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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-22 · 725 added, 302 removed, 67 unchanged (94% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections of this Annual Report on Form 10-K captioned “Selected Financial Data” and “Business” and our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K.

In addition to historical financial information, the following discussion and analysis contains forward looking statements that involve risks, uncertainties, and assumptions.

Our actual results and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed under the sections of this Annual Report captioned “Special Note Regarding Forward Looking Statements” and “Risk Factors”.

For discussion related to changes in financial condition and the results of operations for the year ended December 31, 2020, refer to Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission on February 19, 2021.

We develop, manufacture and sell products that address 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, home energy management, grid services and virtual power plants, as well as products in our non-solar businesses which address e-Mobility, automation machines, lithium-ion cells and battery packs and UPS solutions.

Further information regarding our business is provided in “Part I, Item 1.

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section

of this Annual Report on Form 10-K captioned “Business” and our consolidated financial statements and the related notes to

those statements included elsewhere in this Form 10-K.

In addition to historical financial information, the following discussion and analysis

contains forward looking statements that involve risks, uncertainties, and assumptions.

Our actual results and timing of selected events

may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed

under the sections of this Annual Report captioned “Special Note Regarding Forward Looking Statements” and “Risk Factors”.

F or discussion related to changes in financial condition and the results of operations for the year

ended December 31, 2021, refer to 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 ,

We develop, manufacture

and sell products that address 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 which address e-Mobility

("e-Mobility"), automation machines ("Automation Machines") and lithium-ion batteries ("Storage").

information regarding our business is provided in “Part I, Item 1.

Business” of this Annual Report.

In the year ended December 31, 2021, two customers accounted for 30.9% of our revenues and our top three customers (all distributors) together represented 37.8% of our revenues.

Our revenues were $1,459.3 million, and $1,963.9 million for fiscal 2020, and fiscal 2021 respectively.

Gross margins were 31.6% and 32.0% for fiscal 2020, and fiscal 2021, respectively.

Net profits were $140.3 million and $169.2 million for fiscal 2020 and fiscal 2021, respectively.

In the year ended December 31,

2022 , one customer accounted for 18.5% of our

revenues and our top three customers (all distributors) together represented 34.8% of our revenues.

Our revenues were $3,110.3

million and $1,963.9 million for fiscal 2022 and fiscal

2021 , respectively.

Gross margins were 27.2% and 32.0%

for fiscal 2022 and fiscal 2021 , respectively.

Net income was $93.8

million and $169.2 million for fiscal 2022 and fiscal 2021 ,

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 yearly shipments (inverters shipped, power optimizers shipped, and megawatts shipped) to evaluate our sales performance and to track market acceptance of our products from year to year.

We use metrics relating to monitoring (systems monitored and megawatts monitored) to evaluate market acceptance of our products and usage of our solution.

We provide the “megawatts shipped” metric, which is calculated based on nameplate capacity shipped, to show adoption of our system on a nameplate capacity basis.

Nameplate capacity shipped is the maximum rated power output capacity of an inverter and corresponds to our financial results in that higher total capacities shipped are generally associated with higher total revenues.

However, revenues increase with each additional unit sold, not necessarily each additional MW of capacity sold.

Accordingly, we also provide the “inverters shipped” and “power optimizers shipped” operating metrics.

Covid-19 Impact & Response

Covid-19 continued to present challenges on our operations and business in 2021, primarily, operational challenges which we reported on continuously in our quarterly reports throughout the year.

Although the global distribution of vaccines continues to progress and many government-imposed restrictions have been lifted or removed, the future impact of the Covid-19 pandemic remains highly uncertain.

Resurgences of Covid-19 cases and the emergence of new variants may adversely impact our results of operations.Our first priority continues to be to protect and support our employees while maintaining company operations and support of our customers with as few disruptions as possible.

We follow the guidance issued by applicable local authorities and health officials in each region in which we do business, including in our headquarters located in Israel.

In the third quarter of 2021, our contract manufacturer in Vietnam was forced to temporarily close its facilities due to government mandated lockdowns.

The mandatory shut downs lasted 12 weeks and the Vietnam factory returned to full capacity in November of 2021.

While we increased manufacturing capacity in China, Israel and Hungary in order to compensate for the Vietnam factory Covid-19 related lockdown, our aggregate overall manufacturing capacity was negatively impacted and together with shipping constraints caused by port congestions, caused a reduction in our finished goods inventory and availability to supply in the third and fourth quarter of 2021.

Our manufacturing facilities in Korea (for our energy storage business), Italy (for our e-Mobility components) and Israel and our contract manufacturers’ facilities in Vietnam, China, and Hungary were operational at almost full capacity in the fourth quarter of 2021 as we continued to ramp our new manufacturing site in Mexico.

To the extent that there are no further lockdowns, manufacturing capacity will revert to levels that accommodate the growing demand for our products within the first half of 2022.

Our customer support centers are working at full capacity, partially from home.

Continued travel restrictions, however, continue to have an impact on our operations.

In 2021, we experienced and continue to experience an increase in the cost of goods sold due to an increase in shipping rates that resulted from a reduction in ocean freight capacity, the accumulation of containers in the ports in U.S and Europe that were not returned to Asia and the reduction in the availability of air freight that increased the demand for ocean freight.

In the fourth quarter of 2021, we experienced and expect to continue to experience in 2022, disruptions to our logistics supply chain caused by constraints in the global transportation system including limited availability of local ground transportation coupled with congestion in shipping ports and industry-wide component shortages.

