| GENERAL | NOTE 1:-
GENERAL
a.
SolarEdge Technologies, Inc. (the “Company”) and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic (“PV”) module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features . The Company and its subsidiaries sell their products worldwide through large distributors and electrical equipment wholesalers to smaller solar installers, as well as directly to large solar installers and engineering, procurement and construction firms (“EPCs”).
b.
New accounting pronouncements not yet effective In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement.
c.
Recently issued and adopted pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance with the intent of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted ASU 2016-15 during the first quarter of 2018. The adoption of this new guidance had no impact on the Company’s condensed consolidated balance sheets, statements of income and cash flows. In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. The Company adopted ASU 2016-16 during the first quarter of 2018. The adoption of this new guidance had no impact on the Company’s condensed consolidated balance sheets, statements of income and cash flows. In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 during the first quarter of 2018. The adoption of this new guidance had no material impact on the Company’s condensed consolidated balance sheets, statements of income and cash flows. In May 2017, the FASB issued ASU 2017-09, "Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The Company adopted ASU 2017-09 during the first quarter of 2018. The adoption of this new guidance had no impact on the Company’s condensed consolidated balance sheets, statements of income and cash flows. Revenue Recognition: The Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), effective on January 1, 2018. As a result of this adoption, the Company revised its accounting policy for revenue recognition as detailed below. The Company and its subsidiaries generate their revenues mainly from the sale of power optimizers, inverters and cloud-based monitoring services to distributors, installers and PV module manufacturers. The Company applies the provisions of ASC 606, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an amount reflecting the consideration the Company expects to receive in revenue. In order to achieve that core principle, the Company applies 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.
(1)
Identify the contract with a customer A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the consideration. Deferred revenues or allowance for doubtful debt is recorded based on the Company’s analysis. The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term business relationship and a history of successful collection. For a new customer, or when an existing customer substantially expands its commitments, the Company evaluates the customer’s financial position, the number of years the customer has been in business, the history of collection with the customer, and the Customer’s ability to pay, and typically assigns a credit limit based on that review.
(2)
Identify the performance obligations in the contract At a contract’s inception, the Company assesses the goods or services promised in a contract with a customer and identifies the performance obligations. The main performance obligations are the provisions of the following:
·
Power optimizers
·
Inverters
·
Storage solution
·
Cloud based monitoring services
·
Extended warranty services
·
Communication services
(3)
Determine the transaction price The transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Generally, the Company does not provide price protection, stock rotation, and/or right of return. The Company determines the transaction price for all satisfied and unsatisfied performance obligations identified in the contract from contract inception to the beginning of the earliest period presented. Rebates or discounts on goods or services are accounted for as variable consideration. The rebate or discount program is applied retrospectively for future purchases. Provisions for rebates, sales incentives, and discounts to customers are accounted for as reductions in revenue in the same period the related sales are recorded. When a contract provides the customer with payment terms of more than a year, the Company considers whether those terms create variability in the transaction price and whether a significant financing component exists. The performance obligations that extend for a period greater than one year are those that include a financial component: (i) warranty extension services, (ii) cloud-based monitoring, and (iii) other communication services.
(4)
Allocate the transaction price to the performance obligations in the contract The Company performs an allocation of the transaction price to each separate performance obligation, in proportion to their relative standalone selling prices.
(5)
Recognize revenue when a performance obligation is satisfied Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control either transfers over time or at a point in time, which affects when revenue is recorded. Revenues from sales of products are recognized when control is transferred (based on the agreed International Commercial terms, or “INCOTERMS”). Revenues related to warranty extension services, cloud-based monitoring, and communication services are recognized over time on a straight-line basis. Deferred revenues consist of deferred cloud-based monitoring services, communication services, advance payments received from customers for the Company’s products, and warranty extension services, and are classified as short-term and long-term deferred revenues based on the period in which revenues are expected to be recognized. The most significant impact of the standard on the Company’s financial statements relates to advance payments received for performance obligations that extend for a period greater than one year. Applying the new standard, such performance obligations are those that include a financing component, specifically: (i) warranty extension services, (ii) cloud-based monitoring, and (iii) other communication services. The Company recognizes financing component expenses in its condensed 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 the Company’s deferred revenues balance. The effect of the changes made to the consolidated January 1, 2018 balance sheets following the adoption of ASC 606, Revenue - Revenue from Contracts with Customers were as follows:
Balance as of December 31, 2017
Adjustments due following adoption of ASC 606
Balance as of January 1, 2018
Deferred Revenues – Current term
2,559
(89
)
2,470
Deferred Revenues - Long term
31,453
3,961
35,414
Retained earnings
66,172
(3,872
)
62,300 In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s condensed consolidated statements of income, cash flows, and balance sheets were as follows:
March 31, 2018 (Unaudited)
As Reported
Balances before adoption of ASC 606
Effect of change
Statements of operations
Finance Income
584
1,096
(512
)
Net income
35,686
36,198
(512
)
Cash flows
Net income
35,686
36,198
(512
)
Changes in assets and liabilities:
Deferred revenues
6,981
6,469
512
Balance Sheets
Deferred Revenues - Current
3,010
3,205
(195
)
Deferred Revenues - Long term
41,866
37,287
4,579
Retained earnings
97,986
101,858
(3,872
)
d.
