Item 7. Management’s Discussion and Analysis
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, 2023.
Overview
We
develop, manufacture and sell products in a solar segment that addresses 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 including lithium-ion cells, batteries and energy storage systems, which are part of our Energy Storage Segment as well as
automation machines ("Automation Machines") and in prior years, we also had product offerings for the e-mobility market. In October 2023,
we decided to discontinue our light commercial vehicle e-Mobility ("LCV") activity and the remaining e-mobility activity which include
PV applications, will be included under the solar segment starting January 1, 2024.
In the
fourth quarter 2023 the Company identified two reportable segments: the Solar segment and Energy Storage segment. The Solar segment includes
the design, development, manufacturing, and sales of its DC optimized inverter solutions designed to maximize power generation at the
PV module level and batteries for PV applications. The Solar segment solution consists mainly of the Company’s power optimizers,
inverters, batteries and cloud‑based monitoring platform. The Energy Storage segment includes the design, development, manufacturing,
and sales of high-energy, high-power, lithium-ion cells and BESS solutions for C&I and Utility markets. The Energy Storage segment
provides purpose-built components and solutions, hardware and software, as well as pre and post sales engineering support to design, build,
and manage battery and system solutions according to the customer’s use cases and mission profiles. The “All other”
category includes the design, development, manufacturing and sales of e-Mobility products, automated machines and UPS products (in prior
periods).
Further
information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.
In
the year ended December 31, 2023, two customers accounted for 24.0% of our revenues and our top three customers (all distributors) together
represented 31.1% of our revenues.
Our
revenues were $2,976.5 million and $3,110.3 million for the year ended December 31, 2023 and 2022, respectively. Gross margins were 23.6%
and 27.2% for the year ended December 31, 2023 and 2022, respectively. Net income was $34.3 million and $93.8 million for the year ended
December 31, 2023 and 2022, respectively.
Performance
Measures
In
managing our business and assessing financial performance, we supplement the information provided by the financial statements with other
operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify
trends affecting our business and formulate projections. We use metrics relating to shipments of inverters, power optimizers and megawatts
to evaluate our sales performance and to track market acceptance of our products. We use metrics relating to monitoring (systems monitored)
to evaluate market acceptance of our products and usage of our solution.
We provide
the “megawatts shipped” and "megawatts hour shipped" metrics, which are calculated based on inverter or battery nameplate
capacity shipped respectively, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the maximum
rated power output capacity of an inverter or battery, and corresponds to our financial results in that higher total nameplate capacities
shipped are generally associated with higher total revenues. However, revenues may increase in a non-correlated manner to the "megawatt
shipped" metric since other products such as Power Optimizers, are not accounted for in this metric.
40
Year
ended December 31,
2023
2022
Inverters shipped
1,011,890
1,019,307
Power optimizers shipped
17,430,082
23,736,368
Megawatts shipped 1
12,629
10,491
Megawatts hour shipped
- batteries for PV applications
744
889
1
Excluding batteries for PV applications, 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
Demand
for Products
We have
seen a slowdown in demand for our products in our Solar segment from our direct customers since the second part of the third quarter of
2023. This was a result of slowed market demand in the third quarter of 2023 as distributors began to take actions to reduce inventory
levels. In particular, beginning in the second part of the third quarter of 2023, we experienced substantial unexpected cancellations
and push outs of existing backlog from our European distributors. We attribute these cancellations and pushouts to high inventory in the
channels and slower than expected installation rates both in the United States and Europe. This trend continued in the fourth quarter
of 2023.Additionally, the Company anticipates significantly lower revenues in the first quarter of 2024 as the inventory destocking process
continues.
41
Disruptions
due to the war in Israel
Due
to the war that began on October 7, 2023, approximately 10% of our employees in Israel were called to active reserve duty and additional
employees may be called in the future, if needed. About half of these employees have returned to work. While our offices and facilities
are open worldwide, including in Israel, and, to date, we have not had disruptions to our ability to manufacture and deliver products
and services to customers, a prolonged war or an escalation of the current conditions in Israel could materially adversely affect our
business, financial condition, and results of operations. Due to the recency of these events, and their ongoing and evolving nature, the
extent of the adverse effect on our business operations is still unknown.
