenues, and as of December 31, 2022, three
major customers accounted for approximately 42.2% of our consolidated trade receivables balance.
For the year ended December 31, 2021, two major
customers accounted for 30.9% of total revenues, and as of December 31,
2021, two major customers accounted for approximately
39.3% 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 which are used in our products, including
Copper, Lithium, Nickel and Cobalt. 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.