These factors have impacted our ability to accurately plan and forecast the delivery of our products to customers and have also increased the total shipping time and cost of ocean freight for components and finished goods.

Moreover, industry-wide component shortages require our R&D teams to focus their attention on manufacturing and production design workarounds solutions which can impact our ability to meet our plans to roll out new innovative products and services.

Additionally, a customer of SolarEdge e-Mobility that has experienced disruptions in its own manufacturing process due to global component shortages has delayed the delivery date of powertrain units that were expected to be supplied by SolarEdge e-Mobility in the third quarter of 2021.

We expect that the aforementioned e-Mobility project to return to normal operations during 2022.

Despite the operational hurdles detailed above, our fourth quarter 2021 revenues of $551.9 million, reflect an increase from revenues of $526.4 million in the third quarter of 2021.

Key Components of Our Results of Operations

The following discussion describes certain line items in our Consolidated Statements of Operations.

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 as well as grid services.

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.

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.

Year ended December 31,

Inverters shipped

Power optimizers shipped

Megawatts shipped 1

Megawatts hour shipped - residential batteries

Excluding residential batteries, based on the aggregate nameplate capacity of inverters shipped during the applicable period.

capacity is the maximum rated power output capacity of an inverter as specified by the manufacturer.

Global Circumstances

Influencing our Business and Operations

Impact & Response

Covid-19 continued

to present challenges to our operations and business in 2022, primarily, operational challenges, which we reported on continuously in

our quarterly reports throughout the year, but to a lesser extent than in 2021.

Due to the worldwide growing trend in availability and

administration of vaccines against Covid-19, many restrictions that were placed during the pandemic were gradually lifted by governments

across the globe.

However, the future impact of the Covid-19 pandemic remains highly uncertain.

Resurgences of Covid-19 cases and the

emergence of new variants may adversely impact our results of operations.

For example, in the second quarter of 2022, the mandatory government

shutdowns resulting from the increase in Covid-19 cases in Shanghai, that were eased in the beginning of the third quarter of 2022, led

to delays in our scheduled shipments from the Shanghai port.

Our first priority continues to be to protect and support our employees while

maintaining company operations and support of our customers with as few disruptions as possible.

follow the guidance issued by applicable local authorities and health officials in each region in which we do business, including in our

headquarters located in Israel.

While we have not experienced any new disruptions resulting

directly from Covid-19 in the fourth quarter of 2022, the pandemic and general global economic conditions continue to present challenges

to our operations and business.

In the fourth quarter of 2022, we began to witness a decrease in shipment prices and transit times, both

however are still not at their pre-Covid-19 levels.

In fiscal 2022 as a whole and the fourth quarter of 2022 specifically, the industry-wide

component shortages which originated from Covid-19 and amplified by the increase in demand for our products, as well as other manufacturers

who are competing for the same components, continued to impact our ability to accurately plan and forecast the delivery of our products

to customers and have also increased cost of ocean and air freight for components and finished goods.

To mitigate the impact of these

disruptions on our supply chain, we extended shipment terms that differ from our standard terms in certain transactions including Free-Carrier

and Ex-works (INCOTERMS, 2020) delivery from our manufacturing facilities.

This change was implemented as part of our ongoing efforts

to expedite shipments to our customers and improve visibility throughout our supply chain.

Moreover, industry-wide component shortages

require our R&D teams to focus their attention on manufacturing and production design workarounds solutions, which can impact our

ability to meet our plans to roll out new innovative products and services.

Our operation team is working tirelessly to mitigate the impact

of the disruptions described above.

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.

On one hand, in 2022, rising global interest in becoming less dependent on

gas and oil led to higher demand for our products.

On the other hand, the conflict further 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 cannot

be predicted at this time, the circumstances described above may have 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 incentives intended to promote

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, will among other things, extend the investment tax credit (“ITC”)

through 2034 and is therefore expected to increase the demand for solar products.

The IRA is expected to further incentivize residential

and commercial solar customers and developers due to the inclusion of a tax credit for qualifying energy projects of up to 30%.

these regulations are new and are still pending administrative guidance from the Internal Revenue Service and U.S.

Treasury Department,

we will be examining the benefits that may be available to us, such as the availability of tax credits for domestic manufacturers, in

the coming months.

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.

Key Components of Our

Results of Operations

The following discussion

describes certain line items in our Consolidated Statements of Operations.

We generate revenues

from the sale of DC optimized inverter systems for solar PV installations which include power optimizers, inverters, storage and backup

so lutions, EV chargers, smart energy devices , our cloud-based monitoring platform as well as

grid services.

Our customer base mainly includes distributors, large solar installers, wholesalers, EPCs, and PV module manufacturers.

In addition, we also generate revenues from the sale of lithium-ion cells, batteries and energy storage solutions, UPS systems, 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 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 UPS products, SolarEdge Automation Machines and SolarEdge 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, grow 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 expansion of the new businesses we acquired.

In the year ended December 31, 2021, 45.4% of our revenues were generated from Europe, 40.0% of our revenues were generated from the United States and 14.6% of our revenues were generated from ROW.

In the year ended December 31, 2020, 42.9% of our revenues were generated from Europe, 42.0% of our revenues were from the United States and 15.1% 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, hosting services for our cloud based monitoring platform, and other logistics services.

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, and improvements in production processes and automation.

Some of these costs, primarily personnel and depreciation of testing and manufacturing equipment, are not directly affected by sales volume.