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. In 2022, rising global interest in becoming less dependent
on gas and oil led to higher demand for our products. The conflict 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 decreased in 2023, a change or
escalation of this ongoing conflict could increase the impacts from the circumstances described above and may lead to 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 provisions intended
to accelerate U.S. manufacturing and adoption of 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, among other things, extends the investment
tax credit and production tax credit through 2034 and is therefore expected to increase the demand for solar products. The IRA also further
incentivizes residential and commercial solar customers and developers through the inclusion of a tax credit for qualifying energy projects
of up to 30%. Section 45X of the IRA offers advanced manufacturing production tax credits that incentivize the production of eligible
components within the U.S. To that end, we established manufacturing capabilities in the U.S. in 2023 and announced additional capacity
expected during 2024. These provisions of the law are new and regulations and guidance concerning their implementation are gradually being
published by the U.S. Treasury Department. We continue to monitor the benefits that may be available to us, such as the availability of
tax credits for domestic manufacturers. To the extent that tax benefits or credits may be available to competing technology and not to
our technology, our business could be adversely disadvantaged.
42
Key
Components of Our Results of Operations
The
following discussion describes certain line items in our Consolidated Statements of Operations.
Revenues
We
generate revenues from the sale of DC optimized inverter systems for solar PV installations, which include power optimizers, inverters,
storage and backup solutions, EV chargers, smart energy devices, our cloud-based monitoring platform and grid services. Our customer base
mainly includes distributors, large solar installers, wholesalers, and EPCs. In addition, we also generated 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 lithium-ion cells, batteries, 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 Automation Machines and 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, manage 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 expand of the new businesses we acquired.
In
the year ended December 31, 2023, 64% of our revenues were generated from Europe, 25.5% of our revenues were generated from the United
States and 10.5% of our revenues were generated from ROW. 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.
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, amortization
of intangible assets and other fixed costs, provision for losses related to slow moving and dead inventory, hosting services for our cloud
based monitoring platform, variable utility costs, operational costs related to the manufacturing factories, other logistics services,
contract termination costs and renewable electricity production credits. 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, improvements
in production processes and automation, the volume of products subject to import tariffs (for example, for imports from China to the U.S.)
and the volume of products for which manufacturing credits are available (for example, for products made in the U.S.). Some of these costs,
primarily personnel, amortization of intangible assets and depreciation of testing and manufacturing equipment, are not directly affected
by sales volume.
We continue
to develop our own manufacturing capabilities. During 2023, we continued to ramp up our manufacturing capabilities in Sella 2, our Li-Ion
battery factory in South Korea which serves our Energy Storage segment. We intend to gradually increase the manufacturing capabilities
of Sella 2 in 2024, which will result in additional expenses. We intend to use our available cash balances for this expansion.
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 to 2,857 as of December 31, 2023 from 2,383 as of December 31, 2022.
43
In October
of 2023, the Company made an announcement regarding its restructuring plans to adjust its manufacturing capacity and increase operating
efficiency,including, terminating the manufacturing process in Mexico, reducing manufacturing capacity in China, and discontinuing the
Company’s LCV e-Mobility activity, and on January 21, 2024, the Company announced adoption of additional measures in response to
challenging industry conditions, including reducing its headcount by approximately 16% over the first half of 2024 through an involuntary
workforce reduction plan (together, the “Restructuring Plan”). These decisions were made in order to better align the Company
with current market conditions. The majority of these activities related to the discontinuation of LCV activity and the reduction of our
manufacturing footprint which occurred in December 2023 and the significant part of the workforce reduction occurred in January 2024.
Gross
profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up
costs, restructuring costs, product mix, customer mix, geographical mix, location of manufacturing, shipping method, warranty costs, inventory
write-offs, 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 a significant component of the operating expenses and include salaries, benefits, payroll taxes,
commissions, severance and stock-based compensation. Our employees headcount in our research and development, sales and marketing and
general and administrative departments, has grown to 2,776 as of December 31, 2023 from 2,543 as of December 31, 2022. Under the 2024
Restructuring Plan described above, we expect to reduce our headcount over the first half of 2024.
Research
and development expenses
Research
and development expenses include personnel-related expenses such as salaries, severance, 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, severance, 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, severance, 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 certain legal claims and allowance for doubtful accounts in the event of uncollectible account receivables balances.
44
Goodwill
impairment
Goodwill
impairment consists of impairment charges of goodwill assigned to our reporting units and tested for impairment at least on an annual
basis, in the fourth quarter of the fiscal year.
