SOLAREDGE TECHNOLOGIES, INC. 10-Q

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates, customer concentrations and interest rates. We do not hold or issue financial instruments for trading purposes. 15 Foreign Currency Exchange Risk Approximately 57.1% and 50.7% of our revenues for the nine months ended September 30, 2021 and 2020, respectively, were earned in non-U.S. Dollar denominated currencies, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. Dollar and New Israeli Shekel, and to a lesser extent, the Euro and South Korean Won. Our New Israeli Shekel-denominated expenses consist primarily of personnel and overhead costs. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. A hypothetical 10% change in foreign currency exchange rates during the nine months ended September 30, 2021, between the Euro and the U.S. Dollar would increase or decrease our net income by $50.9 million for the nine months ended September 30, 2021. A hypothetical 10% change in foreign currency exchange rates during the nine months ended September 30, 2021 between the New Israeli Shekel and the U.S. Dollar would increase or decrease our net income by $8.4 million for the nine months ended September 30, 2021. A hypothetical 10% change in foreign currency exchange rates during the nine months ended September 30, 2021, between the South Korean Won and the U.S. Dollar would increase or decrease our net income by $22.5 million for the nine months ended September 30, 2021. For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. Dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate as of the date of the transaction or at the average exchange rate to the U.S. Dollar during the reporting period. To date, we have used derivative financial instruments, specifically foreign currency forward to manage exposure to foreign currency risks by hedging portions of the anticipated payroll payments denominated in New Israeli Shekels (“NIS”). Our foreign currency forward contracts are expected to mitigate exchange rate changes related to the hedged assets. Those hedging contracts are designated as cash flow hedges. In addition, we also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar, mainly forward contracts and put and call options to sell Euro for U.S. dollars, forward contracts and put and call options to sell Australian dollars (“AUD”) for U.S. dollars and forward contracts to sell U.S. dollars for South Korean Won (“KRW”). These derivative instruments are not designated as cash flow hedges. Concentrations of Major Customers Our trade accounts receivables potentially expose us to a concentration of credit risk with our major customers. As of September 30, 2021, two customers accounted for approximately 29.09% of our consolidated trade receivables, net balance. We currently do not foresee a credit risk associated with these receivables other than the amount included in our financial statements.