With respect to ESS, Automation Machines and e-Mobility products cost of revenues consists primarily of materials costs, labor costs associated with the manufacturing, variable utility, and operational costs related to the manufacturing factories, depreciation of testing and manufacturing equipment and other fixed costs.

Except for the manufacturing and assembly activities related to our acquired businesses and the manufacturing of solar products at Sella 1, we outsource our manufacturing to third-party manufacturers and negotiate product pricing on a quarterly basis.

During 2021, supply chain and operational challenges coupled with an increase in demand for our products, resulted in increased use of expedited ocean freight as well as air freight to deliver our products to our customers in a timely manner.

At the beginning of 2021, a high portion of our products manufactured in non-tariff countries imported into the U.S.

In addition, we also generate 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 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.

from the sale of SolarEdge Automation Machines and SolarEdge e-Mobility products are affected by the changes in the volumes, customers’

size and average selling prices of the p roducts 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, grow 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 expansion of the new businesses we acquired.

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

In the year ended December 31, 2021 , 45.4%

of our revenues were generated from Europe, 40.0% of our revenues were from the United States

and 14.6% of our revenues were generated from ROW.

of Revenues and Gross Profit

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, provision for

losses related to slow moving and dead inventory, hosting services for our cloud based monitoring platform, and other logistics services.

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 and improvements in production processes and automation.

Some of these costs, primarily

personnel and depreciation of testing and manufacturing equipment, are not directly affected by sales volume.

respect to ESS, Automation Machines and e-Mobility products ("Non-Solar") cost of revenues, consists primarily of materials costs, labor

costs associated with the manufacturing, variable utility, and operational costs related to the manufacturing factories, depreciation

of testing and manufacturing equipment, amortization of intangible assets and other fixed costs.

Except for the manufacturing

and assembly activities related to our Non-Solar businesses and the manufacturing of solar products

at Sella 1, our manufacturing facility in the North of Israel, we outsource our manufacturing to third-party manufacturers and negotiate

product pricing on a quarterly basis.

During 2022 ,

supply chain and operational challenges coupled with an increase in demand for our products, resulted in increased use of expedited ocean

freight as well as air freight to deliver our products to our customers in a timely manner.

At the beginning of 2022, a high portion of

our products manufactured in non-tariff countries imported into the U.S.

resulted in lower custom tariff charges.

however, disruptions to our Vietnam manufacturing facilities due to Covid-19 restrictions, required us to increase manufacturing from our other manufacturing facilities that are subject to custom tariffs in the later part of the year, which consequentially caused us to temporarily incur an increase in our tariff charges.

As a result of the operational challenges we faced during 2021, the levels of our finished goods inventories required to support our growth were reduced.

Therefore, we expect to continue to deliver our products through expedited ocean freight and air freight.

In absence of additional Covid-19 related shutdowns we expect inventory levels to return to those required to support our growing business and the reduction in expedited shipments and air freight usage during the third quarter of 2022.

We continue to develop our own manufacturing capabilities.

For example, we have developed our own proprietary automated assembly lines for our power optimizers, manufacture sub-assemblies such as cables and magnetic, and own large amounts of equipment in connection with such manufacturing activities.

We expect to continue to invest in additional automated assembly lines in the future.

We have designed and are responsible for funding all of the capital expenses associated with existing and planned automated assembly lines.

The current and expected capital expenses associated with these automated assembly lines will be funded out of our cash flows generation.

Key components of our logistics supply channel consist of third party distribution centers in the U.S., Europe, Australia, and Japan.

Finished goods are either shipped to our customers directly from our contract manufacturers or shipped to third-party distribution centers and then, finally, shipped to our customers.

In the third quarter of 2020 we began commercial shipments to the United States of optimizers and inverters from Sella 1, which reached full manufacturing capacity in the second quarter of 2021.

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 from 1,549 as of December 31, 2020 to 2,052 as of December 31, 2021.

Gross profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs, and seasonality.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, general and administrative and other expenses.

Personnel related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions and stock-based compensation.

Our employees headcount in our research and development, sales and marketing, and general and administrative departments has grown from 1,625 as of December 31, 2020 to 1,912 as of December 31, 2021.

We expect to continue to hire significant numbers of new employees to support our growth.

The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue.

We expect to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.

Research and development expenses

Research and development expenses include personnel-related expenses such as salaries, 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 expense, 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.

As a result of the operational

challenges we faced during 2022, the levels of our finished goods inventories required to support our growth were reduced.

seeing an improvement in supply chain disruptions and component constraints towards the end of 2022, we expect to continue to deliver

our products through expedited ocean freight and air freight.

To the extent that production in

our Mexican manufacturing facility ramps and production in Sella 1 is expanded as anticipated, we expect inventory levels to return to

those required to support our growing business, the reduction in expedited shipments and air freight usage during the third quarter of

continue to develop our own manufacturing capabilities.

For example, we have developed our own proprietary automated assembly lines for

our power optimizers, manufacture sub-assemblies such as cables and magnetic, and own large amounts of equipment in connection with such

manufacturing activities.

In 2022, we developed and commenced manufacturing from our first partially automated inverter assembly line

which began production in our Sella 1 manufacturing site.

We expect to continue to invest in additional automated assembly lines in the

We have designed and are responsible for funding all of the capital expenses associated with existing and planned automated assembly

The current and expected capital expenses associated with these automated assembly lines will be funded out of our current cash

and cash equivalents, available-for-sale marketable securities and cash flows generation.

Additionally, we continue to develop our

own manufacturing capabilities in Sella 2, our Li-Ion battery factory in Korea.