Basis of Presentation: The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and disclosures in footnotes that it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its condensed The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2018, have been applied consistently in these unaudited interim condensed consolidated financial statements, except for the adoption of ASC 606, Revenue - Revenue from Contracts with Customers (see Note 1c).
e.
The Company depends on three contract manufacturers and several limited or single source component suppliers. Reliance on these vendors makes the Company vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields, and costs. These vendors collectively accounted for 60.8% and 51.6% of the Company’s total trade payables as of March 31, 2018 (unaudited) and December 31, 2017, respectively. The Company has the right to offset its payables to one of its contract manufacturers against vendor non-trade receivables. As of March 31, 2018 (unaudited), a total of $1,658 of these receivables met the criteria for net recognition and were offset against the corresponding accounts payable balances for this contract manufacturer in the accompanying condensed Consolidated Balance Sheets.
f.
Derivative financial instruments: To protect against the increase in value of forecasted foreign currency cash flows resulting from salary and lease payments of its Israeli facilities denominated in the Israeli currency, the New Israeli Shekels (“NIS”), the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll and lease payments denominated in NIS for a period of one to twelve months with hedging contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the hedging contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by gains in the fair value of the hedging contracts. These hedging contracts are designated as cash flow hedges, as defined by ASC 815 and are all effective hedges. In addition to the above-mentioned cash flow hedges transactions, the Company also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar. These derivative instruments are not designated as cash flow hedges, as defined by ASC 815, and therefore all gains and losses, resulting from fair value remeasurement, were recorded immediately in the statement of operations, as financial income (expenses). As of March 31, 2018 (unaudited), the Company entered into forward contracts and put and call options to sell Euros for U.S. dollars in the amount of €46.5 million. These hedging contracts do not contain any credit-risk-related contingency features. See Note 4 for information on the fair value of these hedging contracts. As of March 31, 2018 (unaudited), the Company had no derivative instruments that were designated as cash flow hedges. The fair value of the Company’s outstanding derivative instruments is as follows:
Balance as of March 31,
Balance as of December 31,
2018
2017
(unaudited)
Derivative assets:
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
$
111
$
221
Total
$
111
$
221
Derivative liabilities:
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
$
(566
)
$
(285
)
Foreign exchange forward contracts
(488
)
(116
)
Total
$
(1,054
)
$
(401
) The Company recorded the fair value of derivative assets and liabilities, net in “accrued expenses and other accounts payable” on the Company’s condensed consolidated balance sheets. The net increase in unrealized gains (losses) recognized in “accumulated other comprehensive loss” on derivatives, net of tax effect, is as follows:
Three months ended
March 31,
2018
2017
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange forward contracts
$
-
$
909 The net gains reclassified from “accumulated other comprehensive income (loss)” into income (loss), are as follows:
Three months ended
March 31,
2018
2017
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange forward contracts
$
-
$
395 The Company recorded in the financial income, net, a net loss of $1,417 during the three months ended March 31, 2018 (unaudited), related to derivatives not qualified as hedging instruments. No such expenses were recorded in the three months ended March 31, 2017 (unaudited).
g.
Accumulated other comprehensive income: The following table summarizes the changes in accumulated balances of other comprehensive loss, net of taxes, for the three months ended March 31, 2018 (unaudited):
Net unrealized losses on available-for-sale marketable securities
Net unrealized losses on foreign currency translation
Total
Beginning balance
$
(433
)
$
(178
)
$
(611
)
Net other comprehensive loss before reclassifications
(510
)
(14
)
(524
)
Net current period other comprehensive loss
(510
)
(14
)
(524
)
Ending balance
$
(943
)
$
(192
)
$
(1,135
) For the three months period, ended March 31, 2018 (unaudited), there were no amounts reclassified from accumulated other comprehensive income. The following table summarizes the changes in accumulated balances of other comprehensive loss, net of taxes, for the three months ended March 31, 2017 (unaudited):
Unrealized gains (losses) on available-for-sale marketable securities
Unrealized gains (losses) on cash flow hedges
Unrealized gains (losses) on foreign currency translation
Total
Beginning balance
$
(136
)
$
19
$
(207
)
$
(324
)
Other comprehensive income (loss) before reclassifications
28
909
(243
)
694
Losses (gains) reclassified from accumulated other comprehensive loss
-
(395
)
-
(395
)
Net current period other comprehensive income (loss)
28
514
(243
)
299
Ending balance
$
(108
)
$
533
$
(450
)
$
(25
) The
Details about Accumulated Other Comprehensive
Amount Reclassified from
Affected Line Item in the Statements of Income
Three months ended
March 31, 2017
(unaudited)
Unrealized gains on cash flow hedges, net
58
Cost of revenues
207
Research and development
59
Sales and marketing
71
General and administrative
395
Total, before income taxes
-
Income tax expense
395
Total, net of income taxes |