Other
operating expenses, net
Other
operating expenses, net, consist primarily of 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, loans to third parties 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 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, the fair value remeasurement of
hedging contracts not designated as cash flow hedge and bank charges. Foreign currency fluctuations primarily consist 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.
Other
income (loss)
Other
income (loss) consists primarily of realized and unrealized gains and losses on investments in privately-held companies and realized gains
and losses on investment in available for sale marketable securities.
Income
taxe s
We
are subject to income taxes in the countries where we operate.
In
the year ended December 31, 2023, we recorded a net income tax expense of $46.4 million, which consists of a $89.5 million current income
tax expense and $43.1 million of deferred tax income. 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 a $11.0 million deferred tax income. Our tax rate for 2023 is
57% compared with 47% in 2022. The increase in tax rate was mainly attributed to the GILTI effect of IRC Section 174, requiring the capitalization
of R&D expenditures outside the U.S. (see below), and impairments and losses that did not have a corresponding tax effect.
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 tax on Global Intangible Low Taxed Income (“GILTI”) and certain related-party
payments. The Tax Act also amended Section 174 of the U.S Internal Revenue Code, effective from January 1, 2022, eliminating the option
to deduct research and development expenditures currently and requiring taxpayers to amortize them over five years (if incurred in the
U.S.) or fifteen years (if incurred outside the U.S.).
45
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 2022-2023 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel revenues threshold. We currently expect
not to meet the threshold in 2024 and consequently expect our tax on our PTE income to be 12% in 2024.
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. We qualify as an Industrial Company under the Law and benefit from its provisions as applicable.
Loss
from equity method investments
Loss
from equity method investments consists of our proportionate share of the net income or loss of equity method investments.
46
Results
of Operations
The
following tables set forth our consolidated statements of income for the years ended December 31, 2023 and 2022. 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, 2023 and year ended December 31, 2022
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Revenues
$
2,976,528
$
3,110,279
$
(133,751
)
(4.3
)%
Cost of revenues
2,272,705
2,265,631
7,074
0.3
%
Gross profit
703,823
844,648
(140,825
)
(16.7
) %
Operating expenses:
Research
and development
321,482
289,814
31,668
10.9
%
Sales
and marketing
164,318
159,680
4,638
2.9
%
General
and administrative
146,504
112,496
34,008
30.2
%
Goodwill
impairment
—
90,104
(90,104
)
(100
)%
Other
operating expenses, net
31,314
26,434
4,880
18.5
%
Total
operating expenses
663,618
678,528
(14,910
)
(2.2
)%
Operating income
40,205
166,120
(125,915
)
(75.8
) %
Financial income, net
41,212
3,750
37,462
999.0
%
Other income (loss),
net
(318
)
7,285
(7,603
)
(104.4
)%
Income before income
taxes
81,099
177,155
(96,056
)
(54.2
) %
Income taxes
(46,420
)
(83,376
)
36,956
(44.3
)%
Net loss from equity
method investments
(350
)
—
(350
)
100.0
%
Net income
$
34,329
$
93,779
$
(59,450
)
(63.4
)%
Revenues
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Revenues
$
2,976,528
$
3,110,279
$
(133,751
)
(4.3
)%
Revenues
decreased by $133.8 million, or 4.3%, in the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily
due to (i) a decrease of $58.2 million in the amount of ancillary solar products sold; and (ii) a decrease of $50.8 million related to
the number of batteries for PV applications sold, mainly in Europe; and (iii) a decrease of $26.0 million in revenues generated from e-mobility
components, related to the discontinuation of the Company’s LCV e-Mobility activity. The overall decrease in revenues was due to
the decline in demand that began in the third quarter of 2023 and continued in the fourth quarter of 2023. This decline was the result
of high inventory in the channels and slower than expected installation rates beginning in the third quarter of 2023, leading to substantial
unexpected cancellations and push outs of existing backlog, from our European distributors, which continued into the fourth quarter of
2023.
Revenues
from outside of the U.S. comprised 74.5% of our revenues in the year ended December 31, 2023 as compared to 63.5% in the year ended December
31, 2022.