We expect Sella 2 to continue to incur costs and expenses

We also intend to expand the manufacturing capabilities of Sella 2 in fiscal years 2023 and 2024 which will result in

additional expenses.

We intend to use our available cash balances for this expansion.

Key components of our

logistics supply channel consist of third party distribution centers in the U.S., Europe, Au stralia,

Finished goods are either shipped to our customers directly from our contract manufacturers or shipped to third-party

distribution centers and then, finally, shipped to our customers.

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 from 2,052

as of December 31, 2021 to 2,383 as of December 31,

profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up

costs, product mix, customer mix, geographical mix, shipping method, warranty costs, exchange rates and seasonality.

Operating expenses consist

of research and development, sales and marketing, general and administrative, goodwill impairment and other operating expenses, net.

related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions

and stock-based compensation.

Our employees headcount in our research and development, sales and marketing and general and administrative

departments, has grown from 1,912 as of December 31,

2021 to 2,543 as of December 31, 2022 .

expect to continue to hire significant numbers of new employees to support our growth .

The timing of these additional hires could

materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue.

to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses

will increase in absolute dollar amounts for the foreseeable future.

and development expenses

Research and development

expenses include personnel-related expenses such as salaries, 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.

and marketing expenses

Sales and marketing expenses

Sales and marketing expenses consist primarily of personnel-related expenses such as salaries, 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.

The expected increase in sales and marketing expenses is due to an expected increase in the number of sales and marketing personnel and the expansion of our global sales and marketing footprint, enabling us to increase our penetration into new markets.

These expenses will be determined to the extent that marketing activities resume, contingent upon the recovery of certain activities which have been halted due to Covid-19 such as travel, trade shows and in person customer trainings.

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, 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 legal claims and allowance for doubtful accounts in the event of uncollectible account receivables balances.

Other operating expenses (income), net

Other operating expenses (income), net, consist primarily of losses related to write-offs of tangible and intangible assets and income related to payments made to us from the Kokam acquisition escrow account with regards to a working capital adjustment and a legal claim acquired as part of the Kokam acquisition which was settled in arbitration in 2019.

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 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 accretion of the debt discount and amortization of debt issuance cost associated with our Notes due 2025.

Our functional currency is the U.S.

consist primarily of personnel-related expenses such as salaries, 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.

and administrative expenses

General and administrative

expenses consist primarily of salaries, 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 legal claims and allowance

for doubtful accounts in the event of uncollectible account receivables balances.

impairment and other operating expenses, net

impairment and other operating expenses, net , consist primarily of impairment

of goodwill, impairment of long-lived assets and certain other nonrecurring items.

Operating Expenses

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 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 accretion of the debt discount and amortization of debt issuance cost associated with our Notes due 2025.

Our functional currency

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 primarily 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, the fair value remeasurement of hedging contracts not designated as cash flow hedge and bank charges.

We are subject to income taxes in the countries where we operate.

In the year ended December 31, 2020, we recorded a net income tax expense of $23.3 million, which consists of a $26.8 million current income tax expense and a $3.5 million deferred tax income.

In the year ended December 31, 2021, we recorded a net income tax expense of $18.1 million, which consists of a $29.7 million current income tax expense and $11.6 million of deferred tax income.

The decrease in net income tax expense was mainly attributed to a tax benefit related to the laps of a statute of limitation of uncertain tax positions and an increase in deferred tax income related to unrealized losses of foreign currency transactions.

This decrease was partially offset by an increase in tax expense related to operations of our foreign subsidiaries.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law making significant changes to U.S.

Financial (expenses)

income, net, also consists of gains or losses from foreign currency fluctuations primarily 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, the fair value remeasurement of hedging contracts not designated as cash flow hedge and bank charges.

Other income consists

primarily of realized and unrealized gains and losses on investments in privately-held companies.

We are subject to income

taxes in the countries where we operate.

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 $11.0 million of deferred tax income .

In the year ended

December 31, 2021, we recorded a net income tax expense of $18.1 million, which consists of a $29.7 million current income tax expense

and a $11.6 million deferred tax income.

The increase in net income tax expense was mainly attributed to impairments that did not

have a corresponding tax effect and the change to Section 174 of the U.S Internal Revenue Code, which became effective on January 1, 2022.

The change eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over

five years (if generated from a US entity) and fifteen years (if generated from non-U.S.

entities).This change to Section 174, as well

as lower tax benefits relating to stock-based compensation, resulted in an increase in the Company’s taxable income and Global Intangible

Low Taxed Income (“GILTI”) tax.

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 and certain related-party payments.

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 GILTI, as explained above) and certain related-party payments.

the Tax Act required the Company to pay U.S.

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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.

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

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.

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 Technological Preferred Enterprise (PTE), as defined in the 2017 Amendment, that is located in the central region of Israel, will be subject to tax at a rate of 12% on profits deriving from intellectual property (in Development Zone A - a tax rate of 7.5%).

Our Israeli subsidiary has established its own manufacturing facilities in Israel, located in a Development Zone A.

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, we expect that it will be entitled to an effective tax at a rate of approximately 12% in 2020.

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 and patents and accelerated depreciation rates on equipment and buildings.

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

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 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel revenues threshold.

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.

Results of Operations

The following tables set forth our consolidated statements of income for the years ended December 31, 2021 and 2020.

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, 2021 and year ended December 31, 2020

following tables set forth our consolidated statements of income for the years ended December 31,

2022 and 2021 .

