| 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.
On July 1, 2018 (the "Acquisition Date") the Company completed the acquisition (the "Acquisition") of substantially all of the assets and activities of Gamatronic Electronic Industries Ltd ("Gamatronic"), a provider and manufacturer of Uninterruptible Power Supplies ("UPS") devices (see note 2). On October 17, 2018, the Company closed an acquisition of approximately 75% of Kokam Co., Ltd. (“Kokam”), a provider of Lithium-ion cells, batteries and energy storage solutions (see note 11b).
b.
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 1d), adoption of ASC 805, Business Combination (see notes 1g and note 2), adoption of ASC 350 Intangible-Goodwill and other Assets (see note 1h and note 1i).
c.
New accounting pronouncements not yet effective: In February 2016, the Financial Accounting Standards Board (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. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the earliest comparative period presented, or retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company has elected to apply the standard retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. The Company also expects to elect certain relief options offered in ASU 2016-02 including certain available transitional practical expedients. Based on the Company's current portfolio of leases, approximately $39 million of lease assets and liabilities would be recognized on its balance sheet, primarily relating to real estate. The Company has established a cross-functional team and it is continuing to evaluate the new standard and prepare for implementation. The Company will adopt Topic 842 effective January 1, 2019. 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.
d.
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. In June 2018, the FASB issued Accounting Standards Update No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting" (ASU 2018-07). 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 adopted ASU 2018-07 effective July 1, 2018. The adoption of this new guidance had no material impact on the Company’s interim consolidated financial statements. 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; UPS devices; 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 September 30, 2018 (Unaudited)
As Reported
Balances before adoption of ASC 606
Effect of change
Statements of operations
Revenues
$
236,578
$
236,571
$
7
Financial expenses (income), net
689
48
641
Net income
45,643
46,277
(634
)
Cash flows
Net income
45,643
46,277
(634
)
Changes in assets and liabilities:
Deferred revenues
$
8,456
$
7,822
$
634
Nine months ended September 30, 2018 (Unaudited)
As Reported
Balances before adoption of ASC 606
Effect of change
Statements of operations
Revenues
$
673,567
$
673,509
$
58
Financial expenses (income), net
2,585
865
1,720
Net income
115,897
117,559
(1,662
)
Cash flows
Net income
115,897
117,559
(1,662
)
Changes in assets and liabilities:
Deferred revenues
21,576
19,914
1,662
As of September 30, 2018
As Reported
Balances before adoption of ASC 606
Effect of change
Balance Sheets
Deferred Revenues - Current
(5,795
)
(5,873
)
78
Deferred Revenues - Long term
(53,663
)
(48,051
)
(5,612
)
Retained earnings
$
(178,197
)
$
(182,069
)
$
3,872
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 60.6% and 51.6% of the Company’s total trade payables as of September 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 September 30, 2018 (unaudited), a total of $874 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 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 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 September 30, 2018 (unaudited), the Company entered into put and call options to sell Euros for U.S. dollars and sell U.S dollars for NIS in the amount of €7,500 and $6,000 million respectively. These hedging contracts do not contain any credit-risk-related contingency features. See Note 5 for information on the fair value of these hedging contracts. The fair value of the Company’s outstanding derivative instruments is as follows:
Balance as of September 30,
Balance as of December 31,
2018
2017
(unaudited)
Derivative assets:
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts
$
45
$
-
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
202
221
Total
247
221
Derivative liabilities:
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts
(9
)
-
Derivatives not designated as cash flow hedging instruments:
Foreign exchange option contracts
(1
)
(285
)
Foreign exchange forward contracts
-
(116
)
Total
$
(10
)
$
(401
) The Company recorded the fair value of derivative assets and liabilities, net in “Prepaid expenses and other current assets” and in “Accrued expenses and other liabilities” on the Company’s consolidated balance sheets as of September 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
Nine months ended
September 30,
September 30,
2018
2017
2018
2017
(unaudited)
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts
$
45
$
-
$
45
$
-
Foreign exchange forward contracts
$
-
$
-
$
-
$
975 The net gains reclassified from “accumulated other comprehensive income (loss)” into income, are as follows:
Three months ended
Nine months ended
September 30,
September 30,
2018
2017
2018
2017
(unaudited)
(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts
$
(9
)
$
-
$
(9
)
$
-
Foreign exchange forward contracts
$
-
$
-
$
-
$
(994
) The Company recorded in the financial expenses (income), net, a net loss (gain) related to derivatives not qualified as hedging instruments of $(17) and $492 during the three months ended September 30, 2018 and 2017 (unaudited), respectively and $608 and $1,164 during the nine months ended September 30, 2018 and 2017 (unaudited), respectively.