47
The
number of power optimizers recognized as revenues decreased by approximately 6.2 million units, or 26.2%, from approximately 23.7 million
units in the year ended December 31, 2022 to approximately 17.5 million units in the year ended December 31, 2023 as a result of reduced
demand. The number of inverters recognized as revenues, increased by approximately 1.2 thousand units, or 0.1%, from approximately 1,014.6
thousand units in the year ended December 31, 2022 to approximately 1,015.8 thousand units in the year ended December 31, 2023. Revenues
from inverters relative to optimizers was higher this year due to a "catch up" in inverter production in the first half of 2023 which
was needed to meet backlog demand that we were not able to fulfill in the previous year. The megawatts hour of batteries for PV applications
recognized as revenues decreased by approximately 148.3 megawatts hour, or 16.7% from approximately 885.7 megawatts in the year ended
December 31, 2022 to approximately 737.4 megawatts in the year ended December 31, 2023 due to a decrease in demand.
Our
blended Average Selling Price or ASP per watt for solar products excluding batteries for PV applications is calculated by dividing solar
revenues, excluding revenues from the sale of batteries for PV applications, by the nameplate capacity of inverters shipped. Our blended
ASP per watt for solar products shipped decreased by 0.049, or 20.1%, in the year ended December 31, 2023 as compared to the year ended
December 31, 2022. The decrease in blended ASP per watt is mainly attributed to a relatively lower number of power optimizers and other
solar products shipped compared to the number of inverters shipped, leading to an overall reduction in our ASP per watt as well as due
to an increase in the sale of commercial products that are characterized by lower ASP per watt, out of our total solar product mix. This
decrease in blended ASP per watt was partially offset by price increases that went into effect gradually during 2022 and in the first
half of 2023, as well as by the appreciation of the Euro against the U.S. Dollar.
Our
blended ASP per hour watt for batteries for PV applications is calculated by dividing batteries for PV applications revenues, by the nameplate
capacity of batteries for PV applications shipped. Our blended ASP per watt/hour for batteries for PV applications decreased by 0.016
or 3.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease in blended ASP per watt/hour
is mainly attributed to an increase in the portion of three phase batteries, which are sold at a lower ASP per watt/hour and a price decrease
of our single phase batteries, that went into effect gradually during 2023. This decrease was partially offset by the appreciation of
the Euro against the U.S Dollar.
Cost
of Revenues and Gross Profit
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Cost
of revenues
$
2,272,705
$
2,265,631
$
7,074
0.3
%
Gross
profit
$
703,823
$
844,648
$
(140,825
)
(16.7
)%
Cost of revenues increased
by $7.1 million, or 0.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to:
•
an increase in warranty expenses and warranty
accruals of $70.5 million associated primarily with an increased number of products in our install base, which increases our actual spending
on product warranty, and 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, which impacts our remaining obligations for all units under warranty, including those sold
in previous years;
•
an increase of $48.1 million in inventory costs,
which is mainly attributed to changes in inventory valuation, higher inventory accruals related to our initial manufacturing in Sella
2 and the write-off related to the discontinuation of the Company’s LCV e-Mobility activity, partially offset by a decrease in inventory
write-off related to discontinuation of our UPS activities in the year ended December 31, 2022;
•
an increase in personnel-related costs of $14.2
million, related to the expansion of our production, operations, and support headcount, which grew in parallel to our growing install
base worldwide, as well as an increase in severance and related benefit costs as a result of the Restructuring Plan announced to adjust
our manufacturing capacity and increase distribution efficiency, which includes termination of manufacturing in Mexico, reduction of manufacturing
capacity in China, and discontinuation of the Company’s LCV e-Mobility activity;
48
•
an increase in other costs of $11 million mainly
due to the contract termination expenses related to components procurement obligations related to the discontinued LCV e-mobility activity;
•
an increase of $9.1 million in depreciation expenses
of property, plant and equipment and in expenses related to overhead costs; and
•
an increase of $3.9 million in expenses related
to consultants and sub-contractors.
These
were partially offset by:
•
a decrease in direct cost of revenues sold of
$97.5 million associated primarily with a decrease in the volume of product sold;
•
a decrease in shipment and logistic costs in an
aggregate amount of $42.5 million due to a decrease in the volume of shipments, a decrease in shipment rates and a decrease in expedited
shipments costs; and
•
a decrease in other production costs of $12.6
million mainly attributed to a decrease in charges from our contract manufacturers, due to manufacturing disruptions related to global
supply constraints in the year ended December 31, 2022, partially offset by an increase related to ramp up costs associated with Sella
2, our Li-Ion battery cell manufacturing facility located in South Korea, as well as contract termination cost related to claims from
our contract manufacturers as part of the Restructuring Plan in Mexico and China.