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.

of year ended December 31, 2022 and year ended December 31,

Year ended December 31,

5 unchanged sentences

General and administrative

Other operating expenses (income), net

Total operating expenses

Goodwill impairment and other operating expenses, net

operating expenses

Operating income

3 unchanged sentences

(In thousands)

Revenues increased by $504.6 million, or 34.6%, in the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to (i) an increase in the number of inverters and power optimizers sold, with significant growth in revenues in all geographies ;

and (ii) an increase in the numbers of powertrain kits supplied by SolarEdge e-Mobility, in an aggregate amount of $55.5 million.

Revenues from outside of the U.S.

comprised 60.0% of our revenues in the year ended December 31, 2021 as compared to 58.0% in the year ended December 31, 2020.

The number of power optimizers recognized as revenues increased by approximately 3.1 million units, or 20.3%, from approximately 15.5 million units in 2020 to approximately 18.6 million units in 2021.

The number of inverters recognized as revenues increased by approximately 125.1 thousand units, or 18.9%, from approximately 663.3 thousand units in 2020 to approximately 788.4 thousand units in 2021.

Our blended ASP per watt for solar products shipped increased by 0.024, or 10.8%, in 2021 as compared to 2020.

The increase in blended ASP per watt is mainly attributed to an increase in the sale of residential products out of our total solar product mix in the U.S, that are characterized with higher ASP per watt, an increase in the sale of products with enhanced capabilities such as the SolarEdge energy hub inverter that are characterized with higher ASP per watt as well as the appreciation of the Euro and other currencies against the U.S.

This increase in blended ASP per watt was partially offset by a change in our customer mix in the U.S.

toward larger customers that enjoy preferential pricing due to volume commitments.

Cost of Revenues and Gross Profit

increased by $1,146.4 million, or 58.4%, in the year ended December 31, 2022, as compared to the year ended December 31, 2021,

primarily due to (i) an increase of $615.5 million related to the number of inverters and power optimizers sold, with significant

growth in revenues coming from Europe and the U.S.;

and (ii) an increase of $409.6 million related to the number of residential batteries

sold mainly in Europe and in the U.S.

from outside of the U.S.

comprised 63.5% of our revenues in the year ended December 31, 2022 as compared to 60.0% in the year ended

December 31, 2021.

number of power optimizers recognized as revenues increased by approximately 5.1 million units, or 27.4%, from approximately 18.6 million

units in 2021 to approximately 23.7 million units in 2022.

The number of inverters recognized as revenues, increased by approximately

226.2 thousand units, or 28.7%, from approximately 788.4 thousand

units in 2021 to approximately 1,014.6 thousand units in 2022 .

Our blended Average Selling

Price or ASP per watt for solar products excluding residential batteries is calculated by dividing solar revenues, excluding revenues

from the sale of residential batteries, by the nameplate capacity of inverters shipped.

Our blended ASP per watt for solar products shipped

decreased by 0.008 , or 3.3% ,

in 2022 as compared to 2021 .

The decrease in blended

ASP per watt is mainly attributed to the depreciation of the Euro and other currencies against the U.S.

Dollar, which, coupled with our

increased sales in Europe, accelerated this effect, as well as the increase in the sale of commercial products in Europe and the U.S.,

out of our total solar product mix that is characterized with lower ASP per watt.

This decrease in blended ASP per watt was partially

offset by price increases that went into effect gradually during the second half of 2021 and continued in 2022, as well as a relatively

higher number of other solar products shipped compared to the number of inverters shipped, which increased our total solar revenues, but

did not impact the watt amount used for calculating the ASP per watt.

blended ASP per hour watt for residential batteries is calculated by dividing residential batteries revenues, by the nameplate capacity

of residential batteries shipped.

Our blended ASP per watt for residential batteries in 2022 was 0.479.

Cost of Revenues and

Year ended December 31,

(In thousands)

Cost of revenues

Cost of revenues increased by $336.6 million, or 33.7%, in 2021 as compared to 2020, primarily due to:

Cost of revenues increased

by $931.1 million , or 69.8% , in 2022

as compared to 2021 , primarily due to:

an increase in the volume of products sold and the increase in the cost of components used in the manufacturing of our products;

• an increase in warranty expenses and warranty accruals of $48.4 million associated primarily with an increased number of products in our install base.

This increase was partially offset by various cost reductions on the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses;

• a significant increase in shipment and logistic costs in an aggregate amount of $40.1 million due to (i) an increase in shipment rates;

and (ii) an increase in volume shipped;

• an increase in personnel-related costs of $16.4 million related to the expansion of our production, operations, and support headcount which grew in parallel to our growing install base worldwide, the construction of our lithium-ion cell and battery factory in Korea, known as "Sella 2" and the increase in costs associated with the production of powertrain units manufactured by our SolarEdge e-Mobility division;

• an increase in other production costs of $9.9 million, which is mainly attributed to charges from our contract manufacturers due to manufacturing disruptions related to Covid-19 lockdowns, increased logistics costs resulting from transportation disruptions and the mobilization of components among our different manufacturing sites.