g.
Business Combination: The Company allocates 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 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, useful lives and discount rates. 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, the Company 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.
h.
Intangible Assets: The Company evaluates 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 Company has not recorded any impairment charges during the three months period ended September 30, 2018. Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. If the Company reduces the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life (see Note 2).
i.
Goodwill: The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, than a two-step impairment test is performed. The Company tests goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting unit using discounted cash flows. Forecasts of future cash flows are based on the Company's management best estimate of future net sales and operating expenses that are based primarily on expected category expansion, pricing, and general economic conditions. The Company completes the required annual testing of goodwill for impairment for the reporting unit on October 1 of each year and accordingly, determines whether goodwill should be impaired. As of September 30, 2018
j.
Accumulated other comprehensive loss: The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended September 30, 2018 (unaudited):
Unrealized gains on available-for-sale marketable securities
Unrealized gains on cash flow hedges
Unrealized gains on foreign currency translation
Total
Beginning balance
$
(949
)
$
-
$
(189
)
$
(1,138
)
Net other comprehensive income before reclassifications
32
45
87
164
Net gains reclassified from accumulated other comprehensive loss
-
(9
)
-
(9
)
Net current period other comprehensive income
32
36
87
155
Ending balance
$
(917
)
$
36
$
(102
)
$
(983
) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the nine months ended September 30, 2018 (unaudited):
Unrealized losses on available-for-sale marketable securities
Unrealized gains on cash flow hedges
Unrealized gains on foreign currency translation
Total
Beginning balance
$
(433
)
-
$
(178
)
$
(611
)
Net other comprehensive income (loss) before reclassifications
(484
)
45
76
(363
)
Net gains reclassified from accumulated other comprehensive loss
-
(9
)
-
(9
)
Net current period other comprehensive income (loss)
(484
)
36
76
(372
)
Ending balance
$
(917
)
$
36
$
(102
)
$
(983
) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the three months ended September 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
$
(103
)
-
$
(264
)
$
(367
)
Net other comprehensive income before reclassifications
54
-
16
70
Ending balance
$
(49
)
-
$
(248
)
$
(297
) The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of taxes, for the nine months ended September 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
$
(136
)
$
19
$
(207
)
$
(324
)
Net other comprehensive income (loss) before reclassifications
87
975
(41
)
1,021
Net gains reclassified from accumulated other comprehensive income (loss)
-
(994
)
-
(994
)
Net current period other comprehensive income (loss)
87
(19
)
(41
)
27
Ending balance
$
(49
)
-
$
(248
)
$
(297
) 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 September 30,
2018
2017
Unrealized gains on cash flow hedges, net
$
1
$
-
Cost of revenues
6
-
Research and development
1
-
Sales and marketing
1
-
General and administrative
9
-
Total, before income taxes
-
-
Income tax expense
$
9
$
-
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
Nine months ended September 30,
2018
2017
Unrealized gains on cash flow hedges, net
$
1
$
166
Cost of revenues
6
570
Research and development
1
151
Sales and marketing
1
153
General and administrative
9
1,040
Total, before income taxes
-
46
Income tax expense
$
9
$
994
Total, net of income taxes
k.
Certain amounts in prior year have been reclassified to conform to the current quarter presentation. |