Gross
profit as a percentage of revenue decreased by 3.6% to 23.6% in the year ended December 31, 2023 from 27.2% in the year ended December
31, 2022 primarily due to:
•
an increase in actual warranty expenses and accruals
for future warranty obligations related to our existing install base, which were divided this fiscal year by slightly lower revenues resulting
in lower gross margin of 2.7%; and
•
an increase in the inventory accrual due to the
write-offs of excess inventory, write-offs of inventory related to the discontinuation of the Company’s LCV e-Mobility activity
and inventory disposal related to our initial manufacturing in Sella 2 resulting in lower gross margin of 1.6%;
These were partially
offset by a decrease in shipment rates as well as a reduced portion of expedited shipments out of our total shipments and a decrease in
customs duties attributed to the decrease in volumes of products manufactured in China for the U.S. market resulting in higher gross margin
of 1.1%.
49
Operating
Expenses:
Research
and Development
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Research
and development
$
321,482
$
289,814
$
31,668
10.9
%
Research
and development costs increased by $31.7 million or 10.9%, in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:
•
an increase in personnel-related costs of $18.3
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, which were partially offset by the depreciation of the NIS against the U.S. dollar. 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 consultants
and sub-contractors in the amount of $6.8 million:
•
an increase in depreciation expenses of property
and equipment in the amount of $3.4 million; and
•
an increase in expenses related to overhead costs
in the amount of $1.5 million.
Sales
and Marketing
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Sales
and marketing
$
164,318
$
159,680
$
4,638
2.9
%
Sales
and marketing expenses increased by $4.6 million, or 2.9%, in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:
•
an increase in expenses related to marketing activities
in the amount of $2.4 million;
•
an increase of $1.4 million in training-related
expenses as a result of resuming training activities that had been previously cancelled or postponed due to Covid-19 restrictions in 2022;
and
•
an increase in expenses related to overhead costs
in the amount of $1.2 million.
These
were partially offset by a decrease in personnel-related costs of $1.2 million as a result of a decrease in commissions and the depreciation
of the NIS against the U.S. dollar.
General
and Administrative
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
General
and administrative
$
146,504
$
112,496
$
34,008
30.2
%
General
and administrative expenses increased by $34.0 million, or 30.2%, in the year ended December 31, 2023 compared to the year ended December
31, 2022, primarily due to:
•
an increase in expenses related to doubtful debt
in the amount of $14.0 million;
50
•
an increase in expenses related to consultants
and sub-contractors in the amount of $11.5 million;
•
an increase in personnel-related costs of $6.5
million resulting from an increase in our general and administrative headcount, as well as salary expenses associated with annual merit
increases, partially offset by a decrease in employee stock-based compensation and the depreciation of the NIS against the U.S. dollar;
and
•
an increase in expenses related to overhead costs
in the amount of $1.5 million.
Goodwill
impairment
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Goodwill impairment
—
90,104
(90,104
)
(100
)%
Goodwill
impairment decreased by $90.1 million or 100% in the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease
was mainly due to a decrease in the goodwill impairment charge related to three reporting units e-Mobility, Automation Machines, and Critical
Power in the year ended December 31, 2022.
Other
operating expenses, net
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Other
operating expenses, net
31,314
26,434
4,880
18.5
%
Other
operating expenses, net, increased by $4.9 million, or 18.5% in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:
•
an increase of $24.5 million in impairment of
property, plant and equipment income related to the announced Restructuring Plan to adjust our manufacturing capacity and increase distribution
efficiency; and
•
an increase of $1.7 million in legal claims provision,
as a result of a recent court decision against our Italian subsidiary relating to the 2019 acquisition of SolarEdge e-Mobility.
These
were partially offset by a decrease of $22.8 million in impairment of intangible assets, which was attributed to the intangible assets
impairment recorded in the year ended December 31, 2022 for e-Mobility and Critical Power asset groups.
Financial
income (expenses), net
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Financial
income, net
$
41,212
$
3,750
$
37,462
999.0
%
Financial
income, net increased by $37.5 million or 999.0% in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily
due to:
•
a gain of $24.2 million in the year ended December
31, 2023, compared to a loss of $1.5 million in 2022, as a result of fluctuations in foreign exchange rates, primarily between the Euro
and NIS against the U.S dollar; and
•
an increase of $10.6 million in interest income
from marketable securities and loans to third parties.