These increases were partially offset by:

• a decrease in custom duties of $25.5 million attributed to lower tariff charges due to the manufacture of a higher portion of our products for the U.S.

outside of China;

Gross profit as a percentage of revenue increased from 31.6% in 2020 to 32.0% in 2021 as a result of the above detailed analysis.

a significant increase in shipment and logistic costs in an aggregate amount of $124.0 million due to

(i) an increase in volume shipped;

(ii) an increase in air and expedited shipments;

and (iii) an increase in the shipment rates throughout

2022 that was partially offset by a decrease in shipment rates which began in the fourth quarter of 2022;

in other production costs of $89.0 million, which is mainly attributed to charges from our contract manufacturers, due to manufacturing

disruptions related to global supply constraints, increased logistics costs resulting from transportation disruptions, mobilization of

components between our different manufacturing sites in order to allow for continuous manufacturing, as well as ramp up costs associated

with our new contract manufacturing site in Mexico and Sella 2, our Li-Ion battery cell manufacturing facility located in South Korea;

in warranty expenses and warranty accruals of $88.6

associated primarily with an increased number of products in our install base,

as well as 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;

in personnel-related costs of $22.4 million ,

related to the expansion of our production, operations, and support headcount, which grew in parallel to our growing install base worldwide,

our new contract manufacturing site in Mexico and the completion of our lithium-ion cell and battery factory in Korea, known as "Sella

an increase in customs duties of $17.2 million attributed to

the increase in volumes of products manufactured in China for the U.S.

Gross profit as a percentage of revenue

decreased from 32.0% in 2021

to 27.2% in 2022 , as a result of the above detailed

Operating Expenses:

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Research and development

Research and development costs increased by $56.5 million or 34.6%, in 2021 compared to 2020, primarily due to:

• an increase in personnel-related costs of $48.5 million resulting from an increase in our research and development headcount as well as salary expenses associated with employee equity-based compensation.

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 overhead costs in an amount of $3.1 million;

• an increase in depreciation expenses of property and equipment in an amount of $3.0 million;

• an increase in expenses related to material consumption in the manufacturing of prototypes during our development process in an amount of $2.9 million.

These increases were partially offset by:

• an increase in reimbursement of costs, in an amount of $1.7 million, related to the research and development activities performed by SolarEdge e-Mobility;

• a decrease in expenses related to consultants and sub-contractors in an amount of $1.0 million.

Research and development

costs increased by $70.2 million or 32.0% ,

in 2022 compared to 2021 , primarily due to:

in personnel-related costs of $53.0 million resulting from an increase in our research and development

headcount, as well as salary expenses associated with annual merit increases and em ployee stock-based

compensation.

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;

in expenses related to overhead costs in the amount of $6.6 million ;

in depreciation expenses of property and equipment in the amount of $4.2 million ;

a decrease in

reimbursement of costs, in the amount of $4.2 million , related to the research and development

activities performed by SolarEdge e-Mobility;

in expenses related to material consumption in the manufacturing of prototypes during our development process in the amount of $2.4

increases were partially offset by a decrease in expenses related to consultants and sub-contractors in the amount of $3.7 million.

Sales and Marketing

2 unchanged sentences

Sales and marketing

Sales and marketing expenses increased by $23.0 million, or 24.0%, in 2021 compared to 2020, primarily due to:

• an increase in personnel-related costs of $18.4 million as a result of an increase in headcount supporting our growth in all geographies, as well as salary expenses associated with employee equity-based compensation;

• an increase in expenses related to marketing activities by $2.1 million due to the renewal of marketing activities, exhibitions and shows, which were cancelled or postponed in 2020 due to Covid-19 restrictions;

• an increase in expenses related to consultants and sub-contractors in an amount of $1.1 million.

and marketing expenses increased by $40.7 million , or

34.2% , in 2022 compared to 2021 ,

primarily due to:

an increase in personnel-related costs of $28.6 million, as a result of an increase in headcount supporting

our growth in all geographies, as well as salary expenses associated with annual merit increases and employee stock-based compensation;

an increase in expenses related to marketing activities of $4.8 million;

an increase in expenses related to travel in the amount of $2.7 million.

General and Administrative

2 unchanged sentences

General and administrative

General and administrative expenses increased by $19.1 million, or 30.2%, in 2021 compared to 2020, primarily due to:

• an increase in personnel-related costs of $16.6 million resulting from an increase in our general and administrative headcount, the reinstatement of executive management salaries that management voluntarily reduced in early 2020 to mitigate the potential effects of Covid-19, as well as salary expenses associated with employee equity-based compensation;

• an increase of $2.6 million related to insurance and legal expenses.

Other operating expenses (income), net

General and administrative expenses increased

by $30.3 million , or 36.9% , in 2022

compared to 2021 , primarily due to:

an increase in personnel-related costs of $22.7 million resulting from an increase in our general and

administrative headcount, as well as salary expenses associated with annual merit increases and employee stock-based compensation;

in expenses related to consultants and sub-contractors in the amount of $7.3 million;

in expenses related to overhead costs in the amount of $2.4 million.

increases were partially offset by a decrease of $5.6 million

related to a provision for legal claims.

Goodwill impairment

and other operating expenses, net

Year ended December 31,

(In thousands)

Other operating expenses (income), net

Other operating expenses were $1.4 million in 2021, compared to other operating income of $3.4 million in 2020, primarily due to:

• a decrease in income in the amount of $4.9 million related to an acquired legal claim as part of the Kokam acquisition which was settled in arbitration in 2019 and subsequently repaid to the Company in 2020;

• an increase of $2.1 million in expenses related to write-offs of tangible assets in our solar business, which we ceased using during the second quarter of 2021.

These were partially offset by:

• an increase of $0.8 million in income related to a payment made to us from an escrow account with regards to a working capital adjustment in connection with the Kokam acquisition;

• a decrease of $1.5 million in expenses related to write-offs of intangible assets of SolarEdge e-Mobility, which we ceased to use during 2020.

