| 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 directly to large solar installers and engineering, procurement and construction firms (“EPCs”), as well as through large distributors and electrical equipment wholesalers to smaller solar installers.
b.
New accounting pronouncements not yet effective: In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease requirements in Accounting Standards Codification (ASC) Topic 840, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. As currently issued, entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. There are additional optional practical expedients that an entity may elect to apply. The Company is in the process of implementing changes to its systems and processes in conjunction with the review of lease agreements. The Company will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients. In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". ASU 2017-04 was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in ASU 2017-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is evaluating the potential impact of this pronouncement. In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". ASU 2018-07 was issued to simplify several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company will adopt the new standard effective July 1, 2018, and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
c.
Recently issued and adopted pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company adopted the new standard, effective January 1, 2018, using the modified retrospective method applied to those contracts which were not substantially completed as of the adoption date. See “Revenue Recognition” below for further details . 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. 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 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. 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
(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 and 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 a 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) 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, warranty extension services and advance payments received from customers for the Company’s products. Deferred revenues 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) 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
Unaudited
Unaudited
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:
Three months ended June 30, 2018 (Unaudited)
As Reported
Balances before adoption of ASC 606
Effect of change
Statements of operations
Revenues
$
227,118
$
227,067
$
51
Financial income (expenses), net
(2,480
)
(1,913
)
(567
)
Net income
34,568
35,084
(516
)
Cash flows
Net income
34,568
35,084
(516
)
Changes in assets and liabilities:
Deferred revenues
6,139
5,623
516
Six months ended June 30, 2018 (Unaudited)
As Reported
Balances before adoption of ASC 606
Effect of change
Statements of operations
Revenues
$
436,989
$
436, 938
$
51
Financial income (expenses), net
(1,896
)
(817
)
(1,079
)
Net income
70,254
71,282
(1,028
)
Cash flows
Net income
70,254
71,282
(1,028
)
Changes in assets and liabilities:
Deferred revenues
13,120
12,092
1,028
Balance Sheets
Deferred Revenues - Current
(3,407
)
(3,413
)
6
Deferred Revenues - Long term
(47,595
)
(42,689
)
(4,906
)
Retained earnings
$
(132,554
)
$
(136,426
)
$
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 consolidated financial position, results of operations, and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. 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 58.3% and 51.6% of the Company’s total trade payables as of June 30, 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 June 30, 2018 (unaudited), a total of $2,574 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 hedged 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 June 30, 2018 (unaudited), the Company entered into forward contracts and put and call options to sell Euros for U.S. dollars in the amount of €22.5 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 June 30, 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 June 30,
Balance as of December 31,
2018
2017
(unaudited)
Derivative assets:
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
$
340
$
221
Foreign exchange forward contracts
312
-
Total
$
652
$
221
Derivative liabilities:
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
$
(24
)
$
(285
)
Foreign exchange forward contracts
-
(116
)
Total
$
(24
)
$
(401
) The Company recorded the fair value of derivative assets and liabilities, net in “prepaid expenses and other accounts receivable” and in “Accrued expenses and other accounts payable” on the Company’s consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively. The net increase in unrealized gains recognized in “accumulated other comprehensive loss” on derivatives, net of tax effect, is as follows:
Three months ended
Six months ended
June 30,
June 30,
2018
2017
2018
2017
(unaudited)
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange forward contracts
-
$
66
-
$
975 The net gains reclassified from “accumulated other comprehensive loss” into income, are as follows:
Three months ended
Six months ended
June 30,
June 30,
2018
2017
2018
2017
(unaudited)
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange forward contracts
-
$
(599
)
-
$
(994
) The Company recorded in the financial income (expenses), net, a net loss (gain) related to derivatives not qualified as hedging instruments of $2,042 and $(672) during the three months ended June 30, 2018 and 2017 (unaudited), respectively and $625 and $(672) during the six months ended June 30, 2018 and 2017 (unaudited), respectively.
g.
Accumulated other comprehensive income: The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended June 30, 2018 (unaudited):
Unrealized gains (losses) on available-for-sale marketable securities
Unrealized gains (losses) on foreign currency translation
Total
Beginning balance
$
(943
)
$
(192
)
$
(1,135
)
Net other comprehensive income (loss) before reclassifications
(6
)
3
(3
)
Net current period other comprehensive income (loss)
(6
)
3
(3
)
Ending balance
$
(949
)
$
(189
)
$
(1,138
) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the six months ended June 30, 2018 (unaudited):
Unrealized losses on available-for-sale marketable securities
Unrealized losses on foreign currency translation
Total
Beginning balance
$
(433
)
$
(178
)
$
(611
)
Net other comprehensive loss before reclassifications
(516
)
(11
)
(527
)
Net current period other comprehensive loss
(516
)
(11
)
(527
)
Ending balance
$
(949
)
$
(189
)
$
(1,138
) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended June 30, 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
$
(108
)
$
533
$
(450
)
$
(25
)
Net other comprehensive income before reclassifications
5
66
186
257
Net gains reclassified from accumulated other comprehensive loss
-
(599
)
-
(599
)
Net current period other comprehensive income (loss)
5
(533
)
186
(342
)
Ending balance
$
(103
)
$
-
$
(264
)
$
(367
)
The following table summarizes the changes in accumulated balances of other comprehensive income ( )
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
Net other comprehensive income (loss) before reclassifications
33
975
(57
)
951
Net gains reclassified from accumulated other comprehensive income (loss)
-
(994
)
-
(994
)
Net current period other comprehensive income (loss)
33
(19
)
(57
)
(43
)
Ending balance
$
(103
)
$
-
$
(264
)
$
(367
) The
Details about Accumulated Other Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item in the Statements of Income
Three months ended June 30,
2018
2017
Unrealized gains on cash flow hedges, net
$
-
$
108
Cost of revenues
-
363
Research and development
-
92
Sales and marketing
-
82
General and administrative
-
645
Total, before income taxes
-
(46
)
Income tax expense (benefit)
$
-
$
599
Total, net of income taxes The
Details about Accumulated Other Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item in the Statements of Income
Six months ended June 30,
2018
2017
Unrealized gains on cash flow hedges, net
$
-
$
166
Cost of revenues
-
570
Research and development
-
151
Sales and marketing
-
153
General and administrative
-
1,040
Total, before income taxes
-
(46
)
Income tax expense (benefit)
$
-
$
994
Total, net of income taxes |