51
Other
income (loss)
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Other
income (loss), net
$
(318
)
$
7,285
$
(7,603
)
(104.4
)%
Other
loss was $0.3 million in the year ended December 31, 2023 compared to other income of $7.3 million in the year ended December 31, 2022,
primarily due to a decrease in gains from the sale of an investment in a privately-held company.
Income
taxes
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Income
taxes
$ (46,420)
$ (83,376)
$ 36,956
(44.3)%
Income
taxes decreased by $37.0 million, or 44.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily
due to:
•
a decrease of $5.0 million in current tax due
to a decrease in profit before tax, offset by an increase in non-deductible expenses, lower tax benefits relating to stock-based compensation
•
and an increase in our provision for uncertain
tax positions; and
•
an increase of $32.0 million in deferred tax income,
mainly related to the update of the projected preferred technological enterprises tax rate change and certain write-offs items which will
be tax deductible in future periods.
Loss
from equity method investments
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Net loss from equity
method investments
$
(350
)
$
—
$
(350
)
100.0
%
Net
loss from equity method investments increased by $0.4 million, or 100% in the year ended December 31, 2023 as compared to the year ended
December 31, 2022.
Net
Income
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Net
income
$
34,329
$
93,779
$
(59,450
)
(63.4
)%
As
a result of the factors discussed above, net income decreased by $59.5 million, or 63.4% in the year ended December 31, 2023 as compared
to the year ended December 31, 2022.
52
Segment
analysis
Following
the discontinuation of the Critical Power segment in June 2022, we operated in four different operating segments: Solar, Energy Storage,
e-Mobility and Automation Machines. In October 2023, we decided to discontinue our LCV e-Mobility) activity and the remaining e-Mobility
activity is included under the solar segment starting January 1, 2024. In the fourth quarter of 2023, we identified two operating segments
as reportable – the Solar and the Energy Storage segments. The other operating segments are insignificant individually, and therefore,
their results are presented together under “All other.”
We
do not allocate our operating segments revenue recognized due to advance payments received for performance obligations that extend for
a period greater than one year (“financing component”), related to Accounting Standard Codification 606, “Revenue from
Contracts with Customers” (ASC 606).
Segment
profit (loss) is comprised of gross profit (loss) for the segment less operating expenses excluding amortization and impairment of purchased
intangible assets, stock based compensation expenses, restructuring charges, discontinued activity charges, impairment of property, plant
and equipment and certain other items (which are reported under "Not allocated to segments").
Year
ended December 31,
2022
to 2023
2023
2022
Change
(In
thousands)
Solar
Revenues
2,815,539
2,921,175
(105,636
)
(3.6
)%
Segment
profit
364,517
486,862
(122,345
)
(25.1
)%
Energy
Storage
Revenues
83,717
76,325
7,392
9.7
%
Segment
loss
(60,119
)
(13,863
)
(46,256
)
333.7
%
All
other
Revenues
76,438
112,165
(35,727
)
(31.9
)%
Segment
loss
(14,374
)
(31,274
)
16,900
(54.0
)%
Not
allocated to segments
Revenues
834
614
220
35.8
%
Segment
loss
(249,819
)
(275,605
)
25,786
(9.4
)%
Solar
Solar revenues
decreased by $105.6 million, or 3.6%, in the year ended December 31, 2023, as compared to the year ended December 31, 2022 primarily due
to a $58.2 million decrease in the amount of ancillary solar products sold and a $50.8 million decrease in the number of batteries sold
for PV applications. As discussed above, this decrease in revenues was due to high inventory in the channels and slower than expected
installation rates beginning in the third quarter of 2023, leading to substantial unexpected cancellations and push outs of existing backlog
from our European distributors.
Solar
operating profit decreased by $122.3 million, or 25.1%, in the year ended December 31, 2023, as compared to the year ended December 31,
2022. This decrease was mainly due to the decrease in revenue followed by a lower decrease of $55.6 million in cost of revenues, which
was primarily caused by a decrease of $96.5 million in direct cost of revenues and a decrease of $43.0 million in shipment and logistic
costs, which were offset by an increase of $78.0 million in warranty expenses and an increase of $13.2 million in inventory write-downs.
Additionally, operating expenses increased by $72.3 million, primarily due to higher personnel-related costs, expenses related to consultants
and sub-contractors and an increase in expenses related to doubtful debt.
53
Energy
Storage
Energy
Storage revenues increased by $7.4 million, or 9.7%, in the year ended December 31, 2023,
as compared to the year ended December 31, 2022.