Financial income (expenses), net

Goodwill impairment and other operating

expenses, net

Goodwill impairment

and other operating expenses, net were $116.5 million in 2022, compared to $1.4 million in 2021, primarily due to:

an increase in the amount of $90.1 million attributed to a goodwill impairment charge related

to three reporting units:

e-Mobility, Automation Machines and Critical Power ;

of $28.4 million attributed to the impairment of intangible assets,

mainly related to the technology of the e-Mobility asset group, as well as the impairment of the related

intangible assets of the Critical Power asset group, due to the discontinuation of its activities.

were partially offset by an increase of $2.6 million in income related to selling of Critical Power assets and property, plant and equipment.

income (expenses), net

Year ended December 31,

1 unchanged sentence

Financial income (expense), net

Financial expenses were $19.9 million in 2021 compared to financial income of $21.1 million in 2020, primarily due to an increase of $55.6 million in financial expenses resulted from foreign exchange fluctuations, mainly between each of Euro, the New Israeli Shekel and the South Korean Won against the U.S.

These expenses were partially offset by an increase of $13.4 million in financial income related to hedging transactions.

Financial income, net

was $3.3 million in 2022 compared to financial expenses, net of $19.9 million in 2021, primarily due to:

a decrease of $20.9 million in financial expenses resulted from foreign exchange fluctuations, mainly

between each of the Euro, the New Israeli Shekel and the South Korean Won against the U.S.

an increase of $7.6 million in interest income and accretion (amortization) of discount (premium) on

marketable securities.

were partially offset by a decrease of $4.7 million in financial income related to hedging transactions.

Year ended December 31,

(In thousands)

Income taxes decreased by $5.3 million, or 22.7%, in 2021 as compared to 2020, primarily due to:

• an increase of $8.2 million in deferred tax income;

Other income increased by $7.7

million , or 100.0% , in 2022 compared to 2021 due

to the sale of our investment in a privately-held company.

Year ended December 31,

(In thousands)

Income taxes increased

by $65.3 million , or 361.8% , in 2022

as compared to 2021 , primarily due to:

an increase of $51.4 million of current tax expenses mainly

attributed to the change to Section 174 of the U.S Internal Revenue Code, as well as impairment of goodwill and intangible assets, higher

non-deductible expenses and lower tax benefits relating to stock-based compensation.

The change to Section 174, which became effective

on January 1, 2022, eliminates the option to deduct research and development expenditures as expensed and requires taxpayers to amortize

them over five years (if generated from a U.S.

entity) and fifteen years (if generated from non-U.S.

an increase of $13.3 million in prior years taxes income;

This was partially offset by an increase of $9.0 million of current tax expenses mainly attributed to an increase in taxable income in foreign subsidiaries.

a decrease of $0.6 million in deferred tax income.

Year ended December 31,

(In thousands)

As a result of the factors discussed above, net income increased by $28.8 million, or 20.6% in 2021 as compared to 2020.

Liquidity and Capital Resources

The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

As a result of the factors discussed above, net

income decreased by $75.4 million , or 44.6 %

in 2022 as compared to 2021 .

Liquidity and Capital

The following table shows our cash flows from

operating activities, investing activities, and financing activities for the stated periods :

Year ended December 31,

3 unchanged sentences

Net cash provided by (used in) financing activities

Increase (decrease) in cash, cash equivalents and restricted cash

As of December 31, 2021, our cash and cash equivalents were $530.1 million.

This amount does not include $650.0 million invested in available for sale marketable securities, $0.3 million invested in short-term restricted bank deposits and $1.5 million invested in long-term restricted bank deposits.

Our principal uses of cash are for funding our operations, capital expenditures, other working capital requirements and other investments.

As of December 31, 2021, we have open commitments for capital expenditures in an amount of approximately $168.5 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 $1,428.8 million related to raw materials and commitments for the future manufacturing of our products.

We believe that cash provided by operating activities as well as 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.

Increase (decrease)

in cash, cash equivalents and restricted cash

As of December 31, 2022, our cash and

cash equivalents were $783.1 million.

This amount does not include $886.6 million invested in available for sale marketable securities,

$0.5 million invested in short-term restricted bank deposits and $1.4 million invested in long-term restricted bank deposits.

Our principal

uses of cash are for funding our operations, capital expenditures, other working capital requirements and other investments.

As of December 31,

2022, we have open commitments for capital expenditures in the amount of approximately $74.0 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 $1,590.2 million related to raw materials and commitments for the future manufacturing of our products.

We believe that cash

provided by operating activities, as well as 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 provided by operating activities consists of net income adjusted for certain non-cash items and changes in assets and liabilities.

Cash provided by operating activities decreased by $8.5 million in 2021 as compared to 2020, mainly due to unfavorable changes in working capital in 2021 compared to the prior year, partially offset by higher net income.

Cash provided by operating

activities consists of net income adjusted for certain non-cash items and changes in assets and liabilities.

Cash provided by operating

activities decreased by $182.8 million in 2022

as compared to 2021 , mainly due to unfavorable changes in working capital and lower net income

in 2022 compared to the prior year .

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment in, sales and maturities of available for sale marketable securities, investment and withdrawal of bank deposits and restricted bank deposits, and cash used for acquisitions.

Cash used for investing activities increased by $247.6 million in 2021 as compared to 2020, primarily driven by a $355.7 million increase in purchases of available-for-sale debt investments, net, an increase of $22.5 million in capital expenditures and an increase of $19.6 million cash used for asset acquisitions and investments in a privately held company.