Energy
Storage operating loss increased by $46.3 million, or 333.7%, in the year ended December 31, 2023, as compared to the year ended December
31, 2022. The increase in operating loss was primarily due to an increase of $48.8 million in cost of revenues associated with ramp-up
cost and an increase in inventory accrual, both related to the start of manufacturing in our Sella 2 factory.
All
other
All
other segments revenues decreased by $35.7 million, or 31.9%, in the year ended December 31,
2023, as compared to the year ended December 31, 2022 primarily due to the discontinuation of the Company’s LCV e-Mobility activity
and the discontinuation of our Critical Power activity.
All
other segments operating loss decreased by $16.9 million, or 54.0%, in the year ended December 31, 2023, as compared to the year ended
December 31, 2022. This improvement was mainly due to a decrease in warranty accruals related to our LCV e-Mobility activity, a reduction
in personnel-related expenses, and a decrease in the loss incurred in the year ended December 31, 2022 associated with the discontinued
Critical Power business.
Not
allocated to segments
Not
allocated to segments revenues increased by $0.2 million, or 35.8%, in the year ended December
31, 2023, as compared to the year ended December 31, 2022.
Not
allocated to segments operating loss decreased by $25.8 million, or 9.4%, in the year ended December 31, 2023, as compared to the year
ended December 31, 2022. The decrease was mainly due to a decrease in goodwill and intangible assets impairment charges, which were related
to our LCV e-Mobility activity during the year ended December 31, 2022. However, during the year ended December 31, 2023 we have experienced
an increase in costs related to the Restructuring Plan, including costs related to the discontinuation of the Company's LCV e-Mobility
activity, and an increase in impairment of property, plant, and equipment, all of which are not assessed by our CODM and therefore not
allocated to any of the segments above.
54
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,
2023
2022
(In
thousands)
Net
cash provided by (used in) operating activities
$
(180,113
)
$
31,284
Net
cash used in investing activities
(268,894
)
(417,044
)
Net
cash provided by (used in) financing activities
(11,956
)
654,607
Increase
(decrease) in cash, cash equivalents and restricted cash
$
(460,963
)
$
268,847
As
of December 31, 2023, our cash and cash equivalents were $338.5 million. This amount does not include $929.4 million invested in available
for sale marketable securities and $0.3 million invested in restricted bank deposits. Our principal uses of cash are for funding our operations,
capital expenditures, other working capital requirements, other investments and potential future share repurchases. As of December 31,
2023, we have open commitments for capital expenditures in the amount of approximately $95.5 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 $1,041.3 million related to raw materials and commitments for the future manufacturing of our products.
We
believe 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
used in operating activities consists of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash used
in operating activities was $180.1 million in the year ended December 31, 2023 as compared to $31.3 million cash provided by operating
activities in the year ended December 31, 2022, mainly due to lower net income adjusted for certain non-cash items, as well as higher
operating working capital requirements, specifically, an increase in inventory procurement and manufacturing.
Investing
Activities
Investing
cash flows consist primarily of cash used for capital expenditures, cash provided by government grants for 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, cash provided by the sale of equity investments and disbursements and receipts from loans made by the Company.
Cash used for investing activities decreased by $148.2 million in the year ended December 31, 2023 as compared to the year ended December
31, 2022, primarily driven by a decrease of $210.8 million in purchases of available-for-sale debt investments and an increase of $49.0
million in proceeds from sales and maturities of available-for-sale debt investments. This was partially offset by an increase of $58.0
million in disbursements of loans made by the Company, a decrease of $23.0 million in proceeds provided by the sale of a privately-held
company, an increase of $16.7 million in cash used for a business combination and an increase of $11.2 million in the purchase of intangible
assets.
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 proceeds provided by the exercise of stock-based awards and withholding taxes remitted to the tax authorities
related to stock-based awards. Cash used in financing activities in the year ended December 31, 2023 was $12.0 million, compared to $654.6
million cash provided by financing activities in the year ended December 31, 2022, primarily due to a $650.5 million decrease in cash
provided by the issuance of common stock, net, through a secondary public offering which occurred in March 2022 and a decrease of $38.6
million in proceeds provided by the exercise of stock-based awards. This was partially offset by a decrease of $22.5 million in withholding
taxes remitted to the tax authorities related to the exercise of stock-based awards.
55
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 17 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 19b to our consolidated financial statements
for more information).
Share
Repurchases
On
November 1, 2023, we announced the approval by the Board of Directors of a share repurchase program which authorizes the repurchase of
up to $300 million of the Company’s common stock. Under the share repurchase program, repurchases can be made using a variety of
methods, which may include open market purchases, block trades, privately negotiated transactions, accelerated share repurchase programs
and/or a non-discretionary trading plan or other means, including through 10b5-1 trading plans, all in compliance with the rules of the
SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the share repurchase
program are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic
and market conditions. The program does not obligate SolarEdge to acquire any amount of common stock, it may be suspended, extended, modified,
discontinued or terminated at any time at the Company’s discretion without prior notice, and will expire on December 31, 2024.
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 ancillary products, Lithium-ion cells, batteries, energy storage solutions,
EV powertrain solutions and machinery. Our worldwide customer base includes large solar installers, distributors, EPCs, 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.
56
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 15 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 batteries for PV applications. 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 and for our batteries for PV applications 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.
57
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 125.1 million power optimizers and approximately 5.6 million
inverters as of December 31, 2023.
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 $518.2 million and $385.1
million, in the year ended December 31, 2023 and 2022, respectively.
See
Notes 2w and 14 "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 our own manufacturing facilities 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 $46.4 million and $10.2 million, in the year ended December 31, 2023 and 2022, 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 5 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 and Note 3 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.
58
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.
The
more significant estimates and assumptions inherent in the estimate of the fair value of finite-lived intangible assets include (i) assumptions
associated with forecasting product profitability, including sales and cost to sell projections, (ii) tax rates which seek to incorporate
the geographic diversity of the projected cash flows, (iii) expected impact of competitive, legal and/or regulatory forces on the projections
and the impact of technological risk, R&D expenditure for ongoing support of product rights, and (iv) estimated useful lives.
During
the year ended December 31, 2023, we recorded impairment charge of $5.6 million mainly related to intangible assets within the Solar 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 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 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
estimate the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates
include the revenue growth rates taking into consideration industry and market conditions, terminal growth rate and the discount rate.
The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics.
The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those
reporting units.
We
complete the required annual testing of goodwill impairment for the reporting units in the fourth quarter of each year and accordingly,
determine whether goodwill should be impaired. During the year ended December 31, 2023, no impairment of goodwill has been identified.
See
Notes 2.q and 10 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.
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Government
grants
In
August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which contains several provisions
intended to accelerate U.S. manufacturing and adoption of clean energy such as solar. Some of the applicable provisions in IRA include
the extension of the Production Tax Credit through 2034. These provisions of the law are new and regulations and guidance concerning their
implementation are gradually being published by the U.S. Treasury Department. Section 45X of the IRA offers advanced manufacturing production
tax credits ("AMPTC"), that incentivize the production of eligible components within the United States. To that end, we established manufacturing
capabilities in the United States in 2023 and announced additional capacity planned for 2024. IRA allows taxpayers to elect to have AMPTCs
refunded in cash ("direct pay") or transfer these credits to a third party. In addition to using the tax credits to offset tax due to
the U.S. government, the direct pay option is available as a one-time election, in any taxable year after December 31, 2022, for a facility
in which eligible components are produced, and is applicable for five years.
Refundable
and transferable tax credits are similar in essence to government grants. This is because the taxpayer can realize the benefit regardless
of whether they owe income tax or not in the relevant years. Therefore, these amounts are not considered income taxes and fall outside
the scope of Topic 740. Instead, they are treated as government grants.
Government
grants are recognized when there is reasonable assurance that: (1) we will comply with the relevant conditions and (2) the grant disbursement
will be received. We recognize PTCs as a reduction in the cost of revenues in the statement of income. We do this systematically over
time as we recognize the related expenses. Alternatively, we recognize the grant immediately if it compensates us for expenses that we
have already incurred. The AMPTCs are also reflected in the consolidated balance sheet as a reduction of income tax payable within accrued
expenses and other liabilities, as a tax prepayment, or as AMPTCs to be sold within prepayment and other assets. The way we expects to
utilize the AMPTCs determines where they are recorded. In the year ended December 31, 2023, we recognized AMPTCs worth $6.0 million for
inverters produced in the United States and sold to customers. As of December 31, 2023, benefits recognized from AMPTCs of $6.0 were recorded
as a tax prepayment within prepayment and other current assets.
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 2.af and 25 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.
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