This increase was partially offset by a $90.4 million decrease in cash used for investment in bank deposits and restricted bank deposits, net.

Investing cash flows

consist primarily of 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 and cash provided

by the sale of equity investments .

Cash used for investing activities decreased by $67.2

million in 2022 as compared to 2021 , primarily

driven by a $72.2 million decrease in purchases of available-for-sale debt investments, an increase

of $29.0 million in sales and maturities of available-for-sale debt investments, $16.6

million decrease in an investment in a privately-held company and $24.4 million increase

from sale of an investment in a privately-held company.

This increase was partially offset by a $61.1 million

decrease in cash provided by bank deposits and restricted bank deposits and an increase of $20.1 million

in capital expenditures.

Financing Activities

Financing cash flows consist primarily of, issuance and repayment of short-term and long-term debt and proceeds from the sale of shares of common stock through employee equity incentive plans.

Cash used for financing activities in 2021 was $15.2 million compared to $640.5 million cash provided by financing activities in 2020, primarily due to a $617.9 million decrease in cash provided by issuance of the Notes, net, a decrease of $19.3 million in cash received from the exercise of stock-based awards net of withholding taxes remitted to the tax authorities and an increase of $17.4 million in bank loans repayments, net.

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.

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 employee equity incentive plans .

Cash provided by financing activities in 2022 was $654.6 million

compared to $15.2 million cash used in financing activities in 2021 ,

primarily due to a $650.5 million increase in cash provided by the issuance of common stock,

net through a secondary public offering, and a decrease of $15.9 million in repayment of bank

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 16 to our annual financial statements for more information).

Critical Accounting Policies and Significant Management Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S.

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.

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 18b to our consolidated financial statements for more information).

Critical Accounting Policies and Significant

Management Estimates

We prepare our consolidated financial statements

in accordance with generally accepted accounting principles in the U.S.

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 products, UPS systems, Lithium-ion cells, batteries, energy storage solutions, EV powertrain solutions and machinery.

Our worldwide customer base includes large solar installers, distributors, EPCs, PV module manufacturers, 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 UPS and 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.

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

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).

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 products, Lithium-ion cells, batteries, energy storage solutions, EV powertrain solutions

and machinery.

Our worldwide customer base includes large solar installers, distributors, EPCs, PV module manufacturers, 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.

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 recorded upon shipment of products to customers and transfer of title and risk of loss under standard 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.

The most significant impact of the standard on our financial statements relates to advance payments received for performance obligations that extend for a period greater than one year.

Applying the standard, such performance obligations are those that include a financing component, specifically:

(i) warranty extension services, (ii) cloud-based monitoring, and (iii) communication services.

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.

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.

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.

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.

See Note 2s "revenue recognition" and Note 13 "Deferred revenues" of the notes 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 residential energy hub battery.

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 Critical Power products and our battery storage products that exceed the standard warranty period.

In addition, customers can purchase extended warranties for inverters that increase 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 substantially 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”).

performance obligations are those that include a financing component, specifically:

(i) warranty extension services, (ii) cloud-based

monitoring, and (iii) communication services.

See Notes 2 u

and 14 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.

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 residential batteries .

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 that extend the standard warranty

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 i s 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.

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.

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 $83.8 million power optimizers and approximately $3.5 million inverters as of December 31, 2021.

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 $205.0 million and $265.2 million, in the year ended December 31, 2020 and 2021, respectively.

See Note 2u "warranty obligations" and Note 12 "Warranty obligations" of the notes 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 own manufacturing 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 market, 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 value of inventories.

Inventory write-downs are equal to the difference between the cost of inventories and their estimated fair market value.

Inventory write-downs are recorded as cost of revenues in the accompanying statements of income and were $8.9 million and $7.1 million, in the year ended December 31, 2020 and 2021, respectively.

Faulty products returned under our warranty policy are often refurbished and used as replacement units.

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.

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 107.5 million power optimizers and approximately

4.5 million inverters as of December 31, 2022 .

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 $385.1 million

and $265.2 million , in the year ended December 31, 2022

and 2021 , respectively.

See Notes 2 w

and 13 "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.

Our inventories comprise

sellable finished goods, raw materials bought for own manufacturing 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

$10.2 million and $7.1 million , in the year ended December 31, 2022 and 2021, 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 market.

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 Note 2j "Inventories" and Note 4 "Inventories, net" of the notes 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 2m "Business Combination" of the notes 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.

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.

We have not recorded any impairment charges during the year ended December 31, 2021.

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 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

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 2 j

and Note 4 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.

We allocate the fair

value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated

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.

"Business Combination" 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.

and other long-lived assets

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.

During the year ended December 31,

2022, we recorded impairment charge of $28.4 million mainly related to technology within the e-Mobility asset group and intangible assets

within the Critical Power 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 Note 2n "Intangible Assets" of the notes 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 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 complete 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.

During the year ended December 31, 2021, no impairment of goodwill has been identified.

See Note 2o "Goodwill" of the notes 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.

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 2ac "Income taxes" of the notes 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.

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.

and 8 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 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:

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.

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 complete the required

annual testing of goodwill impairment for the reporting units in the fourth quarter of each year and accordingly, determines whether goodwill

should be impaired.

The Company recorded impairment charges of goodwill during the year 2022 in the amount of $90,104 ,

related to the e-Mobility, Automation Machines and Critical Power reporting units.

See Notes 2 q

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 goodwill.

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

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis